Today’s early signs of life in the market were arguably due to the large drop in the Euro. And by “early signs of life” I mean the drop of US equities at the open. We don’t care which way it moves, just as long as “something” is happening. Sadly, when the Euro slowed its trading pace, which usually occurs @ 1-1:30pm CT, the mini-S&P slowed as well. In fact, the S&P traded in about a 5-pt range from mid-morning into the close.

Some folks were perplexed: “Why is the Euro falling? Wasn’t the Italian auction excellent?” Yes it was; however, it was only an auction for 6-month Bills. Heck, I’ll bet even Greece, California, and Illinois can auction off 6-month Bills. Nevertheless, the yield demanded by investors was 50% lower than the Nov. 25th auction.

What probably worried the markets were the recent actions of European banks and Thursday’s next Italian auction.

This morning’s news from the European Central Bank shows us that (ECB) overnight deposits swelled to a record high of €455 billion. Why would banks park their money at the ECB and get 0.25% when it costs 1%? Isn’t that a guaranteed loss? Doesn’t this imply rather forcefully that the banksters know there is another shoe ready to drop? It sure seems like it, and that’s why I believe the Euro fell apart today.

So what could be that other “shoe to drop?” Well, if there is one, it suggests that the bankers know they will not be buying the Italian junk…pardon, debt…and therefore the trading desks slammed the Euro and bought “safety” in the US dollar.

Perhaps they know something else entirely? Is a major downgrade of sovereign debt coming to a EuroZone country and that caused the move in the Euro/Dollar? Thursday could be interesting.

Larry Levin
Founder & President - Trading Advantage