European stocks and the euro slipped back yesterday as initial gains made on news of a massive bank liquidity injection by the European Central Bank faded in unease at the huge amount offered.
The ECB provided commercial banks with a record €489.19 billion via its first-ever 3-year refinancing operation, a move first welcomed as a decisive step in calming the eurozone debt crisis by bolstering the banks.
However, the amount involved could mean that the banks were in even worse shape than first thought and as investors took that view on board, the markets fell back, dealers said.
They said there was also some profit-taking given the sharp advance seen on Tuesday after a series of strong US and German economic data.
In London, the FTSE-100 index of top companies closed down 0.55 per cent to 5,389.74 points. In Paris, the CAC-40 lost 0.82 per cent to 3,030.47 points and in Frankfurt the DAX 30 shed 0.95 per cent to 5,791.53 points.
Madrid fell 0.90 per cent and Milan shed 0.97 per cent.
In New York, stocks were lower too, with the blue-chip Dow Jones Industrial Average down 0.69 per cent at around 1710 GMT while the Nasdaq Composite fell 0.58 per cent.
However, US shares were off their lows after revised numbers for the US housing market suggested it has finally hit bottom, offering hope for a pick-up in activity.
The euro slipped to $1.3051 from $1.3078 in New York late Tuesday. Dealers said investors had become unsettled by the ECB action which drew increasingly sceptical reaction through the day.
“Such a large amount is worrying and shows that there are considerable tensions on the interbank funding market,” Xavier de Villepion, dealer at Global Equities, said, referring to lending among the banks.
Moneycorp analysts were also wary about what the banks would do with the funds, which they get at just one per cent and then can put into relatively safe government bonds returning much more.
“Ostensibly, the purpose... is to avoid a credit crunch resulting from banks’ reluctance to lend to one another,” they said in a note.