Yesterday's trading action was hauntingly reminiscent of the 2007 Wall Street debacle, only this time the shockwaves were coming from the Mediterranean and not the Hudson. As Greek protests turned deadly, the country's debt worries spilt over to other nations and asset classes. The ECB's Goldman Sachs-esque press conference failed to shore up confidence in the markets. Based on the language, analysts can't help but wonder if the ECB fully understands the extent of market unease which they cemented this by affirming that no additional action would be forthcoming from the central bank. Massive sell-offs ensued in both FX and equities signaling the first real signs of stress in short-term funding spreads. If history has taught us anything, we know that a spike in volatility compounded by rapidly-reducing liquidity is a historic recipe for dark times in financial markets. Traders are still debating the glitch theory and the role of automated trading in yesterday's herd-like sell-off in equities. Stock markets plummeted with the Dow Jones nose-diving almost 1000 points during the session, which in turn triggered violent swings in the FX market. The Nasdaq group announced that it will cancel all trades greater than or less than 60% away from the consolidated last print in that security at 14:40 New York Time. Even with the volatility in North America, our focus remains on the Eurozone. Global markets were already extremely bearish - recall Prime Minister Papandreou's comment we are standing at the edge of the abyss - so any added fuel provided the push for markets to tumble. It looks as if Greece's rescue package will be validated by Germany's lower house of Parliament, setting the stage for it to go to the upper house for vote. If everything goes smoothly, Merkel will be able to sign it into law today. However, there is opposition growing in the EU that financial support for Greece violates EU law and a compliant could be filled with the EU Constitutional Court. If that happens, there may be no EU help for Greece. Over in the UK, our short term outlook for sterling against both the USD and JPY is quite bearish. UK politicians must now undertake the messy affair of sorting out a collation government after a hotly contested political contest. While deciding who's in charge of what, policymakers in the UK must continue to wrestle with the nation's looming fiscal problems. The Greek crisis underscores the importance of not being complacent on fiscal policy and further that credit rating agencies are scrutinizing all moves. During the course of the election, all parties were noticeably light on the details of their party's fiscal strategy and it's anyone's guess what sterling policy will look like once the government coalition is formed. The new government must provide a budget that will be acceptable to their constituents while remaining tight enough for a positive nod from credit agencies. This balance will be nearly impossible to strike. While we remain bearish on the GBPUSD and GBPJPY, we expect sterling to remain relatively stable against the Euro, as there is no end in sight for the EU's mounting financial woes. On the data front today, generally US NFP would capture the markets complete attention but today we suspect will take a backseat.
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