The ECB, for a second time in the last three months, has injected a a large supply of euros into the system. Following the €489B in December, they loaned 800 European banks €529.5B today at 1% for three years. They have named this bank bail out program, LTRO, for long term repo operation. The banks have access to the funds after submitting appropriate collateral. In the event banks cannot repay the loans, the ECB keeps the collateral.
The only difference between Bernanke's quantitative easing is, the Fed takes ownership of the paper they have purchased, while the ECB only holds the paper as collateral, which will be surrendered should the bank go into default. In both cases the banks get money now, to be used as they determine what is best for their situation. The bottom line is the ECB has loosened the European credit situation, injecting about $1,350T since December 21th.
Certainly the availability of the funds will prevent a credit lock up and make it easier for the Italians, French and Spanish to float their sovereign bonds. But will this stimulate their economies?
If banks merely keep the money to replenish their capital, it will not be an economic stimulant. To the extent the funds are used to finance the roll over of sovereign debt, this too, would not give the economy a boost. Financing new public debt might be considered a stimulant, and if loans are made to the private sector for business expansion, this might even be a multiplier, and stimulate further business activity.
The morning LTRO report gave the market some volatility but no direction. Later in the day, the U.S. GDP, continuing in the trend of recent data, came in at a positive 3%, better than the the previous estimate of 2.8%. So the U.S., with lower bank rates than Europe is coming in with 3% growth. Europe, with a higher bank rate, is posting low or no growth.
Then there is Bernanke's testimony, which is getting mixed market signals. While this might be good news for Main Street, it was not for some market participants. The crowd had been getting long commodities and metals, anticipating the Fed's next dose of quantitative easing so today, Bernanke's testimony was unnerving.
For the past four days the EURUSD has been trying to make a new high above the 1.3480, only to fail. It was the same today and we have now backed off to 1.3365. We note the gold market was also hit by some selling, taking it down over $75 per ounce, so we may also have some mob psychology at work.
As we have mentioned we have preferred the short side of this pair, but were wary because of the big short interest. The recent CME reports show the open interest in futures declining, so some longs are exiting the market. This market looks choppy and volatile. We strongly feel, however, that 3% growth versus no growth in Europe favors the USD. For those short, a 1.3260 might be a cover target, and then look to sell again in the 1.34 area.
On Friday March 9th we get the important NFP Report. There have been whispers this report will not be as bullish as the last one. It is always safer to put your position on after that report.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.