Today�s early signs of life in the market were arguably due to the large drop in the Euro. And by �early signs of life� I mean the drop of US equities at the open. We don�t care which way it moves, just as long as �something� is happening. Sadly, when the Euro slowed its trading pace, which usually occurs @ 1-1:30pm CT, the mini-S&P slowed as well. In fact, the S&P traded in about a 5-pt range from mid-morning into the close.
Some folks were perplexed: �Why is the Euro falling? Wasn�t the Italian auction excellent?� Yes it was; however, it was only an auction for 6-month Bills. Heck, I�ll bet even Greece, California, and Illinois can auction off 6-month Bills. Nevertheless, the yield demanded by investors was 50% lower than the Nov. 25th auction.
What probably worried the markets were the recent actions of European banks and Thursday�s next Italian auction.
This morning�s news from the European Central Bank shows us that (ECB) overnight deposits swelled to a record high of �455 billion. Why would banks park their money at the ECB and get 0.25% when it costs 1%? Isn�t that a guaranteed loss? Doesn�t this imply rather forcefully that the banksters know there is another shoe ready to drop? It sure seems like it, and that�s why I believe the Euro fell apart today.
So what could be that other �shoe to drop?� Well, if there is one, it suggests that the bankers know they will not be buying the Italian junk�pardon, debt�and therefore the trading desks slammed the Euro and bought �safety� in the US dollar.
Perhaps they know something else entirely? Is a major downgrade of sovereign debt coming to a EuroZone country and that caused the move in the Euro/Dollar? Thursday could be interesting.
Larry Levin
Founder & President - Trading Advantage