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What Just Happened

What Just Happened – May 6, 2010

Greek Debt Fall-Out Exacerbated by Trading Glitch

The Greek parliament backed a $40 billion austerity plan on Thursday despite violent unrest, as the European Central Bank (ECB) inaction on the nation’s debt crisis helped to trigger major falls in the euro and weakness on Wall Street. We put the issues in perspective…

Debt Crisis: Full Thrust of Policy Not Yet Seen

Shock waves from the relatively small Greek economy spread beyond Europe to rock markets in the United States, Latin America and Asia. Some investors panicked about the chance that one or more governments might default on their debt, putting banks in Portugal, Spain, Italy, Ireland and the U.K. at risk.

Although the ECB has resisted market pressure to intervene in the growing debt crisis, we believe we haven’t yet seen the full thrust of government or central bank policy aimed at stabilizing the situation.

In the same way that the Fed bought mortgage-backed bonds, the ECB could buy sovereign debt to support the liquidity situation in the Eurozone. This would alleviate the real risk to the European banking sector which owns government bonds, and also prevent the Greek crisis from morphing into a global risk event.

We have been cognizant that the market was due for a pullback at a minimum, and possibly a correction. The market hasn’t had a correction – technically defined as a selloff of 10% on a closing basis – for at least 14 months. Although we expected fears over Greece’s growing debt crisis to spill over into the markets, we did not expect a ‘fat-fingered’ trader to exacerbate an already volatile situation.

According to news reports, a glitch in the trading of Dow component Procter & Gamble played a major role in Thursday’s sudden and sharp 9% intra day market decline.

According to multiple sources, in what is known as ‘fat-finger’ problem, a trader entered a “b” for billion instead of an “m” for million in a trade involving Procter & Gamble.P&G stock plunged as much as 37% during the selling before recovering.
Beyond the P&G glitch, the selling pressure of the last few days has been more technical than fundamental.

In addition to correlation trading (selling stocks that track and trade in correlation with the group or sector to which they belong), automated trading programs kicked in Thursday when markets dropped through key support levels.  As losses piled up, the Dow Jones Industrial Average went into freefall, tumbling through 10000, before dropping as much as 998 points, or 9.2%. The biggest closing point drop in the Dow’s history occurred Sept. 29, 2008, at the height of the financial crisis, when the Dow ended the day down 777.68 points, or 6.98%.

• We haven’t yet seen the full thrust of Eurozone government and central bank policy aimed at stabilizing the sovereign debt situation.
• The U.S. economic recovery still has momentum and emerging markets are growing strongly.
• If anything, the silver lining in this correction is that the Fed will go slow with interest rate hikes and take more of a lead from the bond market, which has rallied through the whole crisis.