The European Central Bank (ECB) loaned 800 banks €529.5B in cheap three-year loans as a part of their Long-Term Refinancing Operation (LTRO- or should I say LTRO2). This comes on top of the €489B of similar loans issued in late December by the ECB to 500 banks. The programs are aimed at avoiding an escalating crisis as banks struggle to pay off maturing debts, as well as mitigate the impact of a pullback in bank lending to customers within the euro-zone. Although the ECB, hoping to avoid any negative connotations being associated with the program, does not disclose the identities of the banks that borrowed under the program, dozens of European banks (including almost all Spanish and Italian banks) have disclosed that they did borrow in December, and many expected to borrow again this week. Because roughly €150B of short- and medium-term ECB loans mature this week, net new liquidity entering the system is actually around €379B.
An unidentified party has requested the International Swaps and Derivatives Association (ISDA) rule on whether the collective-action clauses for Greek soverign debt should be classified as a “credit event,” which would trigger a payout on credit-default swaps. This move came shortly after S&P downgraded Greece to selective default, making them the first euro-zone member to have that a “default” rating. Payouts from sellers of a net $3.2B worth of CDS on Greece hangs in the balance. The ISDA has announced that the Determinations Committee will decide by 5pm GMT “whether to accept the question for deliberation or reject it.”
U.S. equity index futures are pointing to a higher opening and are currently trading up +0.1% on the day. The S&P 500 has rallied +4.6% in February, and looks to be headed for its third straight month of gains. Global sentiment is higher as euro sovereign debt yield spreads to Germany decline, the dollar falls, and equities are mostly higher.
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U.S. equity futures are higher this morning as investors look to the ECB’s long-term liquidity operation to boost risk appetite, and oil has pulled back from its nine-month high above $109 last week; Brent crude is trading down -0.7% on the day. Economic confidence rose more than forecast in February; an index of executive and consumer sentiment in the 17-nation euro-zone rose to 94.4 from 93.4 in January. The median estimate from 31 economists in a Bloomberg News survey for 94. According to Howard Archer, the chief European economist at HIS Global Insight in London, “the euro zone is past the worst… Even so, sentiment is still at a pretty low level and the euro zone is far from out of the economic woods.” The euro has been strengthening, up around +0.4% for the day, as bond risk declines a day before the ECB will provide a second round of unlimited funds to support the banks. European banks are expected to tap the ECB for €470B euros in three-year funds according to a Bloomberg News survey. Jeremy Stretch , the head of currency strategy at Canadian Imperial Bank of Commerce in London says, “In the short term, the LTRO operation should be risk- and euro-supportive… The liquidity that the operations have injected into the market has reduced some of the solvency fears, particularly in the European banking market, and that’s provided a much better risk environment.”
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U.S. equity futures are pointing to a lower open this morning, amid declining stock indices in Europe after a meeting between G20 finance ministers and central bankers saw no agreement on boosting funding for the IMF. The officials indicated there would be no such agreement until European leaders take action to boost the size of the rescue funds aiming to provide a firewall against contagion. “The world’s leaders won’t help Europe out until, as U.K. Chancellor George Osborne said, it shows the color of its own money,” said Kathleen Brooks, a research director at Forex.com. European events are likely to be a major driver for the markets this week, wrote strategists at KBC Bank in Brussels. This week’s calendar features a number of debt auctions by nations within the euro-zone, a parliamentary vote regarding Greece’s second round of bailout funds, and Wednesday’s three-year long-term refinancing operation by the ECB. Many equity markets find themselves trading near critical levels after the strong rally over the past 2 and a half months; this is an indication that risks on a profit-taking move have increased, and may be triggered by a disappointment in any one of these events. “Europe still has work to do in terms of the great bailout and there seems to be some things various parties can’t agree upon, so that’s winding down on the market at the moment,” said Matt Riordan, who helps manage $6.8 billion in Sydney at Paradice Investment Management Pty.
The yen is gaining and the U.S. Dollar is up +.199 points as sentiment continues to sour on the morning. Brent crude has retreated from its nine-month high, and U.S. treasuries have decreased -3bps to 1.95% in early morning trading.
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