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While you were sleeping: ECB boosts liquidity

Thursday 22nd December 2011

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Initial euphoria about the European Central Bank's bigger-than-expected generosity towards the euro zone's banks quickly faded amid concern the cheap three-year loans won't fix the fiscal crisis.

Europe's central bank has lent 489 billion euros to the region's banks to bolster their liquidity. That exceeded the median forecast for 293 billion euros in a Bloomberg survey of economists and the 310 billion euros expected by traders polled by Reuters.

Initially stocks and the euro strengthened amid hopes the increased liquidity would ease the strain of borrowing in the euro zone, with Europe's Stoxx 600 rising as much as 1.4 percent. However, it didn't take long for concern to get the upper hand, and the Stoxx 600 ended the day with a 0.5 percent decline.

The euro was last 0.2 percent weaker, after climbing as much as 0.9 percent after the ECB announcement, according to Bloomberg News.

"While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too," Jonathan Loynes, chief European economist at Capital Economics, told Reuters.

Bonds of debt-laden nations dropped. Yields on Italian two-year notes rose as much as 27 basis points to 5.25 percent, while Spanish debt yields with the same maturity increased 27 basis points to 3.5 percent, according to Bloomberg News.

Economic data didn't help, with consumer confidence in the euro zone dropping to the lowest level in more than two years.

The sombre mood hit home across the Atlantic too. In afternoon trading in New York, the Dow Jones Industrial Average fell 0.80 percent, the Standard & Poor's 500 Index shed 0.73 percent and the Nasdaq Composite Index dropped 2.21 percent.

Oracle paced losses in the Nasdaq, with the stock dropping more than 13 percent at one point after its latest profit results missed expectations.

While the latest data on US home sales showed signs of promise, a revision to earlier numbers proved just how bad things really were. The National Association of Realtors today said it had overstated home sales from 2007 to 2010 by 14.3 percent and that sales bottomed at a 3.30 million-unit pace in July 2010, rather than 3.86 million.

The group also said that sales of previously owned homes climbed 4 percent last month from October to an annual rate of 4.42 million units.

"The housing market is finding its bottom, and that will translate into more growth in GDP and less of a drag on consumer confidence," Robert Dye, chief economist at Comerica in Dallas, told Reuters. "But we still have a long, long way to go."

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