It appears that minor setback in the market was due to Bernanke not hinting as strongly as he has in the past for QE3…. precious metals took it on the chin hard as every algo on Earth now appears to be tied to Bernanke's whims. Either way the dip buyers of course came in and the S&P 500 did not even test its 10 day moving average. The Russell 2000 continues to be the weak outlier…
In other events, LTRO 2.0 results were announced this morning and while they were not near some of the sky high estimates of 1T, there was more uptake on this round versus LTRO 1.0. [Dec 20, 2011: LTRO - A New Acronym to Learn and Important to Watch] While not as direct as QE, this is a salve the market does love, rightly or wrongly. I will admit to underestimating the power of this action, and I think most in the market would agree with that view.
The balance sheets of all the major central banks are now in the 20-30% of their respective country/region's GDP range; it has been a remarkable era in central banking the past 3-4 years and only gets more remarkable by the month.
- Banks grabbed 530 billion euros at the European Central Bank's second offering of cheap three-year funds on Wednesday, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the euro zonecrisis. In the space of two months, the ECB has now injected more than a trillion euros into the financial system, banishing the threat of a credit crunch.
- A total of 800 banks borrowed money at the tender, with demand exceeding the 500 billion euros expected by traders polled by Reuters and the 489 billion allotted in the first such operation in December. The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on euro zone bond markets that threatened to tear the bloc apart.
- Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have told Reuters the ECB is not inclined to offer a third dose. (unless the market falls more than 7%) "You can't argue with 529 billion," said Peter Chatwell at Credit Agricole CIB. "It's undoubtedly positive for risk assets and also will help to support core markets as initially banks need somewhere to store the resultant excess liquidity."
- Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros they borrowed first time around to cover maturing debt and have been parking close to half a trillion euros at the ECB in overnight deposits. Draghi has urged banks to lend out the funds they tap at Wednesday's operation to households and businesses, helping strengthen economic growth.
- Anecdotal evidence suggests banks especially in Spain but also in Italy used the first LTRO to pursue this "Sarkozy trade" – a term adopted by markets after the French president suggested governments should encourage banks flush with ECB cash to buy their bonds. Spanish banks bought a net 23.1 billion euros of government debt last month and Italians 20.6 billion, both record increases.
- Banks have already taken more funds from the ECB than ever before and risk becoming dependent on those. Italian banks had taken more than 200 billion euros in central bank funds by January, and those in Spain and France were not far behind.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog