Trader Talk

Europe: Traders' 3 Big Concerns

Confused yet? Conflicting reports out of Europe about what will happen at the EU Summit this weekend confounded traders in the last hour. Dow Jones said a Guardian report that there was a deal to lever up the EFSFwas "totally wrong."

Maybe. There are many who are opposed to leveraging the EFSF because it would expose the EFSF to considerable additional risk.

Still, don't get distracted too much. The three issues of most interest to traders are all on the table:

1) the most important banks will likely be forced to recapitalize. How much money may be required to meet the discussed 9 percent capital ratio--100 billion or 200 billion euros--is still unclear.

2) banks will take a bigger haircut on Greek debtthan the 21 percent initiall proposed.

3) discussion about leveraging the EFSF are being held, but there is no final agreement. But even Dow Jones acknowledged that the EFSF will likely be used as an insurance policy to backstop guarantees.

Of course, numbers matter. Traders want big numbers, they want a "bazooka." It's possible there could be an agreement reached on the above issues but it will fall short of expectations. Markets would sell off.

But — slow as they are — European officials do seem to get the need for a bigger gun, particularly to ring fence Italy and Spain.

More on the leveraged/inverse ETF debate: check out this article in Index Universe, just published, entitled "Leveraged/Inverse ETFs: Not Wagging the Dog."

While noting that these ETFs were inappropriate for most investors, Dave Nadig notes that leveraged and inverse ETFs are only about 5 percent of closing volume in the S&P 500, not enough to make a big impact.

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