by Wolf Richter, Wolf Street:
Gusto for US stocks and bonds dies down quickly.
Thursday morning, 474 European banks grabbed with “greater than expected” gusto €233 billion ($251 billion) in totally free (and possibly even better) money that the ECB held out to them within its Longer Term Refinancing Operation (LTRO), one of the special programs with which it douses the markets with liquidity to perform miracles.
The amount that banks took today was more than double than what had been expected. This money is a four-year loan from the ECB that carries 0% interest. If certain lending growth targets are met – because this money is supposed to be lent out – the interest rates can become negative and drop as low as -0.4%. In other words, under these conditions, the ECB would pay the banks to take this money and lend it out.
Investors expected banks to plow this money into the stock and bond markets, and so they tried to front-run the banks in anticipation of this miracle, and stocks and bonds duly jumped, first in Europe, then in the US.
How can you not party when banks get this kind of free moolah that they have to do something with?
It was the fourth and final LTRO allotment of the series that was announced in March last year and has been running in parallel with the ECB’s QE. Today’s operation brought gross amounts to €739 billion, of which €329 billion had been rolled over from a program dating from the euro debt crisis.
So where are banks going to put this money? That’s what everyone wants to know. The instant knee-jerk reaction: Stocks and bonds. And that’s where speculators dash into.
The German DAX rose 1.1%, the French CAC 40 0.76%. The Spanish IBEX 35 jumped nearly 1% and is up 32% from its recent low last June. The Italian MIB jumped 1.1% and is up 28% from the recent low in June. This is the same Italy whose banks are spiraling ever deeper into a banking crisis. The Portuguese PSI-20 rose over 1%, but alas, it’s barely up from the lowly bottom of its range.
Speculators also dove into Eurozone government bonds, and prices rose and yields fell early on. But then someone turned off the money spigot and bonds reversed course, prices headed south, and yields rose again at the end of the day.
That became the song and dance in the US, where stocks jumped in morning trading. The DOW was up over 100 points by 1 PM, only to end the day in the red once again, for the sixth day in a row. The S&P 500 and the Nasdaq followed a similar trajectory into the red.
And Treasuries too reversed course during the day. At first, the 10-year yield fell as low as 2.39%, but then prices lost their footing and the yield rose to 2.42%, the first increase in a week.
The finger-pointing has started to explain the failed rally. Many commentators blamed the struggles of the Republican leadership in Congress that can’t get their Republican ducks all lined up in a row to agree on, and pass, a healthcare bill or any of the other wonders that Wall Street has been hyping relentlessly as the greatest boon to stocks since sliced bread. And now markets, teetering up there in the stratosphere, are getting impatient and are drumming with their fingers on the sell button.
But it could just be that the money from the ECB, which flows globally in all directions, as money does, simply wasn’t enough to accomplish much these days, in an era when investors — after years of zero-interest-rate policy, negative-interest-rate policy, QE, QQE, and other programs such as LTRO — have become inured to central bank machinations; and that these machinations have lost their power to inflate the already inflated markets further; and that other issues are wriggling unpleasantly into the foreground.
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