European stocks and the euro firmed on Wednesday, enjoying a brief surge after banks borrowed around $489 billion euros from the European Central Bank at its first-ever offer of three-year loans on hopes it will be a significant step toward easing the region's two-year old debt crisis.
The ECB has indicated it wants the ultra-cheap, long-term funding to boost trust in banks, free up money markets and tempt banks to buy Italian and Spanish debt.
The very heavy take-up of the ECB's three year long-term refinancing operation (LTRO) provides some encouragement that banks' liquidity needs are being amply met, said Jonathan Loynes, chief European economist at Capital Economics.
But while this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too, he said.
Traders polled by Reuters just hours before the operation expected the ECB to allot 310 billion euros, up from a forecast of 250 billion euros in a poll on Monday.
The FTSEurofirst 300 <.FTEU3> index of leading shares was up around 0.6 percent on the day, pulling back from an initial bounce.
The euro was up 0.2 at $1.3101, after earlier nearing Tuesday's high of $1.3132. It is well off an 11-month low seen last week of $1.2945.
German government bonds edged down although on low volumes as the holiday season approaches.
Italian 10-year bond yields, which have been falling rose slightly to around 6.7 percent.
Italy's outlook was hurt by news the economy contracted by 0.2 percent in the third quarter compared to the previous three months due to a slump in domestic demand. The negative GDP number put the country on track for what analysts expect will be a prolonged recession.
We expect this trend to continue in the fourth quarter, when there will be an even sharper contraction, and also in 2012, said Vladimir Pillonca economist at Societe Generale.
ECB in graphics: http:/link.reuters.com/neg32s
ECB bond buying and Euro zone bond yields (live graphic) http:/link.reuters.com/pax23s
British consumer morale hit its lowest in almost three years in December as households' became much more pessimistic on the outlook for the next 12 months, a survey from researchers GfK NOP showed.
Gold's rose to a one-week high on Wednesday on the encouraging economic data from the United States and Germany, with a weak dollar adding support to prices. Spot gold is currently up 1.1 per cent to $1,632 an ounce.