Eoin Treacy's view On July 5th the ECB lowered short-term interest rates by 0.25% to an historic low of 0.75%. Concurrently they lowered the overnight deposit rate to zero. This presented the banking sector with a challenge. The majority of banks had been borrowing at the discount window and depositing the proceeds with the ECB on an overnight basis. This minimised risk to their balance sheets and helped ensure they had ample liquidity with which to deal with all too common unforeseen circumstances. What did they do when they could no longer earn a return on deposits?

This chart illustrates the decline in funds on deposit and the rise in funds lodged at the ECB's current account following the July 5 th announcement. Funds on deposit contracted by €451 billion from early July, while funds lodged in the current account rose by €393 billion. It is therefore reasonable to assume that the balance of €58 billion was invested elsewhere. German 3-month yields dropped sharply from early July and remain firmly in negative territory (-0.129%). German 2-year yields dropped into negative territory the week after the ECB decision and continues to contract. A clear upward dynamic will be required to suggest a return to supply dominance.

At negative yields, the momentum of the decline needs to be sustained in order for investors to profit. As the ECB ramps up its rhetoric with regard to purchases of peripheral debt and broad based liquidity provision, the potential for a renewal in risk appetite continues to increase. However some concrete evidence of central bank action is likely required to act as a catalyst for investment sentiment.

Some commodities, consumer related equity sectors and a number of emerging stock markets have already moved to positions of outperformance. Additionally, the Nasdaq-100 found support in the region of the upper side of the underlying trading range and the 200-day MA earlier this month. It has held a progression of higher reaction lows since and a sustained move below 2500 would be required to begin to question medium-term scope for additional upside.