Stock markets paid little attention to another credit rating downgrade of Greece and managed to gain modestly on Tuesday as oil prices fell for a second consecutive day, with investors awaiting the European Central Bank's next offering of ultra-cheap long-term loans to banks. Many of the world’s leading indexes have returned to levels they were trading at before last summer’s significant sell-off, and U.S. markets are above the levels seen prior to the collapse of U.S. investment bank Lehman Brothers in September 2008. This has led to a slowdown in buying momentum over recent sessions, particularly as oil prices hit nine-month highs.
While developments surrounding oil prices will continue to be closely monitored due to fears they may hinder the global economic recovery, investors will also be watching developments regarding Europe’s debt crisis, especially on Wednesday when the European Central Bank offers banks another round of three-year loans. The first such long-term refinancing operation in December was widely credited with helping to calm markets in 2012. Market consensus suggests that eurozone banks will take up around €500 billion ($669 billion), approximately the same amount taken up in December. This is equivalent to about 5 percent of the eurozone’s collective GDP.
“There can be little doubt that the ECB’s decision to channel nearly half a trillion euros into the eurozone banking sector in late December had a profound market impact,” said Neil Mellor, an analyst at the Bank of New York Mellon. However, he warned that the greatest risk is that in expanding its balance sheet, the ECB has “become increasingly hostage to the fortunes of the eurozone economy and loans that are of unknown discounted value.”
Investors remain uncertain how the markets will react to the actual amount taken up. For example, a higher-than-expected figure could raise concerns about the financial health of eurozone banks but might equally bolster prevailing market sentiment by increasing liquidity in the markets. One outcome of the December offering was that banks, flush with cash, sought investment opportunities—stocks and government bonds of Italy and Spain are believed to have benefited from the ECB’s generosity.
Given the uncertainty surrounding this week’s ECB operation, European stocks are trading within very narrow ranges. The FTSE 100 index of leading British shares was flat at 5,916, while Germany’s DAX was up 0.2 percent at 6,861. The CAC-40 in France was 0.1 percent higher at 3,446. U.S. markets are expected to open slightly higher, with Dow futures and the broader S&P 500 futures both up 0.3 percent.
Market sentiment has not only been buoyed in recent weeks by the apparent calm in Europe’s debt crisis but also by a series of strong U.S. economic data, particularly concerning jobs. Later, there will be interest in monthly durable goods orders figures as well as a closely watched consumer confidence report from the Conference Board.
However, European debt concerns will always remain present, especially since Greece still needs to secure the bailout funds required to avoid defaulting next month. Greek lawmakers are set to vote on a package of tough salary and pension cuts on Tuesday as part of measures needed to secure the payout of the debt-ridden country’s second international package of bailout loans.