Market Focus Returning to Europe

The focus is again shifting to Europe.

The dollar's rallyof the past three days is not so much a dollar rally as it is a euro reversal. It began last Thursday, when Trichet implied there may be no June rate hike. Then there is the realization that Greece is effectively locked out of the capital markets and its position is becoming increasingly untenable.

Today's move by S&P to lower the debt rating of Greece was not surprising, but S&P did perform a valuable service by stating once and for all what any talk of "rescheduling" (i.e., extending maturities) of Greek debt really is: "Under our sovereign ratings criteria, a commercial debt rescheduling typically constitutes a default."

Bottom line: the dollar relationship to other currencies may be changing.

Remember the main driver of the dollar was the fact that the U.S. was easing while Germany was tightening; that accelerated the dollar weakness after January.

Now that European debt issues are again coming into focus, we have been seeing various signs of flight to safety in Europe: 1) into Germany bunds, which is pushing down German yields, and 2) into the Swiss franc, which has been rallying to near-historic highs against the euro in the last three days.

What does this mean? Flight to safety in Europe means what it has meant for hundreds of years: money leaves the periphery and goes to core countries like Germany and Switzerland.

This, of course, is negative for European financial stocks, which are heavily weighted with pan-European debt.

Finally, what about commodities? Commodities have been rallying, partly on the dollar weakness — today commodity and commodity stocks are up, even as the dollar is rallying again. Who's right?

In my mind, this reinforces the view that last week's moves in commodities and commodity stocks were not necessarily fundamental — that there was forced selling largely on margin increases.

I'm not suggesting that fundamental concerns of slower growth are not factors, or that traders are not continuing to shrink their books to reduce risks. I think both are factors.

t I noted that every trader was screaming about the simple technical factors around the iShares Silver Trust : the security goes parabolic ($30 to $48 in two months) on record price and record volume. That was a technical red flag if there ever was one.

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