How European Banks Affect the U.S.
As the consumer continues to deteriorate it can't help but impact Europe first.
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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