Europe remains the most important market to watch for interbank liquidity. And I don't believe US investors appreciate is how much of US credit is in the hands of European financial institutions - either on balance sheet or through special-purpose vehicles. And as the consumer continues to deteriorate it can't help but impact Europe first. Watching the European markets is like watching the coming attractions of a movie.
Looks like we are beginning to see a breakdown between between the commodity markets and the dollar/Euro exchange rate. Many participants believe that these two markets will continue to move in tandem - the dollar will fall and commodity prices will rise- oil and gold especially.
But exchange rates reflect only relative economic strength. Should we see more trouble in the European bank market - and remember, the "sub" has already taken down two German banks and a British bank - I believe that all bets are off on the dollar/Euro exchange rate. At least in the short run.
I don't know if the market is positioned at all for that. And how that plays out through the commodity/China trade will be interesting to see. Many have suggested that Asia can withstand a decline in U.S. consumer spending. The bigger question to me is whether Asia can withstand the one-two punch of a U.S. and a European slowdown.
For these reasons, Europe matters. As goes Europe, so goes the world.
So wounderful.mp3.http://www.moteldemoka.com/squashed/Gilberto-SWonderful.mp3
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