ECB Hands Banks $250 Bn Today, Floats all Markets – um, Briefly

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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.

Turns out, the S&P 500 companies blew $1.7 trillion over the past three years on making earnings per share appear less bad, 0but they still looked terrible. Read…  Despite Financial Engineering & Clever Reporting Schemes, S&P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar




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  22 comments for “ECB Hands Banks $250 Bn Today, Floats all Markets – um, Briefly

  1. cdr
    Mar 23, 2017 at 7:02 pm

    ECB gives puts out $251Bilion at 0% or less and no market jump!!?

    Many years ago, the Japanese carry trade pushed markets higher and higher. The levitation seemed effortless. The money apparently had numerous places to go or potentially go.

    If no rise today on firm news like this, then there’s no place to invest or even look like someone might invest. To me, it looks like liquidity is excess and even this amount makes no difference. HFT and stories are keeping the markets elevated is a realistic explanation for market levels today. If so and if HFT is emulating velocity of money, then this looks a little unsettling.

    • Scott
      Mar 23, 2017 at 8:29 pm

      To help highlight the exponentially increasing cost of maintaining market stability, a recollection: less than 20 years ago the US hedge fund Long Term Capital Management blew up and, fearing contagion and a systemic collapse of the entire system, the Fed negotiated a complete bailout. The cost? A mere $3.6bn.

  2. Tom kauser
    Mar 23, 2017 at 7:19 pm

    Pump don’t work cause the vandals took the handle- Dylan.

  3. Brian
    Mar 23, 2017 at 8:08 pm

    This article is misleading. LTRO is a form of open market operations. The ECB is purchasing sovereign debt (used as collateral) from banks in exchange for reserves. The bank cannot plow its newly acquired reserves into the stock market just like a bank cannot plow retail deposits into the stock market. There are rules in terms of what banks can swap reserves for, and it is not stocks.

    The main effect of LTRO is lowering rates, much like QE did in the United States. At this point the QE reaction function of “risk on” is so muted QE like operations are now a non-event.

    • Mar 23, 2017 at 9:15 pm

      Your comment is misleading.

      >>”The ECB is purchasing sovereign debt (used as collateral) from banks in exchange for reserves.”

      No, within the LTRO, the ECB is not “purchasing sovereign debt from banks.” It is LENDING this money to the banks, and the banks have to post collateral. Huge difference.

      When you get a loan from a bank and put up the house as collateral, you’re not selling the house to the bank.

      Or are you confusing LTRO with QE?

      • d
        Mar 24, 2017 at 5:59 am

        “No, within the LTRO, the ECB is not “purchasing sovereign debt from banks.” It is LENDING this money to the banks, and the banks have to post collateral. Huge difference.”

        And the ECB under the Mafiosi, is apt to accept the used toilet paper the italian and club-med banks offer as “Collateral” at the obscenely overstated bank “Values”.

        Much to the displeasure of the German’s, and others in the German corner.

        The Mafiosi at the ECB is determined that all euro taxpayers must contribute to filling the bottomless pits, that are his pet italian and club-med bank’s. no matter teh damage to the Eu and Eur.

        • Valuationguy
          Mar 24, 2017 at 9:00 am

          Is there any wonder among readers why this (doubling the expected size of the last tranche) occurred JUST AFTER Deutsche Bank completed its critical equity raise (that it needed just to get the collateral to provide to the ECB for its part of the 233B euro loan program?) and just before the Italian banks collapse?

          (Not to mention the French banks issues…which never seem to get any press here in the U.S.)

        • d
          Mar 24, 2017 at 10:01 pm

          Not this one.

          The consencus for a while was that DB or some other major northern EU bank had to be wound, up before MDP and others were wound up.

          Now we are back to Illegal state aid in the italian banking sector again. So DB gets a new lease of life.

          italy is trying to bring several more insolvent and irredeemable bank’s into the program with MDP Frankfurt is at he moment weakly saying no. I expect that no to become, No, Nicht’s, Nein, VERBOTEN, as others in German finance join in..

    • Maximus Minimus
      Mar 24, 2017 at 9:03 pm

      Who said LTRO was free money to buy whatever banks wanted? It was not-quite-openly intended to buy government debt in the secondary market to lower borrowing cost in the club-med countries. And of course they had to put up collateral, but who believes collateral has some magically fixed value. It was the quality of the collateral that was questionable. Otherwise, bank could just dump them on some investors.
      Next, to convince investors that whatever banks created was worth it, NIRP them.

  4. Petunia
    Mar 23, 2017 at 8:14 pm

    I’ll bring up the recent declines in the art market again. The art market is where rich people spend their discretionary money. If these markets are crashing it’s not because rich people don’t have money, it’s because they don’t see the value in the purchase. They seem to have reached saturation on the consumption side.

    So what are they doing with all this new free money. They are all trying to buy trips into outer space. I’m hoping they can all buy a one way ticket. Maybe I will buy some Tesla SpaceX.

    • Bruce Adlam
      Mar 24, 2017 at 3:20 am

      Maybe they will get lost in space lol it’s a very big world out there

    • Meme Imfurst
      Mar 24, 2017 at 7:53 am

      Since I am in the ‘Art market” I can state that you are 100% correct. This decline has be creeping along for three years but this last 6 months, art is crashing, and crashing everywhere not just in the USA.

      This is another canary in the coal mine, when art declines, it is not long before everything associated with art follows. You may not believe it but many wealthy people buy a house based on where the art will go.

      Loosing art and the arts is loosing our humanity, look around you.

      • Petunia
        Mar 24, 2017 at 8:19 am

        The art market in Miami, specifically the Art Basel Show, was a big draw in its own right, but it also affected the real estate market in Miami and South Florida. People who flew in to buy art usually looked at the real estate as well.

        Since art buyers have been staying away, that’s a lot of high end buyers not looking at the real estate as well.

      • Mary
        Mar 24, 2017 at 10:33 am

        I’m not sure what you mean by “Loosing art and the arts is loosing our humanity”. If you mean decline of the high stakes contemporary art market has something to do with the state of culture, I’d disagree. That’s like saying the economics of the Super Bowl somehow correlates with the state of children’s sports programs.

        Now, if you want to talk about Trump’s attempt to defund the NEA and the NEH, that will be a body blow to grass roots culture in this country.

        • Petunia
          Mar 24, 2017 at 11:37 am

          Firstly, the Super Bowl does correlate with the economics of children’s sports programs. As does the entire sports industry.

          Secondly, as a lover of contemporary “pop” art, I would argue that it correlates exactly with modern culture, even if you disagree.

          Thirdly, about public funding of the arts, I’m not against it, but if the govt funds it, it should promote public interests and cultural themes, not strive to offend. Not being a total waste of money would be good too.

  5. Emanon
    Mar 24, 2017 at 3:06 am

    Back in the 1990s, I was speaking with some fellow engineering graduate students. We started talking about various companies. Someone mentioned General Electric. I had watched as GE slowly morphed from a conglomerate of industrial divisions into a bank that happened to own some industrial assets.

    GE at that time was posting spectacular profit increase in its finance division. For one year they had a 33% increase in profits.

    I asked the other guys if they knew of any other industry that could regularly create a 33% increase in profits. The only possibility that they could think of was computer hardware and software, as Moore’s Law was still doubling computing power every 18 months, and software was tagging along for the ride.

    Some bright fellow who was good at math asked, “If the banking guys continue to increase their share of the economy at least three times faster than anyone else possibly can, won’t they end up owning the entire economy? Where will this stop?”

    We sort of looked at each other and wondered how long it would be before this happened.

    By the banking crisis of 2007-8, GE Finance had grown to be the source of half of the profits of the entire company. The other divisions were mercilessly pummeled by the big bosses to try to match the finance guys, who were the stars of the show. A very solid 11% annual increase in profits by hard-working managers and workers in one of the industrial divisions was a mere third of the increase in profits by the finance guys – until the crisis.

    If GE had not been bailed out by the Fed and the TARP bill, the financiers would have bankrupted the entire company.

    The sole corporate survival strategy was to go to Washington and demand a bailout.

    At taxpayer expense.

    “Champagne socialism” for the rich, just enough welfare to buy the votes of the poor, and the cruelest form of crony-controlled capitalism for the rest of us.

    That’s the new American system.

    Europe sounds just as bad.

    The only way this will end is when there is a crisis so huge that the banks and the national governments simply can’t print their way out of it, because average people will quit using paper money and fiat electronic money. It will be a hundred Zimbabwes, all at once. Only barter will get you any food, as money dies.

    “Credit” comes from the Latin verb “credere”, which means “to believe”.

    Once nobody believes that Federal Reserve notes are valuable, then they are good for nothing except to use as toilet paper.

    Just like Zimbabwe dollars.

    Search Google images for “Zim dollars toilet paper” to see the future of all other fiat currencies.

    When a quarter trillion dollars of free money in a single day (!) only creates a 1% spike in the stock market, then the end is nearing fast.

    The junkies are at the point where the amount of heroin that they must inject to get high is just under the lethal dosage. They won’t stop the injections until the junk kills them.

    • James Levy
      Mar 24, 2017 at 6:53 am

      Although I am sympathetic to your statements, I have to point out that unlike Zimbabwe, in the US, Eurozone, and Japan M1, the actual amount of cash and coin in circulation, hasn’t grown at anything like the rate that “money” and near money have. We’re not going to be using dollars as TP because there just aren’t that many dollars, which will likely keep the system rolling along for a few extra weeks or months even after the bubble bursts. In fact, I think there will be an initial hording and bidding up of the value of paper money, but credit cards will no longer be accepted and all forms of credit will dry up. People will demand cash on the barrel head first, then lose faith in physical dollars later.

      • Petunia
        Mar 24, 2017 at 8:03 am

        If US currency disappears, for whatever reason, people will simply use other currencies, euros, pesos, rubles, whatever. All of them will become more valuable and more useful than gold or silver. In the border towns of Texas they already accept Mexican pesos as payment in many places.

        • SamThomas
          Mar 24, 2017 at 10:03 am

          Really?

          Paper script from third-world nations in a collapsing global economy will be MORE valuable than silver coins? More valuable than gold coins and bullion? Paper notes and electronic digits that can be created instantly, with a keystroke or two, with no functional limits?

          I agree that paper will be infinitely more “useful” than precious metals (with the emphasis on “precious.” Because precious metals will disappear (see: “Gresham’s Law”).

          So if you are buying cigarettes down at the 7-11, greasy paper notes will work just fine. But if the dollar implodes in value, the move of wealth “in size”–even for sheltered Americans–into reserve assets of the highest quality, with no counterparty risk, will be mind-boggling.

          And the most reliable and liquid of these has always been precious metals–the perfect store of value.

          This has always been the end-game for fiat currencies throughout history.

    • John M
      Mar 24, 2017 at 8:19 am

      “Mortimer get in there and sell”

      https://www.youtube.com/watch?v=obAoPP1bdIM

  6. Haggis
    Mar 24, 2017 at 8:30 am

    I cannot proffess to offer any insights,but it sure is great to watch!

  7. Joe
    Mar 24, 2017 at 11:34 pm

    Today was just the announcement of the auction results. The actual settlement is next Wednesday.

    The same thing happened with Brexit. $400B TLTRO auction results were announced on the day after the vote, and the market fell on Brexit news anyway. That money settled the following week, and the S&P 500 reclaimed the entire Brexit loss and more within six trading days.

    Next week could be interesting.

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