Beyond Today

Submitted by Nic Lenoir of ICAP

There is the danger of walking out of today's session with a sense of relief for equity traders, because that insane move was "just" a fat finger or at least it is the word in the media and on the street. There are three things to keep in mind: 1/ the market was down 3% already when the alleged input error happened 2/ we are still in the middle of a major unresolved currency crisis threatening all of Europe and that led to deadly riots already 3/ the financial industry does not need any bad press right now and detractors just got some more ammo to push tough regulation.

Let's completely put aside the fat finger trade in terms of price action. The one thing the financial industry did NOT need is any bad press or give reasons to people to pass regulation that could have dramatic consequences. I am not saying I don't think any reform is needed, clearly some things haven't been working great, but don't kill the golden goose either. Financial innovation and capital markets development have been one of the main enablers of the phenomenal growth of the 90s. The problem is that when CDO^3s (yes that actually did happen) blow up and threaten the system it looks like some mad scientists blowing up the lab. When someone inputs billions instead of millions (if that really happened) it looks like a kid blowing his hand out with a firecraker. Unfortunately people will use the incident to serve their political means.

Talking about politics, I almost felt bad having such harsh words for Trichet and Weber yesterday and felt I might have let my emotions past what is appropriate in a market commentary. Watching this morning's press conference however I felt like I probably held back a little much. Without implying Trichet is responsible for anything going on in Greece, there have been three dead people there yesterday in the midst of riots: claiming the purchase of sovereign bonds by the ECB has not even been discussed is arrogant and most importantly it is pointless. It would be one thing to argue that the ECB is reticent to go down the path of quantitative easing, but it is disrespectful and simply not true to claim it hasn't been discussed. It has been the word on everybody's lips for the past few days, so pretending it wasn;t even a topic of conversation is misplaced arrogance, plain and simple. The market reacted very badly to it, and even without knowing what the process is to remove the head of the ECB one can hope it is being discussed.

So what to expect? The federal reserve is likely to offer currency swaps to other central banks like in 2008 if the funding situation doesn't improve rapidly. The ECB is very unlikely to come up with a solution tomorrow let's be honnest especially given that they haven't started discussing one apparently. The world is very binary right now: default or quantitative easing. It seems improbable at this point that private demand will step up for any PIIGS sovereign bond without one or the other. A third solution being talked about would be to let the PIIGS fly out of the Eurozone, but obviously devaluation (even if it takes the place of an actual default which might not be avoided anyways) would punish the holders of PIIGS debt and the domino effect would not be prevented in terms of contagion to members still remaining in the Euorzone. This is why I do not think this latter solution is a viable one. Hence being left with a choice of defaulting within the Eurozone or quantitative easing. Sadly there is no rabbit hiding in this hat. Politicians will come to that realization after a lot of destructive arguing and back and forth, and I personally lean towards the idea they will try to find some form of debt restructuration but end up adopting Q.E.. Sadly this will come only after more volatility and chaos in the markets. Some have questioned why the markets get to decide what politicians should do. To that I would respond that when politicians run huge deficits and burry countries in debt, they hand out the keys to their countries to their creditors.

We remain strongly convinced EURUSD bears, and EUR-almost-whatever bears in general. Eastern European currencies should get affected quite a lot as well as they depend on Western European demand which is obviously going to be annihilated. We also called for a strong JPY a couple days ago and we had spectacular downmoves in AUDJPY and USDJPY today. Emerging market currencies should be weak in general and we point out to ZAR we recommended shorting recently as well. Given there is no resolution to any issues right now I believe more downside for risky assets is being expected even though bounces could be sharp. Psychological market response to NFP tomorrow will be very interesting, though ahead of the weekend it is hard to imagine who would want to go home long risk. In that perspective could a strong number tomorrow be ignored by the time the bell rings? Absolutely.

1,041 is the key support in S&P futures below.

In the name of French people I apologize for Jean Claude Trichet.

Good luck trading,