EU and IMF Take A Page From The Fed's Playbook

The markets are rallying sharply after a large aid package was announced yesterday from European leaders. The EU has pledged 500 billion euros and the IMF another 250 billion euros for eurozone countries that face financial uncertainty. This comes in addition to word that the ECB will buy eurozone bonds in the open market, and the Fed has reactivated swap lines with foreign institutions.

The combination of all of the above has led to a strong wave of buying (and short-covering) in the markets, and has also spurred a rally in the Euro and out of the dollar. The ECB is essentially taking a page out of the Fed's playbook by directly buying EU bonds and expanding its balance sheet. We saw what a positive effect this had on US financial markets, let's just hope it can do the same in Europe.

I am a bit surprised that the Euro isn't up more today. The major indexes are up more than 4% so far today, but the euro (FXE) is only up 1%, and struggling. I would have thought with all the traders short the euro recently, we would have seen a bigger spike. Go figure.

The lower dollar is supporting commodity prices, with oil rising more than 2% to $76.75. Gold is lower, as people exit the flight to safety trade, but still holding $1200.

Among the sector etfs, financials and industrials are leading, both +5.3%, though all 10 sectors are higher. Among sub-sectors, homebuilders are surging +6.2%, and most emerging market etfs are up more than 6%, with Russia gaining +10.15%.

Asian markets were higher overnight on the news out of Europe; the 10-year yield is bouncing to 3.56%; and the VIX is plunging -28% down to 29.40.

Trading comment: Those trades I made late on Friday are up nicely, and I am taking half profits on them. Why? Because I don't want to look a gift horse in the mouth.

This rally could carry a bit higher, its hard to tell right now. But we are approaching resistance levels at the underside of the 50-day moving averages. I will look to lighten up into those levels, as I think it is likely that we will see a retest of the recent lows at some point.