Faltering European Stocks to the ECB: Thanks, But No Thanks

(Bloomberg) -- Squint and it might just look like the European Central Bank has revived the region’s faltering stock rally. Open your eyes a little wider and the picture looks much less rosy.

The Stoxx Europe 600 started the day in the red, sharply reversed losses, and then fell right back into negative territory, trading 0.6 percent lower as of 2:41 p.m. in London. With investors in search of new catalysts amid a lull in trade updates, the ECB delivered what initially looked like a fillip: a new round of cheap loans, known as TLTROs, to the region’s banks and guidance to keep rates on hold at least through year’s end.

Faltering European Stocks to the ECB: Thanks, But No Thanks

But as President Mario Draghi started to speak, the markets had second thoughts. While he said the risk of a recession is “very low,” the stimulus came alongside cuts to growth forecasts.

Banks, which initially rallied on the ECB news, even swung from a 0.4 percent gain to a 2.3 percent loss. Low rates hurt lenders’ profitability, and the details of new TLTROs disappointed investors. They start in September, and even Draghi himself, when asked whether receiving banks can pay dividends, said the loans are only somewhat more favorable than the market.

“The interpretation of today’s measures is negative as low rates for longer hurts a lot banks’ margins and the new TLTRO doesn’t look as attractive as the previous ones,” said Nuria Alvarez, a banking analyst at Renta 4 in Madrid.

The news confirmed what traders had been speculating all year: that the ECB would step in as economic momentum sags. But that might just be investors’ problem, especially if they’re looking from across the Atlantic -- Why bet big on European stocks when growth is slowing to the extent that the central bank has to reverse its tightening plans? Evidence of a recovery might need to come first.

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