By Greg Peel

The Dow closed down 100 points or 0.9% while the S&P fell 0.7% to 1165 and the Nasdaq lost 0.3%.

Tomorrow the eurozone may be no more. At least that would potentially be the fallout were the German constitutional court to deliver an adverse ruling prior to the opening bell on Wall Street tonight. The court is to decide whether the initial bail-out of Greece in 2010 breached the German people's property rights, whether the government acted illegally in contributing to subsequent Portuguese and Irish bail-outs without first obtaining parliamentary approval and, on an EU scale, whether ECB purchases of eurozone sovereign debt are illegal under the Maarstricht Treaty.

Legal experts do not, however, believe an adverse ruling will be delivered. Rather they expect the court to insist all future loan packages to eurozone members must first be approved by the German parliament. Such a ruling might save the eurozone, but it would also restrict the German government's capacity to act swiftly in a financial crisis. European response times have already been painfully protracted. The requirement for parliamentary approval would only slow the process further and encourage more market volatility in the meantime.

It is also expected that tonight German chancellor Angela Merkel will address parliament. As a compromise offer, her party has drafted a proposal to grant the German parliament veto rights over the European Financial Stability Fund.

Why does Germany want to save the eurozone anyway? Recent election results suggest the German people are dead against using taxpayer funds to prop up profligate Club Med members and were there are general election tomorrow, and not in 2013, Merkel would most likely lose power to those pushing an anti-euro barrow. 

There are two reasons: (1) allowing eurozone members such as Greece to default and withdraw would resonate back into German banks holding Greek and other eurozone sovereign debt, impacting on taxpayer loans and deposits anyway; and (2) Germany has been the greatest beneficiary of the common currency, given the weakness of peripheral economies has offset the strength of German and other northern European economies, keeping a cap on what would otherwise be the German mark, and thus rendering Germany's significant export industry competitive on a global scale. Germany's economy relies heavily on its manufacturing industry, and we all know what happens to manufacturing industries when one's currency becomes overly strong.

The Swiss certainly appreciate this problem, which is why last night the Swiss National Bank shocked the world by announcing the franc would no longer float freely, but would be capped against the euro at an EUD-CHF rate of 1.20. The Swiss franc was trading at EUD 1.12 at the time of announcement and hence rallied (ie the Swiss franc fell) nearly 10% in a blip – an extraordinary move for any currency.

All year the Swissy has been the paper currency of choice, playing global safe haven alongside gold. Like Australia, Switzerland's economy has been suffering as a result. 

This was the state of play in early trading in Europe last night, which saw further substantial falls on European stock markets. The German index fell another 4% having fallen 5% the night before, and European bank stocks were all again down double digit percentages. Having had a day off, Wall Street opened in the middle of the ongoing mayhem. The Dow immediately fell over 300 points.

Did anyone say Lehman? The CEO of Deutsche Bank certainly did on Monday to much criticism. The similarities are obvious – in 2007, US and other investment banks maintained unrealistic valuations of toxic CDOs on their books when a mark-to-market would effectively render them worth zero, and once mark-to-markets were enforced the ensuing solvency crisis threatened to bring down all US institutions. In the end, only Lehman was allowed to fall. In 2011, European banks are valuing sovereign debt positions for Greece et al on their books at unrealistic levels on the basis of default being prevented by ECB and bail-out fund intervention. Were these bonds to be marked to the levels priced by bond markets, European banks would find themselves insolvent. Of course we can't really call the situation in reality “another Lehman”. It's just the same Lehman, which was passed on to public from private hands and has never gone away.

Yet it is also true that the worst of the sovereign debt positions held by European banks represents only about 6% of bank capital – enough to spark capital adequacy and liquidity issues but not enough to render a bank insolvent as long as the credit market does not freeze as it did in 2007-08. Last month new IMF chief Christine Lagarde told European banks they needed to urgently recapitalise with private funds ahead of public funds where necessary. Yet most European banks have lost around half their market capitalisation value in 2011, so raising new capital at these levels would be basically untenable. Last night the IMF backed away from Lagarde's statement and suggested the number of European banks requiring forced recapitalisation are actually very few.

It was a turning point.

Around the same time, the Greek finance minister stepped up to say that the Greek government intended to speed up the structural reforms and austerity measures need to satisfy bail-out requirements. Can we believe him? Yesterday it seemed as if Greece was deliberately failing to comply, eyeing default and eurozone exit as the lesser of the evils. But the minister insisted that implementation was indeed progressing, it was just being held up in a backlog of reforms.

And while all of this was going on, general strikes were underway in Italy to protest Italy's new austerity package, as insisted upon by the ECB, as it moves to debate in the Italian senate.

As European stock markets headed towards their closing bells and the morning session on Wall Street unfolded, a rally ensued. The German and French markets ultimately closed down only 1%, while London closed up 1%. Wall Street wobbled its way up but by its closing bell the Dow had recovered 200 of those initial 300 points.

Aiding buying interest on Wall Street was the release of the US services sector PMI, which rose to 53.3 in August from 52.7 in July when economists had expected a fall to 51.0. Could all this talk of double-dip again be overly pessimistic? Jobs aside, US economic data have not been that bad of late. Throw in what transpired in Europe overnight, which by day's end seemed almost more encouraging than discouraging, and clearly there were enough bargain hunters seeing value in US stocks.

The German court could throw a spanner in these works tonight, but that is not what is expected.

If the Swissy is no longer a safe haven option, where does the money go? Well the obvious choice is gold, and that's exactly where the money went initially. Spot gold traded up to US$1920/oz and talk was of US$2100-2200 now being a given in the wake of the Swiss move, but by the same token the near 10% collapse in the Swissy sent the US dollar index up 1% to 75.93, providing US dollar gold with quite a headwind.

In the end, gold fell US$26.70 to US$1873.60/oz but this was most likely reflective of some profit-taking, with few expecting the gold trend to alter at this stage. But gold is a very crowded market now, many note, rendering it less attractive as safety investment.

US bonds perhaps? Well if you buy US bonds now as a safe haven against both European bonds and a US recession you'd probably find buying support from the Fed later in the month, with QE3 expected to take the form of a sell short-buy long end “twist”. But under 2%, the US ten-year yield is as low as it has ever been, including in the GFC, so there's not a lot of upside. By the close that yield was little changed at 1.98%.

Perhaps the true safe haven answer lies in something real, something “hard”, something that actually has a purpose beyond funny money currencies, unpayable debt and shiny stuff. Perhaps that's why Brent crude was up US$2.97 to US$112.89/bbl last night, despite having fallen the night before, and despite the big move up in the dollar index. West Texas crude closed little moved at US$86.51/bbl, but then that effectively represents two days of trade, and WTI is irrelevant anyway.

One might argue the same could be true for base metals, but base metals do not hold the same “monetary inflation hedge” aura as does oil. So last night base metals were little moved.

So how does all of this affect the Aussie? The Aussie is down half a cent in 24 hours to US$1.0493, but that's as much about a slightly weaker than expected June quarter net exports result released in Australia yesterday ahead of today's GDP result. So really the Aussie is maturing, one might suggest, into not just a risk trader's plaything but into an actual safe haven substitute. Unless, of course, the developed world falls apart again and takes China with it.

And what of our poor, battered stock market? Weighing up the developments of Friday and Monday's trade against the moves in Europe and last night's move in the US, we appear to have been oversold. On that basis, the SPI overnight is up 60 points or 1.5% to recover some ground.

From here on anything can happen, and probably will. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow rose 254 points or 2.3% while the S&P gained 2.8% to 1210 and the Nasdaq added 3.3%.

Hurricane Irene did not cause as much damage to New York City as was feared, but while the NYSE was open it was still difficult for many in the financial market workforce to make it into town. Hence volume on the exchanges was light last night. We are also rapidly approaching the end of the month, and data shows fund managers a very underweight equities.

This means any sign of good news has the power to trigger a sharp upside scramble, which was pretty much the theme of things on Wall Street last night.

It is now the morning habit of a Wall Street trader on arising to first check whether any new havoc may have been wrought in Europe overnight before deciding what the day might bring. Last night traders awoke to the news two of Greece's largest banks had agreed to merge. The new entity would instigate an E1.25bn rights issue and E500m of convertible bonds would be issued to a Qatari investment fund which would provide a 17% stake on conversion. On face value, the tier one capital ratio of the new bank would reach 14%.

The news sent the Greek stock market up 14%, and the stock markets of Germany, France, Spain and Italy up over 2%.

Adding fuel to the fire was a scheduled testimony from ECB president Jean-Claude Trichet to the European Parliament suggesting eurozone growth would likely be weaker than expected and fear and uncertainty would remain heightened. While he also noted inflation would likely remain above 2%, the testimony was taken as a hint that the ECB did not intend to raise rates any further at this stage. We recall that as Greece threatened to implode and eurozone contagion threatened to spread earlier in the year, the ECB raised its cash rate, just as it had done during the 2007 credit crisis.

The news out of Europe was alone enough to inspire more confidence on Wall Street, and then along came the US July personal income and spending numbers. A double dip was back on the agenda last month when it was revealed spending fell in June and savings rose despite a rise in incomes, but July's numbers showed a 0.8% jump in spending on a 0.3% rise in incomes, and a drop in the savings rate to 5.0% from 5.5%. The increase matched the jump in February which was the biggest since mid-2009.

What double dip?

Of course it was August when the world began to fall apart, with debt ceiling wrangling and the S&P downgrade masking ongoing indecision in Europe, so there may be no point in getting too excited just yet. The other issue is that we are now officially in a “bad news is good news” phase given the world expects the Fed to act, one way another, if the US economy appears to be faltering. So do we thus say that good news must be bad news? Well, not on last night's performance. Maybe good news is good news and bad news is a good news safety net.

That seems to be how gold saw it last night. Last Friday on Wall Street we had the unusual, in recent times, situation in which both stocks and gold rallied. Up to then, money had been flowing out of stocks and into gold as a safe haven. On Friday, an open door for more QE measures from the Fed meant stocks rallied on stimulus potential and gold rallied on money printing potential. But last night gold fell as stocks rallied, by US$39.40 to US$1788.50/oz, given better economic news means less likelihood of money printing.

The fall in gold also formed part of a “risk on” session, in which stocks rose, the US ten-year bond yield rose 8bps to 2.28%, the VIX volatility index fell 9% to 32, and the Aussie jumped another cent to US$1.0688 despite the US dollar index being steady at 73.68.

Oil all rose, with West Texas up US$1.90 to US$87.27/bbl and Brent up US52c to US$111.88/bbl. It was a public holiday in the UK last night so the LME was closed and there was no base metal trading.

It was a solid day yesterday in Australia but the futures want to go on with it, as the SPI Overnight is up 58 points or 1.4%.

So once again we might ask the question, is it all over? Can life go back to normal again? The answer is maybe, but we should bear in mind that one European bank merger still leaves plenty of others in balance sheet difficulties, banks were up on the back of the news in New York but insurance companies led the charge, having been sold down heavily last week in case of Irene devastation. It's officially the last week of the summer holidays in the US, and volumes were very light last night given many could not get into work.

It's also close to month's end, and US fund managers are underweight equities. This could mean a very sharp rally both into September and beyond, but all we need is one little trigger out of a still turbulent Europe and we might be right back down again.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow fell 170 points or 1.5% while the S&P dropped 1.5% to 1159 and the Nasdaq lost 2.0%.

Hate to say it, but I've been saying it all week – no news out of Europe does not mean good news. Lack of developments across the pond has allowed Wall Street this week to focus on the now hackneyed subject of whether to QE or not to QE and one might argue that after a positive couple of sessions, last night was an opportunity to square up ahead of Jackson Hole. But Europe has not gone away.

The world stopped worrying about Greece mid-year and started worrying about Spain and Italy, but the reality is the European Financial Stability Fund tacitly agreed upon back then has never been ratified. It ran into a bit of a roadblock back in July when the minority (19%) True Finn party, which is anti-eurozone, forced the Finnish government to insist upon cash collateral from Greece in return for Finland's EFSF contribution.

What this effectively would mean is that some amount of the funds handed over by other eurozone members, particularly Germany and France, would go straight to Finland for safe keeping. A lot of grumbling followed, but the Finnish deal was reluctantly given the nod in principle. That is until Austria kicked up a fuss, and said it was against any collateral deals but if Finland was getting collateral, then Austria would need some too. Then the Netherlands piped up in agreement, as did economic powerhouses Slovenia and Slovakia.

You can see where this is heading, can't you? Oh yes, we'll all put funds into the EFSF, but we all want collateral in return, say, of the amount we put in. Call me old fashioned but I think I spot a flaw in the logic.

We won't be able to find out for a while what might happen to the EFSF, given Germany has suggested it may call a postponement of further discussions. Why? The Pope is coming to Germany. Oh well, fair enough.

Prayer might be all the eurozone has left.

In the meantime, the short-selling ban on European bank stocks put in place a fortnight ago is due to expire, but talk now is of extending it. This talk has financial markets furious. So what do you do when you can't sell European bank stocks? Well, you can sell US bank stocks as a proxy (this has been happening ever since the ban was announced) or you can sell futures as a proxy for the stock market in general. And that's exactly what someone did last night. A huge sell order hit the German DAX futures, and at one point the physical DAX fell 4%. It recovered to be down only 1.7%, but the whole episode was enough to spook Wall Street.

Funny, therefore, that Warren Buffet should choose last night to announce Berkshire Hathaway had bought US$5bn of newly created preference shares in the struggling Bank of America, at what analysts suggest is a substantial cost not to Buffet, but to BofA. Prefs are a form of hybrid debt, and Buffet stands to collect US$3bn in coupon payments over the next ten years irrespective of the share price movement. The announcement came a day after the CEO of BofA appeared on CNBC and insisted the bank was not looking to, and did not need to, raise fresh capital.

The news hit before the opening bell and provided Wall Street with a brief moment of strength, before macro factors took over. The other announcement of note, made after the close on Wednesday – that Steve Jobs was resigning as head of Apple – proved a fizzer, with Apple shares down less than the Nasdaq by the closing bell. BofA shares jumped 25% on the open (they're worth about tuppence-ha'penny), but settled back to be up only about 7%.

If European shenanigans were not enough to send Wall Street south last night, or squaring up ahead of Jackson Hole, another jump in the US weekly new jobless was enough to give stocks a downward shove as well.

“Square-up” seemed to be the trade of the day across all other markets too. Base metals rallied 1-2% as stocks fell, which was attributed to short covering. After falling US$150 in two days, gold found some support and rebounded US$20.60 to US$1771.90/oz. The US dollar index rose 0.3% to 74.24 and the Aussie fell 0.4% to US$1.0430.

The oil market is closely watching Hurricane Irene as well as being conservative ahead of tonight. Brent rose US47c to US$110.62/bbl and West Texas rose US14c to US$85.30/bbl. Irene is set to hit the US eastern seaboard and not the Gulf oil rigs.

With talk that the Fed's new tactic might be to swap short-end bonds in its balance sheet for long-end bonds, the US Treasury's auction of seven-years last night again saw another record low settlement yield. Traders were actually expecting lower than 1.58%, but foreign central banks bought 52% compared to a 40% running average. The benchmark ten-year yield fell a couple of bips to 2.22%.

The SPI Overnight fell 49 points or 1.1%.

There's no more I can say about Jackson Hole that I or anybody else hasn't already said, other than if you're really keen tune into your favourite business channel at midnight tonight (Eastern). And don't forget that Jackson Hole has rather drawn attention away from the fact the first revision of US June quarter GDP will be released tonight as well.

Local result season highlights today include Lend Lease ((LLC)) and Perpetual ((PPT)). RBA governor Glenn Stevens will provide the House of Ill Repute...sorry, the House of Representatives with a regular update which they won't understand. Pretty devious, that RBA, if you believe the unions. Gotta blame someone to get your face on the camera.

I'll be appearing on Sky Business today at 2pm. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow closed down 419 points or 3.7% to 10,990 while the S&P fell 4.5% to 1140 and the Nasdaq dropped 5.2%.

If you wanted to put a finger on what really caused last night's sudden renewal of fear across global markets, I'd suggest you could sum it up in one word – Lehman.

What was most notable about Wednesday night's trade in the northern hemisphere was that the response to the disappointing Merkozy announcements was pretty benign. The concept of a eurobond was quickly dismissed, the EFSF was deemed to be already sufficient, and the idea of a financial transaction tax was touted. Yet on a net basis the European markets didn't respond much, and Wall Street closed flat.

So why is it that media reports will suggest today that last night's big fall, which begun in Europe, was due to fears over a transaction tax and a lack of further injection of EFSF funds? Unless you think of the response as being akin to a small child who thinks very hard before finally bursting into tears, what any sell-off really needed was a more frightening trigger. And that came last night when an unnamed European bank “went to the window”.

The expression means that a bank was forced to go to the ECB to ask for an emergency short-term loan – in this case E500m -- and that signals a liquidity issue. The implication is that the bank was finding it difficult to raise overnight funds in global money markets. The rumour, totally unsubstantiated, is that a US bank had gone cold on accepting a European bank as a counterparty, given the current risks. And that's how it all started in 2008 – first with Bear Stearns and then with Lehman Bros. No wonder there was panic.

European bank shares were again down double digit percentages, leading the UK, German and French stock indices all down 5-6%. The rout spilled into Wall Street from the open, and US banks ended the day down 5-10%.

If you want to take the Lehman analogy further, we can reflect on the fact the debt crisis of 2008 merely saw the problem pass from private to public hands, rather than actually being resolved. Back then, the issue was US investment banks owning “toxic” sub-prime debt which they belligerently continued to carry on their books at around 95c in the dollar when the market was bidding zero. Right now, the eurozone is refusing to mark down “toxic” peripheral sovereign debt to realistic levels as well. It all ended in tears in 2008. What might happen this time?

Perhaps the answer lies not in movements on global stock markets last night, but in movements on global bond markets. The bonds of the UK, Germany and France were all bought. The bonds of Spain and Italy were sold, but not by much at all. The yield on both ten years did not exceed 5% despite having been to 6% previously this month. The “safe haven” US bond was bought, but not by much. The ten-year yield fell only 10bps to 2.07% despite having hit an all-time record low 1.99% earlier in the session. The rise in US bond prices did not match the fall in US stocks.

Moreover, recently the ECB opened up its balance sheet to European banks for effectively unlimited six month loans. And the European banks haven't mucked around, having snapped up nearly E50bn to date. In other words, the European banks have been propping themselves up. By contrast, Lehman was allowed to go under.

There was nevertheless more to the story of weakness on wall Street last night.

The US July CPI rose a more than expected 0.5% on higher fuel prices, leaving the annual rate level with June at 3.6%. The core CPI rose 0.2%, increasing the annual rate to 1.8% from 1.6% in June. In theory, there will be no QE3 if US inflation is not falling.

US existing home sales fell an unexpected 3.5% in July to the lowest level since November. The Philadelphia Fed manufacturing index fell to minus 30.7 this month from plus 3.2 last month. Economists had expected a low but still positive number.

The compounding fear on Wall Street last night was, therefore, the old chestnut of double dip. And to top things off last week's new jobless claims in the US rose by 9,000 to be back above the critical 400,000 number once more.

Strangely, the Conference Board index of leading economic indicators for July went the other way, rising 0.5% after a 0.3% reading in June, and compared to a 0.2% forecast. However the rise reflected an increase in the money supply, which would be a result of the recent “flight to safety”, so take that out and economists suggest indicators are showing flat to very low US growth ahead.

Just to add fuel to the fire, a couple of Wall Street firms decided it was time to lower their global GDP forecasts, picking a bad day to do so.

Morgan Stanley lowered its 2011 global GDP growth forecast to 3.9% from 4.2% and 2012 to 3.8% from 4.5%. For Europe MS sees only 0.5% growth in 2012, down from 1.2%, and in China 8.7%, down from 9.0%. Goldman Sachs also trimmed its forecasts, lowering global to 4.0% from 4.1% in 2011 and to 4.4% from 4.6% in 2012. Goldman's US forecast for 2011 is down to 1.7% from 1.8% and for 2012 down to 2.1% from 3.0%. Goldman nevertheless sees 1.4% growth in Europe in 2012.

It is worth noting that it wasn't until last week that Goldman Sachs decided to lower its end-2011 target for Australia's ASX 200 to 4450 from 5125, adding a bear case “recession scenario” target of 3600. FNArena has been suggesting since early this year that broker targets of up to 5500 for year-end were simply too high in comparison to falling corporate earnings forecasts, and it's taken this long for the equity strategists to join the party. Now Goldmans is giving us a year-end target range of 3600-4450.

Cheers.

The point here is that brokers are always behind these macro forecast curves and never in front of them, often revising only each quarter or more. Looking at the new forecasts above there are indeed some big cuts – Morgan taking Europe 2012 to 0.5% from 1.2%, for example, and Goldmans taking US 2012 to 2.1% from 3.0%, but to see MS drop its 2011 global to 3.9% from 4.2% at this stage of the game, all one can really say, as is often the case, is “Thanks Scoop”.

When the IMF finally lowers its global forecasts, the market will be a screaming buy. 

In the meantime, fear is back. Gold jumped US$35.90 to US$1825.90/oz last night, despite the US dollar index rising 0.6% to 74.22. Silver was up 1%. The Aussie has fallen one and a half cents to US$1.0388. The VIX volatility index in the US jumped 35% to 42 (it traded at 48 last week).

Commodities were routed. Base metals all fell 2-3% in London with the exception of tin, which fell 6%. Brent oil dropped US$3.61 to US$106.99/bbl, while West Texas plunged US$5.85 to US$81.73/bbl.

The SPI Overnight is down 103 points or 2.4%.

So is it a case of here we go again? Well, it was nearly two weeks ago now that I pointed out the realities of sharp stock market plunges. History shows that a sustained rally never begins from a sudden reversal after a sudden drop. There are always false-start rallies first, and usually they are followed by further sharp drops, often to even lower levels. Only when the market gets to the point of “giving up”, when the buyers just disappear and the market can do nothing other than drift down further, will we find the bottom.

Last night on Wall Street was not actually a selling rout. The Dow opened down 500 points and stayed around that level all day until the very death, when it rallied back 80 points. Volumes were decent for a summer's day, but not much more than half what they were on the heady days last week. All that really happened was that the buyers disappeared, at least until the very end. One might call it an orderly adjustment for renewed fear. Others would call it an overreaction in stocks, pointing to more benign bond markets responses.

Either way, while the dust had settled somewhat this week after last week, the nervousness had not dissipated. That nervousness remains entrenched for now, and the script is still playing out.

Earnings season highlights in Australia today include reports from Billabong ((BBG)), Fortescue ((FMG)), QBE ((QBE)) and Santos ((STO)). ANZ Bank ((ANZ)) will complete the Big Four updating the market with its own trading update today.

Rudi will be appearing on the BRR network's Roundtable panel at 3pm (brr.com.au).

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow rose 423 points or 4.0% while the S&P gained 4.6% to 1172 and the Nasdaq jumped 4.7%.

History was made on Wall Street last night as the Dow closed up 400 points because never before have four consecutive sessions seen moves in excess of 400 points, let alone consecutively down and up. Even in 2008 the market found time enough to take the occasional breather. I've no idea what history tells us in percentage terms but I do know that in the dark days of 1929 the ticker machines were running several hours behind due to overwhelming volume, meaning no one much knew what had happened until it had.

Today we not only have instantaneous market updates readily available to all but we also have computers placing and withdrawing orders in microseconds and programmed algorithms that make the decisions, along with big players hiding transactions in so-called “dark pools” and mum&dad investors no longer spitting because they can't get their broker on the phone given they can trade on-line.

Volatility is most often prevalent in “thin” markets but despite some brief black holes both Wall Street and Bridge Street have fallen down into, and up into, this past week in intraday moves, volumes have been the heftiest all year and generally the heftiest since Lehman. So “thinness” is not the cause of the extraordinary volatility we are experiencing.

I would like to eventually see the numbers which determine how much of this week's activity can be put down to “high frequency trading” but the reality is HFT is not about size but about speed. The way I see it we have a large pool of cash which has been sitting waiting for a couple of years for “value” to emerge and a large pool of investments that have been bitten for a second time and just want to get out into cash. Views are polarised between those recognising that there is a lot less vulnerable leverage in the market this time around and those terrified of collapse in Europe and/or fearful of a recession in the US. This is what we call “a market”.

Normally in sharp up-days like last night there would be dismissive talk of mere short-covering, but last night a pick-up was noted in both “insider buying” (nothing illegal, just disclosed buying by executives of their own company's stock) and corporate buybacks, both of which suggest “value” views. Yet at the end of the day I just think there is a very large group who simply don't want to be either caught long, caught short, or miss out. The only certainty is uncertainty.

So why did the coin come up heads last night?

Rumours were unsurprisingly in the frame again last night. First of all the media outlet which first posted the “French downgrade imminent” rumour on Wednesday, with no source other than “a trader who wished not to be named”, apologised last night for their reckless journalism and withdrew the claim. And then another supposedly more substantive rumour surfaced last night suggesting European officials were considering placing a temporary ban on short-selling – as occurred in 2008 – in order to stem the sharemarket “run” on the European banks.

In a dose of reality, it was announced that German chancellor Angela Merkel and French president Nicholas Sarkozy will meet in Paris on Tuesday having each prepared plans for how ever the current crisis within the wider crisis can be addressed. Up until this week Merkel has been under constant fire from her opposition, the electorate, and even those within her own party over thought of providing further hand-outs to all those good for nothing Mediterranean types, but suddenly the complaint is now “why aren't you doing something?!” 

Wouldn't want her job for all the dollars in China.

This news was taken positively, despite the fact anything that might arise not only has to be agreed upon by the eurozone's two most senior leaders, but also by the leaders of all the members and the seventeen member parliaments. Should be a piece of cake – not. Expectation is that the EFSF (European Financial Stability Fund) will be bumped up from a trillion to two trillion, or something like that, and if you pass Go you receive 200 euros.

Also welcomed early on Wall Street last night was last week's US jobless claims number, which showed a drop in new claims of 7,000. Are 7,000 people really worth 400 Dow points? Well, the point was that the fall took the total to 395,000 and 400,000 is considered the magic number between rising and falling unemployment. The total has not been below 400k since April and economists had expected an increase last week to 410k.

Let's not dwell on the fact weekly jobless claim data are notoriously volatile.

So it was all this “good” news which caused the coin to come up heads last night, and in fact with about half an hour to go the Dow was up 560 points. Usually a last minute, 100 point sell-off would be considered ominous but Wall Street was happy just to book the 423. While the sellers might be genuine, they might also be HFT computers who bought early and never carry trades overnight.

When stocks go up usually bonds go down, and this week has seen no less volatility in the US bond market as it has in the stock market. Early this week Ben Bernanke told the market short-end bonds will not fall in price for two years, so the world bought three-years in the Treasury's Tuesday auction with their ears pinned back, despite the fact Tuesday was an up-day in stocks. Wednesday was a down-day in stocks, but the world was not nearly as keen on the longer-dated ten-years the Treasury had on offer. And last night was an up-day, so it was not going to be that easy for Uncle Sam to attract lenders on a thirty year time horizon. America might be good for its short term debt at next to no interest, but where will the once mighty empire be in thirty years time? Demand at the auction was woeful.

Foreign institutions bought only 12% of the auction compared to a running average of 40%. I can't recall so wide a variation in recent years. Suffice to say the thirty-year yield jumped 25 basis points while the benchmark ten-year yield jumped 19bps to 2.34%.

The euro and the pound surged last night on the supposedly good news out of Europe, which should have seen the greenback trounced, but following a statement from the Swiss National Bank that it would be taking “drastic” measures the Swiss franc fell heavily. The US dollar index thus only dropped 0.3% to 74.56. Gold was an unsurprising victim although not materially so, falling US$27.80 to US$1767.60/oz. Silver lost 1.7%.

They loved it all in war torn London and when stocks go up, so do commodities mostly. Aluminium rose 1% but all other metals were up 2-4%. Oil was also up, despite being up on Wednesday too, with Brent rising US$1.34 to US$108.02/bbl and West Texas jumping US$2.77 to US$85.66/bbl.

And all of the above means “risk trade on”, so the Aussie is up a cent and a half to US$1.0339.

So – yesterday in Australia we closed flat as a tack despite the Dow being down 500. You can add that one to my list of “never been seen befores” as well. Does this mean we must also close flat today with the Dow up 400? We could look to the SPI Overnight, which was up 72 points or 1.8%, but then on Wednesday night it was down 99 points.

I'll toss, you call. Or better still let's just go to lunch. 

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