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SCOREBOARD: ECB placebo

Markets reversed after the ECB's funding injection, as investors pondered the severity of EU bank problems.
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Another choppy day on the markets saw equities hit their highest levels in a week, after the ECB's 3-year long-term refinancing operation was announced. The amount of money borrowed came in at a hefty €489 billion – at the higher end of expectations – with 523 banks taking advantage of the facility. After this initial sugar pill had dissolved, investors began to realise the heavy uptake may not be such a good thing, given that the number of banks tapping the facility highlights the serious problems inherent in the European banking sector.

Wall Street then opened lower after European markets slid back (having traded higher initially). Stocks in focus include software giant Oracle, which reported earnings that missed expectations. This sent the technology sector tumbling sharply, with IBM and Hewlett Packard leading the trend down. With half an hour until the close, the S&P 500 index was 0.05 per cent, or 0.59 points higher (1,241.89), the Dow Jones had slipped 10.37 points, or 0.09 per cent (12,093.21) and the technology-weighted Nasdaq let go 1.19 per cent, or 31 points (2,572.72), dragged down by Oracle's earnings miss.

Energy commodities, on the other hand, have been rallying again, building on yesterday's upward momentum. US Department of Energy energy inventories continued the recent trend of big positive surprises that included today's Canadian retail sales (1.0 per cent vs street 0.5 per cent) yesterday's US housing starts and last week's US jobless claims, just to name a few. US crude climbed above $98.50/bbl with next resistance near $110.00 while UK crude has rallied above $107.50/bbl after US crude oil stocks fell by 10.5 mmbbls last week, much better than the 2.1 mmbbl drop that had been widely expected. Gasoline has also rallied as its inventories fell by 0.4 mmbbls when a 1.5 mmbbl increase had been widely anticipated.

A broadening base of indicators shifting from 'not as bad as feared' to 'much better than expected' suggests that US economic growth has finally kicked into gear over the last month or so.

In currency markets, European currencies have been soft for the most part with the euro undercut by concerns that today's refinancing operation amounts to more money printing, undermining the value of the single currency, which slipped to 1.304 US cents at 0813 AEDT. Pound sterling has been outperforming with cable up slightly, to 1.75 US cents at 0813 AEDT, as the street responded to better than expected public sector net borrowing. Meanwhile, the Australian dollar has pared early losses, trading at 1.009 US cents at 0805 AEDT, down from a high of 1.02. The US dollar after initially being under pressure in early trade has bounced back strongly this afternoon. It had slipped back early on after the ECB long-term refinancing operation came in well above expectations but soon recovered as markets took the view that the high take-up was not necessarily a positive for risk.

With many traders winding down operations this week it appears that unless a major catalyst emerges markets are likely to remain in consolidation mode as traders consider what may be in store for 2012.

As Italian and Spanish yields started to rise again it soon became apparent that if the intention of cheap money was to boost the bond market, as Nicolas Sarkozy wanted, it was having the opposite effect. If anything the high take-up crystallises the distrust between banks in the interbank funding markets.

In the commodities space, crude oil prices pushed higher this afternoon after a larger than expected shortfall of 10,570k barrels at Cushing against an expected shortfall of 2,125k. With concerns about economic growth tempering upside and worries about unrest in the Middle East tempering downside oil prices look set to remain in a range.

Gold prices shot sharply higher initially this morning pushing above its 200 day moving average at $1,623 before sliding sharply back as the US dollar pulled back some ground. Copper prices shot higher initially in the wake of the ECB long-term refinancing operation, however prices soon fizzled out as the feel good factor fell flat.

As an aside, today's US existing home sales didn't do much for momentum. Sales were up 4 per cent over month, much better than the 2.2 per cent growth the street had expected. Annualised sales were 4.42 million, much less than the 5.05 million expected. Why the big discrepancy? It appears that past numbers were overstated due to multiple listings of the same home and were way too high. The National Association of Realtors revised annual average home sales for the 2007-2010 period downward by 14 per cent to 4.42 million from 5.15 million. This could have led to expectations for this month being too high but should be readjusted in time for next month's numbers.

Focus now turns to third-quarter GDP revisions starting with New Zealand this afternoon followed by the UK and US overnight. US jobless claims due overnight may also attract a lot of attention as the street looks to see if last week's big surprise was a one-off fluke or an indication of stronger employment trends.

Later in the morning, University of Michigan consumer confidence, the US leading indicator and house price data are all due.

Colin Cieszynski is a market analyst and education manager at CMC Markets Canada. Michael Hewson is a market analyst at CMC Markets UK. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

* SCOREBOARD's Adam Carr is currently on leave, returning in the new year.

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Colin Cieszynski & Michael Hewson
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