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IMF Chief Sex Scandal to Generate Serious Market Ripples?

On Monday even the most conservative, buttoned up investors were talking about sex and the charges filed against Dominique Strauss-Kahn, the head of the IMF.

As you may know, Kahn was arrested and charged on Sunday with sexually assaulting a New York hotel maid.

Will the sex scandal move markets?

The Street's immediate knee-jerk reaction was to shrug off the developments as intriguing but without impact.

However, around midday, after the court refused to grant bail saying Strauss posed too much of a flight risk, chatter surfaced about a potential ripple that could be generated as the salacious details come to light.

What must you know? Where is this going?

Instant Insights with Fast Money traders

- Near term impact

In the near term, the absence of Dominique Strauss-Kahn raises the prospect that a debt restructuring for Greece could be delayed, explains Fast Money host Melissa Lee.

And that uncertainty could translate into trouble for the euro.

Although the euro gained against the dollar on Monday, top trader Stephen Weiss thinks gains will be short-lived. Weiss has been bullish on the US dollar for quite some time, citing overseas financial woes and the end of QE2. The sex scandal is just another catalyst that’s “good for the dollar and should help it rally further,” he says.

Trader Steve Grasso suggests the broad market could take a hit. “The market is looking for direction. Anything euro related, any negative tone and the market sells,” he says. "I think we head south into the close."

Weiss agrees. "The market will probably go lower into the close," he says.

That's potentially bad for stocks because energy and materials had been the top two sectors over the past two quarters when stocks rallied.

A stronger dollar makes commodities more expensive to holders of other currencies, which in turn drags down demand. If commodities and commodity related stocks in the energy and materials sectors sell-off due to dollar strength, the entire S&P could go with it.

- Long term impact

Trader Zach Karabell takes a big picture approach. And it may sound dramatic but he thinks the sex scandal could potentially lead to the collapse of the EU.

That’s because Dominique Strauss-Kahn was considered to be the front runner in the 2012 race against Nicolas Sarkozy for president of France.

”If Straus can’t run for the presidency the number two candidate is Marine Le Pen” – a right wing candidate who took over the party from her father Jean-Marie Le Pen.

And a new poll puts her ahead of President Sarkozy in next year’s presidential race.

“If we get an isolationist, right wing government in France, it may want to detach from the EU. That’s something to be concerned about,” says Karabell. “But that’s a 2012 problem.”

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BUZZKILL: LOWE’S IS A LOSER

The traders are closely watching the action in Lowe's after the company said first quarter profit fell 5.7%. Also the company cut its full-year financial outlook.

What’s the trade?

Trader Stephen Weiss is cautious. He's concerned that Lowe's has started discounting to hold custimers. He thinks Home Depot will have to match prices.

Trader Zach Karabell thinks Lowe’s and Home Depot are unique because they're very tethered to the housing market. He says that there are probably places in retail where investors can nibble but it's not in these two names.

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UNUSUAL ACTIVITY: BULLISH BETS IN FINANCIALS

Trader Trader JJ Kinahan has spotted unusual options action in the XLF.

He's spotted sellers of June 16 puts in the XLF and buyers of July 17 calls - a trade he considers bullish. In addtion he's spotted a large volume of Morgan Stanley July 27 calls. "People are looking for a positive reaction," he says.



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Trader disclosure: On May 16, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Stephen Weiss is short (AKS). Stephen Weiss is short (X). Stephen Weiss owns (DVN), (COP), (QCOM), (BRCM), (TEVA), (KO), (RIG), (HK), (AKAM), (UUP), (DE), (UAL), (MRK), (HBAN), (KEY) and (JPM). Steven Grasso owns (AKS), (AMD), (ASTM), (BA), (BAC), (C), (D), (HOV), (JPM), (LIT), (LPX), (MHY), (NDAQ), (PFE), (PRST), (AKS), (AMD), (ASTM), (BA), (BAC), (C), (D), (HOV), (JPM), (LIT), (LPX), (MHY), (NDAQ), (PFE) and (PRST). JJ Kinahan owns (C). JJ Kinahan owns (F), is short (F) calls. JJ Kinahan owns (GE), is short (GE) calls. JJ Kinahan owns (MSFT), is short (MSFT) calls. JJ Kinahan is short (SLV) calls . JJ Kinahan is short (SPY) options. Zachary Karabell owns (AAPL), (GE), (GOOG), (RIMM) and (SLV).

Steven Grasso
Stuart Frankel & Co and it’s partners own (ABX)
Stuart Frankel & Co and it’s partners own (CSCO)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MSFT)
Stuart Frankel & Co and it’s partners own (MU)
Stuart Frankel & Co and it’s partners own (NEM)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners are Short (QQQQ)
Stuart Frankel & Co and it’s partners are short (AAPL)

Zachary Karabell
River Twice Capital owns (QCOM)
River Twice Capital is short (LCC)
River Twice Capital is short (SPY)
River Twice Capital is short (QQQ)

Itay Michaeli
Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of Ford Motor Co, Johnson Controls Inc, Meritor Inc. This position reflects information available as of the prior business day.
Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of Borg Warner Inc, Ford Motor Co, Goodyear Tire & Rubber Co, Johnson Controls Inc, Tower International, Inc..
Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Borg Warner Inc, Ford Motor Co, Goodyear Tire & Rubber Co, Johnson Controls Inc, Lear Corporation, Meritor Inc, Tower International, Inc..
Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from Ford Motor Co, Johnson Controls Inc.
Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Borg Warner Inc, Ford Motor Co, Goodyear Tire & Rubber Co, Johnson Controls Inc, Lear Corporation, Magna International Inc, Meritor Inc, Tower International, Inc. in the past 12 months.
Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): Meritor Inc, Tower International, Inc., Goodyear Tire & Rubber Co, Borg Warner Inc, Ford Motor Co, Johnson Controls Inc, Lear Corporation.
Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: Borg Warner Inc, Ford Motor Co, Goodyear Tire & Rubber Co, Johnson Controls Inc, Lear Corporation, Magna International Inc, Meritor Inc, Tower International, Inc..
Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: Borg Warner Inc, Ford Motor Co, Goodyear Tire & Rubber Co, Johnson Controls Inc, Lear Corporation, Magna International Inc, Meritor Inc, Tower International, Inc..
Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from Meritor Inc, Tower International, Inc., Goodyear Tire & Rubber Co.
Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues.

CNBC.com with wires.

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