Goldilocks at the ECB!

The 530 billion euros borrowed from the ECB in the secondLTRO operationannounced today was perfect — neither too much, nor too little — enabling most to say the operation was a success. Eight hundred banks participated, well above the 523 that participated in the first round in December.

European Central Bank
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European Central Bank

Yields on the Italian 10-year declined again to 5.24 percent, the lowest since September of last year.

So why are European stock markets mixed, with southern European bourses mostly down? Because it's widely believed that the ECB wants this to be the last operation of its kind. They want the banking system to start operating more normally. In other words, they want the banks to lend to each other for their funding needs, and not come to the ECB trough.

Good luck with that. The one thing we do know: when the ECB — or the Fed — cut the spigot off, stock markets run into trouble.

And the Fed is cutting off the spigot. Its Operation Twist is expected to be completed at the end of June. In Operation Twist, the Fed has extended the average maturity of the Fed's portfolio of Treasurys, a way of keeping rates low without printing more money and expanding the Fed's balance sheet.

That's one reason the CBOE Volatility Index, sitting near its lows at 17-18, jumps to 27 on the July futures contract and nearly 30 by October.

You can bet Ben Bernanke will be asked about the end of Operation Twist and about any prospects for QE3 during his testimony today in the House of Representatives.

Draghi for President, Draghi for President!

The S&P issued an innocuous sounding report this morning, "ECB's Funding "Bazooka" Gives Eurozone Banks Time To Reshape Their Business Models And Balance Sheets," but it was really a big pat on the back to ECB head Mario Draghi.

While noting in the press release that "the ECB's actions do not address the underlying structural issues in the banking sector," S&P makes it clear they believe the LTRO has been a huge success: "We believe that the ECB's intervention has materially reduced the risk of a liquidity-driven bank failure, and averted the possibility of a severe credit crunch and additional recessionary pressure across the Economic and Monetary Union (EMU or the eurozone)."


1) U.S. futures jumped a couple points at 8:30 AM ET when the second Q4 GDPestimatecame in at 3.0 percent, above the 2.7 percent expected.

2) Good February, so far:

Nasdaq +6.2 percent

S&P 500 +4.6 percent

Dow Industrials +3.0 percent

  • S&P, Dow headed for best February since 1998.
  • If S&P closes up more than 4.36 percent this month, it will be the best overall month since last October.
  • Nasdaq is having best February since 2000. For that to hold, Nasdaq has to be up more than 4.23 percent

This year

Nasdaq +14.7 percent

S&P 500 +9.1 percent

Dow Industrials +6.5 percent

Dow on track for best year since 1998, S&P since 1991.

But there is a more mixed picture in Europe, with southern countries lagging:

February 2012

Germany +7.2 percent

France +5.2 percent

Portugal +4.7 percent

Italy +4.1 percent

Spain +0.1 percent

Greece -7.7 percent

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