Commentary: Giant Web of Deleveraging as EU Fears Rattle

On Tuesday, investors started closing down risky bets because they feared what secret nasties the Germans had uncovered to prompt them to unilaterally ban 'naked' short selling on their top 10 banks.

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The fear has now mushroomed, as big investors watch major currencies swing - and enormous carry trades being partly unwound - more and more of their positions look likely to be unprofitable.

So they shut them down.

It's like a giant web of deleveraging, pingpong-ing around the world.

Before Wall Street opens tomorrow, there are two major hoops that investors have to successfully jump through.

The first is the opening of the markets in Asia, in particular China, as the Shanghai Composite is one of the world's worst performing indices this year. It's just holding above a critical level which if breached, analysts say could lead to a possible 20 percent downside.

Big European institutions have specifically been dumping mining, steel and chemical stocks for fear that the 'Great China' commodity boom could be punctured.

Secondly, before the U.S. re-opens, we need the German parliament to vote-through Berlin's portion of the EU/IMF trillion dollar bailout package, following Angela Merkel's impassioned plea Wednesday that the very future of the euro is at stake.

If the turmoil lasts another 24 hours, there is no question that there will be a widespread expectation tomorrow night, that something will have to be done and announced over the weekend to calm markets.

A possible joint, international initiative by G-20 Central Banks and Governments, will be watched for, not least because ominously the short term rates that banks charge each other to borrow is creeping higher.

Europe will keenly watch any moves as they become more suspicious of who is sitting on what potential losses - not just from sovereign debt, but now big losses on world markets.