Notes From Underground

The weekend news has been that the European Union has gone on war footing in its battle against the market forces. Remember, its these market forces that are wreaking havoc on the designs of the the arrogant Eurocrats and their ill-conceived deams of an imperial state. It seems that a €500 billion package has been constructed to underwrite the sovereign debt of the European debt-stressed states.

We really don’t know how this package will work but the EURO is higher on the news and the S&Ps and other global equity markets have gone bid. We are presently trading above the S&Ps’ high made after the unemployment number on Friday. In addition to the European “bailout,” it has been announced that the FED and other Central Banks have agreed to reopen previously expired DOLLAR SWAP LINES, providing the necessary DOLLAR funding for any shortfall of dollars just in case European Banks have a run on dollar funding. The number from the FED has been reported to be $30 billion, so the immediate appearance is that the markets will be awash in liquidity.The only thing that is missing is a guarantee from the ECB to purchase sovereign debt in the secondary market, but there are rumors that the ECB has acquiesced to do just  that if needed. This support package has been deemed a success by the market but we advise caution because of the  result in the NORTH RHINE Westphalia election. The Christian Democrats and the Free Democrats lost control of the Bundesrat as they were defeated in a state they have held for many years. The loss was deemed an anti-Greek vote as German citizenry are in opposition to the Merkel appraoch to the “bailout” of Greece and the potential aid they expect going to the other PIIGS.

Even though the market presently accepts the injection of liquidity as a similar plan to the U.S. action post-Lehman Brothers, the political situation in Germany may temper enthusiasm. Then throw in the Constitutional Court challenge that is sure to arise from the five reputable economists and the euro rally may run into stiff resistance. We advise that you check the resistance levels on the EURO and the euro crosses. The market is certainly short the currency and the euro elites are committed to punish “speculators” so the rally will be painful. But if the bailout is successful, it ought to be able to take out last Sunday night highs anything short of that we leave this intervention something far short of a Plaza Accord.

In the U.K., we do not have word yet of a new government as Cameron and Clegg have yet to  form a Tory/Lib coalition. The British are aware of the need to put a government in place as the credit crisis in Europe needs the U.K. to play a role in its resolution. Labor Party leaders are advising Brown to step down from his position as party leader and accept the fact that the Labor /Lib coalition would not have enough seats to govern. The only hope for Labor is that the Tories move to form a national unity government because the problems facing Parliament are in need of immediate action and may well need a national consensus, but the Tories going that route is very doubtful. If Cameron and Clegg can tone done the rhetoric and demands of their party stalwarts, then a government can be formed and they can get to work on the budget and other financial issues. If this can be accomplished, then the STERLING ought to find some legs. It should be noted that at this time the British will not be part of the package of guarantees. There is a benefit to not being part of the EURO.

Tags: Dollar, Euro, Fed, PIIGS, S&P, Sterling

This entry was posted on May 9, 2010 at 10:07 pm and is filed under Currency, Federal Reserve. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.