The Fed intervention in global markets this morning appears to be a time-buying mechanism for the ECB. Obviously the very NEED for intervention in the first place ought to be cause for concern amongst global equity strategists. Something very foul was in the Euro stew just a few days ago (picked up by the futures signals service we use). The squeeze on global dollars has to have pushed a major european player to the brink because by Monday morning (tip of the hat to Zerohedge) the Fed had already voted to intervene.
No Change in Underlying Fundamentals
The circumstances which pushed the Fed intervention have not dramatically changed. The Fed does not act typically to bail out foreign institutions unless US interests are likely to be impacted (which in today’s linked financial over-debtedness really makes the restriction moot) so the situation had to be dire indeed. We don’t necessarily need to know which bank or banks were in trouble but what is important is that the EMU ECB Eurozone problems that existed yesterday (and had to be the source of the trouble) are still there today. No amount of window dressing in US statistics is going to smooth over significant deficit issues in Spain, Greece, Belgium, Italy, etc. Banks aren’t lending to each other to fund their dollar needs and as a result the Fed intervention has been necessary to keep the supply of dollars flowing to institutions that need them.
Expecting to See Market Resume Declines Post as Support Withdrawn
I expect the market to resume its generally downward trajectory as the Fed reduces international support lines. Fear not, the windows will be flung wide open the next time USD funding becomes an issue again (think we’ll see it again before year end? Maybe that would be a fun reader poll). Today’s market boost will likely be given back in stages over the next week to ten days if history is any indicator.