Stocks gain as ECB s LTRO watched

European stocks gained on Tuesday after a somewhat volatile start to the week yesterday, as financial stocks were supported and investors eyed the result of the ECB’s second LTRO whilst there was little reaction to Standard & Poor’s cutting Greece’s long term rating to ‘selective default’.

The FTSE 100 rallied 10 points by 10.15am, whilst the DAX and CAC saw gains of 0.37% as early gains in miners and financials helped to support European indices.

Liquidity is the key for investors 
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 keep liquidity high 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 measures that helps to keep liquidity high is being seen positively by the markets, with investors trading on the assumptions 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.

The key will be how much is actually taken up by banks in 3 year loans offered by the ECB. Whilst a high take up of the LTRO may normally raise suspicion of deeper funding issues at Europe’s major banks, this time around the story may well be somewhat different. With this expected by some to be the last long term refinancing operation of its kind, there is every chance we could see a high take up by banks, who will want to take advantage of the cheap liquidity.

A sharp turnaround in US markets yesterday, where stocks rallied from significant lows was an important confidence boost for European equities, as it helped to emphasise that demand for shares remains strong within any attempted sell off. However, the lack of vigour shown in the FTSE 100 to push higher towards the 6000 level is somewhat concerning, particular when taken within the broader stock market rally seen for major US Indices such as the Dow Jones and S+P 500, which closed above key levels last night.