Markets Cheer ECB's Joint Move To Pump Dollars Into Banks

Stocks and commodities rose, as investors who had dumped riskier assets for gold and the dollar reversed those trades on the prospect of a coordinated central bank effort to lubricate Europe's banking system with
more dollars.

In concert with the Federal Reserve, Bank of England, the Bank of Japan and the Swiss National Bank, the European Central Bank announced a move to pump dollars into European banks, which have been punished by markets over the last several weeks by fears stemming from the euro zone's sovereign debt problems.

Speculation has been rife that banks were running low on dollars to fund operations. Analysts have warned that banks' exposure to distressed European sovereign debt could unleash a financial cataclysm that ran the risk of sending an already weak global economy spiraling into recession. Those fears converged with Greece's long-running financial distress, which investors fear could lead to a disorderly restructuring or default.

"This just highlights the amount of stress that's been building in the European financial system and the difficulty that certain banks are having in accessing dollar funding," said Peter Boockvar, managing director and equity strategist at Miller Tabak & Co. "The house is burning and we're dousing it with some water [but] that doesn't necessarily mean the fire is fully out."

The ECB's move overwhelmed dour economic data that showed U.S. jobless claims rising in the latest week, rising consumer prices in August and decidedly weak U.S. manufacturing activity.

Markets, which have anticipated some form of concerted action, sent risk-sensitive assets soaring on the news. U.S. stocks surged in early Thursday trading, with the Dow Jones Industrial Average up 0.6% at 11309, while the Standard & Poor's 500 index rose 0.4% to 1193.

Oil futures rose 1.3% to $90.04 a barrel on the New York Mercantile Exchange, while copper prices were up 1.2% at $3.9325 a pound. Prices have been battered in recent weeks by concerns that the Greek debt situation will weigh on the broader economy, pushing down commodities demand.

Safe harbor assets, however, took a pounding. Benchmark U.S. 10-year note prices fell sharply, yielding about 2.097% as traders responded more to bearish consumer price data than the ECB's surprise move to enhance liquidity.

Gold futures slid to a two-week low after the liquidity announcement, as gains in risky assets such as stocks and some commodities limited demand for the metal as a safe-haven. The December-delivery contract was recently down 2.2% at $1,786.10 a troy ounce on the Comex division of the New York Mercantile Exchange.

Meanwhile, the dollar suffered sharp losses against major European currencies, as analysts said the short-term increase in the supply of dollars would undermine the greenback in the short-term. The euro was at $1.3874, after having touched $1.3916, up more than 1% according to EBS via CQG. EUR/JPY was at Y106.55, after having surged to Y106.93, also up more than 1% and EUR/CHF was at CHF1.2055, up 0.07%.

The ECB's measures are "a backstop" for dollar funding and "presumably this is meant to calm down the market," said Aroop Chatterjee, foreign exchange strategist at Barclays Capital in New York. "It alleviates pressure on the banking sector and is a positive for the euro."