Escalating European Crisis Weighs on Global Financial Markets

I don’t think last night’s selloff at Wall Street was mainly about the stalemate or the failure by the special debt-reduction committee to come into an agreement over budget cuts as portrayed by media.

Although I’d say that the extant gloomy sentiment may have been partly aggravated by the above events.

I would further add that the developments at the MF Global Holdings, where shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected appears to be more of an influence considering the sharp declines in prices of the commodities.

Although I would reckon that last night’s semi-crash mostly reflected on European debt crisis, which according to reports, have been spreading to the core

From Reuters,

ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone's periphery to its core economies and was affecting economies outside of Europe.

"These are very challenging times... The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin.

"The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt."

And growing evidence of the banking stress in Europe has been the fund flows (capital flight) to the US Federal Reserve

From Bloomberg

Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

In what appears to be a choice between two seemingly ‘toxic’ assets, investors have been exiting the EU and has flocked to the US, which alternatively means that US dollar has been winning this round so far.

Politically captive financial markets will remain highly volatile.