Market Analysis

European shares gain on hopes of a new ECB stimulus plan

European indices moved sharply higher on Friday after ECB board member Benoit Coeure said that the European Central Bank was discussing the idea of issuing new cheap loans to European banking institutions. Especially as many EU nations banks would face funding problems in 2020 when previously issued ECB bank loans are due to be repaid.

Benoit Coeure, who is amongst the front-runners to replace outgoing ECB President Mario Draghi, whose tenure as European Central Bank President comes to an end this October, said that a new TLTRO programme was indeed possible, should such a liquidity operation is needed to help Europe’s failing banks.

More than 720 billion euros in current four-year TLTRO financing operation is still outstanding and will start to mature in June next year. Banks in Germany and Italy are amongst the most troubled and face serious funding problems when the European Central Bank’s Targeted Long-Term Refinancing Operation comes to an end.

Officials from some of Europe’s failing bank are now eagerly awaiting the release of the European Central Bank’s meeting minutes this Thursday, with any references to a new TLTRO program likely to spark the next major rally in European banking shares. If the meeting minutes fail to mention any new LTRO programme, financial markets are likely to be on edge until the next ECB monetary policy monetary, which is scheduled to take place on March 7th.

The ECB has the mandate to keep EU inflation around two percent, with fears now growing that the European Central Bank will slash its growth and inflation forecasts when they meet next month. If the ECB does offer new loans to troubled European banks, it could be seen as a move by ECB President Draghi to target inflation without cutting EU interest rates before he departs this coming October.

Central banks around the world are starting to turn more dovish and tighten monetary policy as global economic growth subsides, with the European Central Bank recently following the Federal Reserve and changing its own policy communication to investors as the euro-area outlook deteriorates.


Ger30 Daily Mountain Chart | Source : ActivTrader

Ger30 Daily Mountain Chart  | Source: ActivTrader 


The German DAX was amongst the strongest performing indices on Friday, following the news that the European Central Bank may offer new loans to Europe’s struggling banking sector. If we see the German DAX moving to a fresh February trading high, found at the 11,380 level, it is quite possible we could see a strong upside breakout towards the December trading high, located at the 11,550 level.

If buyers fail to take out the 11,380 level over the coming sessions, it is quite possible we will see a minor period of price consolidation in the German DAX, until the ECB meeting minutes are released later this week.


Written by Nathan Batchelor, External Analyst


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