ECB Lending Program Boosts Banks, Markets

Joel Anderson  |

Markets leapt for joy Tuesday on positive news out of Europe and the United States. Positive data on the German economy was paired with the beginning of an important European Central Bank (ECB) lending program for private banks, while strong housing data showed promise in the United States.

ECB to Save Banks

Markets have appeared disappointed in recent months that ECB president Mario Draghi has not been willing to engage in an aggressive, large-scale bond-buying program to calm roiling financial markets. However, today gave a sign that while Draghi may not be willing to directly buy sovereign debt, the alternate plan he put forth on Dec. 8 appears to be showing the first signs of success. Draghi's plan involves offering up unlimited 3-year loans to European banks with an interest rate of only 1 percent.

Along with this, Draghi also dramatically reduced the stipulations for what qualified as collateral for these loans. The ECB invited banks to place their first orders today, initiating what could be viewed as an end-around method for injecting money into the bond markets. Banks now have the potential to take loans from the ECB at a rate of 1 percent, then turn right back around and purchase Italian and Spanish bonds, which have had yields approaching 7-percent in recent months. “Given the ongoing stresses in the banking system, we expect there to be high demand for these loans,” Ben May, an economist in London with Capital Economics, said in a research note. “Nonetheless, we doubt that banks in the region’s most troubled economies will go for broke and purchase vast quantities of their governments’ debt in a bid to bring bond yields down and avoid damaging sovereign defaults.”

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Spanish Bond Auction Goes Well

The first signs that Draghi's plan may potentially be working also came today as yields at a Spanish bond auction fell sharply. The Spanish treasury sold $7.3 billion of three-month and six-month T-notes, with the yields of 1.74 percent and 2.44 percent respectively. This represented major falls as those rates were at 5.11 percent and 5.227 percent as of Nov. 22. "This is another impressive auction from Spain and an early Christmas present for the Treasury," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. "Spain is by no means out of the woods. The Spanish economy is still flat on its back and Spain is threatened with yet more credit rating downgrades." The successful Spanish bond auction, which ultimately sold $1.56 billion more in bonds than initially planned due to high demand, is widely seen as an early success of the ECB's lending program.

Good News from Multiple Sources

While the Spanish bond auction was a major factor, it was combined with other solid economic news Tuesday to help push the markets higher. The Munich-based Ifo think tank released data today showing that German business sentiment rose sharply against expectations in December. In America, housing starts in November showed a 9.3 percent increase over October, reaching their highest levels since April of 2010. "The increase, coupled with the improvement in home builder sentiment over the past few months, suggests the housing market may finally be breaking out of the 'bounce along the bottom' environment that housing has been stuck in since early 2009," wrote analysts at Nomura in a research note. The euro also gained against the dollar, hitting a one-week high of $1.31320.

Markets Respond

All told, the good news, coming on the heels of improving jobs data in America over the last few weeks, meant that the markets jumped higher in early trading. The Dow Jones jumped just under 2.75 percent while the S&P was up just over that mark with the Nasdaq edging near 3 percent in gains. Leading the way, predictably, were major banking institutions that seem to rise and fall sharply with any news out of Europe. The  iShares S&P Global Financials Sector Index Fund (IXG), a financial ETF, was up 3.82 percent. The biggest gainer in the financial sector was Jefferies Group, Inc. (JEF), which had gains approaching 20 percent. Jefferies was under scrutiny for its exposure to European debt, so the combination of solid news out of Europe and a Q4 earnings report that beat analyst expectations despite a year-over-year decrease in profit helped to drive the investment banking firm higher. Other major banks posting big gains were ING Groep (ING), up almost 8 percent; Deutsche Bank (DB), up just over 7 percent; Barclays (BCS) up close to 6.25 percent; and everyone's favorite insurance company American International Group, Inc. (AIG), up over 6 percent.

Also posting a major gain was independent oil and gas company Cobalt International Energy, Inc. (CIE). Its shares bounced almost 35 percent on news that it had signed a production sharing agreement for offshore development in Angola.

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