The markets giveth, and then they taketh away. The overnight session produced a continuation of yesterday’s rally, though the markets have reversed and have sold off on one important piece of news.
This morning was the start of the ECB 3-year lending facility to European banks, with 523 banks seeking loans of $643 billion, which exceeded estimates. While initially this news was positive and the Euro rallied, a quick reversal occurred as the impact of this program was absorbed. There are two schools of thought on this issue. The first (and initial) reaction was that this is a net positive as it shores up the banks and will help offset losses and will maintain liquidity in the markets.
The second school of thought is that because the amounts and number of banks exceeded expectations, there may be more banks in trouble than previously thought. Also, this new flood of liquidity not only increases the amount of Euros in the system, but also potentially allows for EU leaders to further kick the can down the road. Hence the subsequent sell-off this morning.
As with anything, the truth probably lies somewhere in between. My thoughts are the following: I don’t think we should read that much into the number of banks or the amount that are participating. Much like the tarp program here in the US, even banks that were healthier needed to participate because of the unfair competitive advantage that those who needed it more would receive. With the ability to receive cheap funding, it is a no-brainer to participate and doesn’t necessarily say anything about the health of the banks. I thought as much yesterday in my commentary, when I said, “expect this program to be utilized, big time”.
However, this does in fact increase the sheer supply of Euros in the system, which at the end of the day still adheres to the economic laws of supply and demand. More supply in the system, prices go down. Simply math. So that’s what we are seeing this morning, and the correlative effects of a lower Euro are taking markets lower to start the US session.
In the UK, the release of the BOE rate policy meeting minutes revealed a unanimous decision but revealed that further easing may be difficult at this time. While this doesn’t preclude further easing in the New Year, the BOE is likely to be in “wait and see” mode for a while. Tomorrow’s GDP figures are expected to show growth of .5% and the BOE is concerned about the possibility of recession. Earlier in the session, UK consumer confidence came in at 3-year lows as inflation and unemployment are weighing on the UK economy.
Later this morning, US existing home sales figures will be released and this will largely serve as a barometer for the health of the housing market. Lost in the shuffle of the politics of the blame game in Washington DC and the “focus” on unemployment, the housing market has largely gone un-addressed as the problem nobody wants to talk about. Yet the housing market actually holds the key to economic health here in the US so it is only natural that the idiots in government haven’t addressed its impact. However a better than expected number could reverse some of the selling we are seeing this morning.
Later today, New Zealand will issue their GDP figures and are expected to show quarterly gains of .6%, with the YoY number at 2.2%.
I think the overall impact of the ECB lending facility is largely positive so this selling could be temporary. The fear is that banks may be in worse shape or that somehow this flood of Euro liquidity is going to hit the market. But I think Euro banks will likely sit on the cash the same way that they do here in the US which helps keep inflation in-line.
Global economic fears do not only affect individuals but institutions as well. By shoring up their balance sheets, the banks may be able to survive any potential sovereign debt losses they may be sitting on, or may be facing. Banks that aren’t in trouble may be able outpace their troubled rivals and could in fact buy up some of the bad debt at considerable discounts. As there is no mandate on what the money has to be used for, the potential for this to be wildly successful seems likely to me.
While the markets may be seeing the short-term impact as negative, my opinion is that this is going to be a home run for Europe and for the global economy in general.
