Mar 01, 2012, 08.31 AM | Source: CNBC-TV18

Market happy with LTRO 2 but are banks stress-borrowing?

CNBC-TV18 spoke to some analysts on how the markets will react to LTRO 2.0. Check out their comments.

Bob McKee, Chief Economist, Independent Strategy
LTRO 2.0 is finally here, well above street expectations, at 530 billion euro. Experts believe the move is good for the European economy in the medium-term and some say that equity markets are likely to get a shot in the arm from the liquidity injection. CNBC-TV18 spoke to some analysts on how the markets will react. Check out their comments.

Bob McKee, chief economist, Independent Strategy says that there could possibly be a sell on the news in the equity markets because that is the anticipation based on confidence. “Down the road, this means there is net injection available as most euro zone banks are pretty well-funded that gives them some spare capacity to move in the bond markets,” he says.

Graham Neilson, chief investment strategist at Cairn Capital however believes that it is a bit early from a broader market perspective to predict the exact reaction. “Clearly, there are some major things going on in the last three-four months as well, which is a massive allocation switch from being risk-averse to risk-loving, and part of that is what has been going on in Europe, but also what is going on in terms of people's growth expectations which have clearly moved up and are moving up again in Europe. He says that that is not necessarily peripherally, but more in the core. “So as the market got slightly ahead of that, it is definitely technically stretched, it needs to absorb these numbers, probably consolidate, and then it needs to wait for the economic data to come out,” he says. “Frankly we are going to move on from these liquidity issues pretty quickly,” Neilson opines.

Nonetheless, Mark Schofield of Citigroup is clear about what to look for. “For me, there are two clear kind of sources of demand for these type of operations - one is banks cannot borrow any other way, it's stressed borrowing; the other is various permutations of carry trade- whether it is regulatory, linked, whether it is pure carry trade, whether it is just lock-in for future funding.” According to him, if it is in a very low number, it would tell you that perhaps there are less stressed borrowers out there. “With a higher number, they are telling you that there is more appetite for carry trade than you thought, but again, carry trades do not tell the truth of real economy,” he says.


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