For all the economic gloom, investors have just enjoyed one of the best starts to a year since 1989. Despite some recent profit-taking, the FTSE100 is still up 2.8 per cent since traders returned to work on 3 January. Since 21 December 2011, it's up 5.7 per cent, while across the Channel, the CAC40 has risen 9 per cent and Germany's Dax is 10 per cent higher.
That date is of particular importance. It is when the European Central Bank (ECB) launched its Longer Term Refinancing Operation (LTRO), designed to head off a liquidity squeeze among European banks. The LTRO has been the driving force behind the recent strong run - and is also the reason investors should be wary.
The LTRO provides a three-year lending facility to Europe's cash-strapped banks as the inter-bank market remains decidedly chilly. Without this facility, it is questionable whether a number of European banks would have made it to the end of the year. The size of the funding problem is immense; it is estimated that from 2012 to 2014, there is €1.7tn (£1.4tn) in bank debt maturing.
Faced with refinancing on this scale, European banks were becoming increasingly reluctant to lend to each other for fear of default, and US money-market funds were shunning European bank paper. The "Ted spread" - the difference between the interest rates on US Treasury bills and eurozone interbank rates, and a crucial market indicator of banking sector liquidity - steadily rose from 20-25 basis points over the summer to a dangerously high 61 basis points (0.61 percentage points) in December.
The timing of the LTRO facility was key, because the majority of bank refinancing takes place in the first half of 2012. An LTRO extension to provide a further €500bn to €1tn will launch in February. This isn't so much European quantitative easing as liquidity crisis management.
Not surprisingly, the main beneficiaries of this funding in the UK market have been the banks. Since 21 December, RBS shares are up 36 per cent and Lloyds is up 31 per cent.
