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How European Banks Affect the U.S.


As the consumer continues to deteriorate it can't help but impact Europe first.

The following was an exchange between Todd and Minyan Peter posted on the Buzz & Banter between 10:00 am and 11:00 am.

Todd: Look at me, the ECB!

I know, I know... it doesn't matter. We were watching the world worry warts a while ago and, well, they stemmed the crimson tide and turned the bears around.

Still, when you see the ECB tap their emergency fund for €3.9 billion (which attracts a penal interest rate)--and it's the largest sum since October 2004--it's worthy of a knows crunch.

Minyan Peter: Why Europe Still Matters

Europe remains the most important market to watch for interbank liquidity. What I don't believe US investors appreciate is how much of our credit is in the hands of European financial institutions - either on balance sheet or through special-purpose vehicles. And as the consumer continues to deteriorate it can't help but impact Europe first. As I said to someone the other day, watching the European markets is like watching the coming attractions of a movie.

It also feels to me like we are beginning to see a breakdown between between the commodity markets and the dollar/Euro exchange rate. Many participants believe that these two markets will continue to move in tandem - the dollar will fall and commodity prices will rise.

But exchange rates reflect relative economic strength. Should we see more trouble in the European bank market - and remember, we've already taken down two German banks and a British bank - I believe that all bets are off on the dollar/Euro exchange rate. At least in the short run.

I don't know that the market is positioned at all for that. And how that plays out through the commodity/China trade will be interesting to see.

-Minyan Peter (Position in FXI.)
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