Investors on LTRO watch keeps the markets choppy

Gains in banking stocks helped to support European stocks in a mixed opening session on Wednesday, but the market remained choppy as investors eyed the result of the ECB’s second LTRO, which is designed to maintain liquidity in the financial system. The question on investors’ lips today is ‘how much will the banks take up?’ in what may be the last ECB operation of this nature for some time.

The FTSE 100 traded flat after the first hour of trading whilst French and German stock indices saw gains of between 0.3% and 0.5%, with banks supporting much of the early Index moves.

Investors today are focussing on two main events; the result of the ECB’s second LTRO and the latest US GDP reading, whilst eyes will also likely be on Ben Bernanke’s semi-annual testimony on monetary policy to the House Financial Services Committee.

LTRO watch
The market is intensely awaiting the result of the ECB’s second LTRO, which gives unlimited liquidity to banks at cheap lending rates for a period of three years. The First three-year LTRO has been widely seen as a success, with banks strongly taking up the offer of cheap liquidity, a factor that injected a huge amount of liquidity into the financial system and by doing so, supported equity prices and calmed bond markets.

The result is expected to be confirmed shortly past 10.15am London time.

A key support to European indices is the amount of liquidity being injected into the global economy by the world’s Central Banks. Following co-ordinated efforts to free up additional and cheap US dollar liquidity last year by a number of the world’s major Central Banks, alongside longer term refinancing operations conducted by the European Central Bank, this has helped to maintain liquidity at major banks and help to keep confidence topped up at a time when interbank lending markets was starting to shut down.

Investors love liquidity and any measure that helps to keep liquidity high is being seen positively by the markets currently, with investors trading on the assumption that cheaply obtained liquidity will need to find a home within the financial system. It is therefore no coincidence that the FTSE 100 has rallied over 10% since the co-ordinated Central Bank US Dollar liquidity operations was announced at the end of November last year, and equally no coincidence why investors have quickly turned their attention to the second LTRO by the ECB after a large take up of the first.

The key will be how much is actually taken up by banks in three-year loans offered by the ECB. There is every chance that this could be the last long term refinancing operation of by the ECB of this kind for a while, and so we could see a high take up by banks, who will want to take advantage of the last chance to take up cheap liquidity. That said, investors may do well to guard against the caveat that a high take up of the LTRO may normally raise suspicion of deeper funding issues at Europe’s major banks.

US GDP out at 1.30pm
The afternoon trading session could be defined by any deviation in US fourth quarter GDP from the previously released 2.8% growth. A stronger than expected session could help to support equities and risk appetite, though with investors still eyeing the potential for QE3 from the Federal Reserve, a stronger reading could dampen this potential.

ITV shares rally on earnings
Shares in ITV rose straight to the top of the FTSE 100 after the broadcaster reported a 13% rise in adjusted earnings for the year, beating most expectations. Earnings came in at £462 million with external revenues rising 4% to £2.14 billion whilst the firm also highlighted their diversification away from a reliance upon advertising revenues, with non advertising revenues growing £93 million to £922 million. News that the broadcaster has also seen a better than expected start to the year in terms of advertising revenues also lifted shares, which rallied 8.6% straight to the top of the FTSE 100 performers list.