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A Prelude to LTRO

The hype surrounding the latest version of the ECB's LTRO is certainly not like the last. There was a muted output in terms of reactions across currencies, and now we face everything the mainstream media has to throw at us in terms of this event. More people are listening, thus a higher residual action (le volatility) is expected.

There have been reams of articles discussing how much is potentially being distributed, effects on both a long-term and short-term scale, etc., so I'll hold my breath and provide you with a few links below. One way or the other this is not your college financial aid package and essentialy emulates quantitative easing in terms of its final desired outcome.

  • Release time: 5:15am EST
  • December 21st (LTRO1):  E 489bln lent
  • Median expectation for LTRO2: E 500bln most E 450bln to 600 bln, steering closer to the lower side (effectively pairing estimates against their only point of reference: LTRO1). Bottom line: all the banks have surveyed their clients and thrown in their 2 cents as well – investors seeking high output, banks seeking lower. Ultimately scattered in the range above, with 300bln to the lower side cited by several banks.,
  • More take-up than expected to see an initial positive reaction in carry trade funded with Euro and Euro vs. the dollar.

Let's talk about price. First, the bullish case:

With the typical reaction of any form of government aid / bailout, risk-on has been the traditional trade. Expecting this, the market has continued to bid up the euro essentially “buying the rumor” ahead of the release.

There is little clarity in terms of how this will play out, simply stated, other than the mere fact that most analysts are viewing it as an immediate risk-on event (a good “safety” bet – if the market ticks 5 pips higher they'll all be saying they were right). Over the course of time this traditionally tapers off and corrects. So needless to say, another jerk higher in price wouldn't be much of a surprise from this one.  The market has been bidding straight through New York / Asia and awaiting it's stimulus.

After LTRO1, you'll remember, it was actually “risk off” until those bonds (mentioned below) corrected 2 weeks later and hopes for peripherals started to resurrect yet again. Intraday, it was “risk-on” for minutes prior to downfall.

And the bearish case for LTRO:

If LTRO mimics anything like that of the reaction received as a result of QE1 and QE2 by the Fed, the reverse should (in a black and white perspective) put selling pressure on the Euro. During both phases of quantitative easing, riskier assets took the helm and the dollar effectively got crushed (EUR/USD, after the initial rally of QE1 then sold off as a result of deteriorating conditions in Greece and other peripherals). One would think that, “well, should the same occur in a European version of QE, where the Euro is the one that actually gets sold?”….this, of course, all risk on / off correlations aside.

And about that risk on / off correlation – the lower rates get for the EU, the less attractive buying into it should effectively become. This is indeed another form of “side pocket easing”. After LTRO 1 we saw 2 weeks of higher yields in Italian and Spanish bonds before significant downfall.

Second, when is the hell are investors going to indeed realize that Greece's (and other peripheral nations') troubles really aren't so good after all? There is really no need elaborate here as the clock is ticking but the gist is that several of Europe's nations are still deeply suffering while generally good news is coming from it's counterparts around the globe.



A Few Related Reads: 

Last Thoughts on LTRO (Marc Chandler)

LTRO2 101 Top Down (Zero Hedge):

Mixed Signals Ahead of LTRO & Cause/Effect Analysis: