Market Snapshot: Reaction To Trichet - We Are Not Impressed

Out of the gate, credit and equity markets seemed happy that Trichet was offering CBPP2 and a Euro-TLGP II program in Oct/Dec but that quickly subsided (what no rate cut?) as rather surprisingly the market realized for itself - with little cajoling from us - that while short-term roll risk was reduced, capital still remains a 'problem' as the seemingly known (haircuts/exposures) unknowns and we assume unknown unknowns (contagion impact) remain tangible and this does nothing solve the underlying problem of insolvency. We were pleasantly taken aback by this reaction (and not in a Schadenfreude manner) but more simply that the market is 'getting it' - kicking the can by extending more and more credit (as Peter Tchir alluded to earlier) simply has its limits - and perhaps we are there.

Stocks and spreads are well below their starting point (of Trichet's speech) and have dropped notably from the mid-speech euphoria. FX market saw EUR weakness pretty much straightaway but it was AUD that weakened the most (as carry was unwound). EURUSD is about 0.33% weaker so far but JPY remains unch...

Chart: Bloomberg