February 28, 2012 / 12:37 PM / 5 years ago

Fall in oil, ECB cash hopes support euro, European shares

5 Min Read

Bull and bear statues are pictured outside Frankfurt's stock exchange February 1, 2012.Alex Domanski

LONDON (Reuters) - A fall in oil prices and the European Central Bank's looming cash boost for banks lifted the euro and shares on Wednesday, although some investors worried that the benefits of a second injection of cheap money may be short-lived.

Brent crude oil futures slipped to around $123 a barrel from highs above $125.50 late last week, ending a surge that had dampened demand for other commodities and slowed the gains in global stock prices.

Lower oil prices were also supporting U.S. equities, with stock index futures pointing to a higher open on Wall St.

Markets expect European banks to borrow about 500 billion euros ($670 billion) of the cheap funds on offer from the ECB on Wednesday, although forecasts range from 200 billion to 750 billion euros.

"The euro has priced in a cash injection of 500 billion euros and anything above 600 billion will be risk positive and push the euro higher," said Ankita Dudani, G-10 currency strategist at RBS Global Banking.

On the other hand, a take-up of less than 400 billion will hurt risk appetite and could drag the euro lower, she added.

The euro stood at $1.3444, up 0.3 percent on the day, trading not far from a near three-month peak of $1.3487 set on Friday. The U.S. dollar was unchanged against the yen at 80.50 yen, below a nine-month high of 81.66 yen hit on Monday.

European stock indexes pushed higher as bank shares gained on expectations for a good take-up of the ECB money, which is designed to improve their balance sheets and encourage lending activity to boost the wider economy.

The FTSEurofirst 300 .FTEU3 index of top European shares was up 0.25 percent 1076.48, still just below a seven-month high hit last week before rising oil prices unnerved investors. The STOXX Europe 600 Banks index .SX7P up 0.3 percent.

A solid session on Asian markets, helped by strong gains in Japan's Nikkei index .N225, which has gained about 15 percent this year, pushed the MSCI world equity index .MIWD00000PUS up 0.33 percent to 331.93.

Limited Benefits

However, despite the gains in both the euro and European shares, concerns are growing that the boost from Wednesday's ECB lending operation may be short-lived.

The ECB tender, which follows a similar operation in December, is widely credited with easing credit pressure across the whole European banking system, and enabling banks to participate more in euro zone government debt auctions, bringing down government borrowing costs.

But Ian Stannard, head of European FX strategy at Morgan Stanley, said renewed selling of the euro could emerge soon as the economic picture was still weak within the euro zone, while the flood of cheap public money reduces the need for private capital inflows into the euro area.

"From a flows perspective, the use of the ECB facilities is basically squeezing out foreign investor capital," he said.

"Banks are using the funding from the ECB for their refunding purposes when normally they would have had to go out and attract foreign investor capital, so the euro zone will not be seeing those inflows."

Share markets have also rallied since the ECB's first loan tender and market players expect Wednesday's extra burst of cash to support more buying initially, but maybe not for long.

"It adds some liquidity to the (equity) market and there are lots of strategists that think this will push stocks higher," Koen De Leus, strategist at KBC Securities said.

"But it is just a sign that banks still cannot go to the interbanking market to get loans, and it is probably the last operation for a while. I would not get my hopes up on a strong rally. The market could still go down 5-10 percent."

Offsetting these concerns on Wednesday, however, were signs that oil prices have ended a surge linked to concerns over supply from the Middle East.

Front-month Brent was down $1.17 to $123 a barrel, after also losing more than $1 a barrel on Monday. U.S. crude fell 46 cents to $108.10 a barrel, after ending seven straight days of gains in the previous session.

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Oil in various currencies: link.reuters.com/qun66s

Euro zone bank funding strains link.reuters.com/rer25s

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Gold edged up to $1,776 an ounce after two straight sessions of losses, gaining in line with other major assets on hopes for the ECB loan offer, with the weaker U.S. dollar against the euro lending some extra support.

In debt markets Italy's 10-year borrowing costs fell below 6 percent to the lowest level since last August at an auction of fresh debt in a clear sign of how the flood of ECB money into banks is helping to ease the region's debt crisis.

The successful sale left Italy at the half-way mark of a major refinancing program in the first few months of the year, easing concerns in debt markets that it would struggle to refinance all its maturing debts.

Editing by Anna Willard

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