May 11. Europe’s huge bailout already fading

Though the Dow gained 400 points yesterday, some of the market moves associated with Europe’s huge weekend bailout package are fading.  For example, EUR/USD traded as high as 131 early yesterday, but is right back to Friday’s level of 127.30. The dollar funding crunch was apparently significantly alleviated as EDM0 settled up 14 on the day at 99.49, but trades 99.46 this morning. Gold was down $20 early yesterday morning but has regained most of the pullback.
–Perhaps a cautionary tale for Europe is what is currently going on in China.  Shanghai Comp is making new lows (-19% on the year). After the financial crisis, China committed the biggest stimulus package as percentage of GDP, but now is faced with rising inflation and falling stocks.
–In terms of the US situation, it’s worth noting that Fannie and Freddie are back asking for more funds after horrendous Q1 results.  FNM asking for $8.7b and FRE for $10b.  Perhaps as the Fed bought MBS in Q1 the companies themselves were left with the lesser quality paper.  In any event, when the gov’t lifted the $400 billion cap on the two companies at Christmas last year it should have been obvious that they were being used as tools of administration housing policy to keep funding flowing in spite of questionable collateral. Additionally, individual state budgets are still in crisis.  Illinois for example is facing a $13 b shortfall yet the legislature recessed without taking action…by many measures worse than CA.

Posted on May 11, 2010 at 4:04 am by alexmanzara · Permalink
In: Eurodollar Options

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