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What's Behind the Euro Rally?

The euro rallies: Is the Greek drama coming to a head a positive for the euro? A stronger, core Europe would certainly be good news, but most traders still believe in the "contagion" theory over the "ringfence" theory, which means Portugal and Ireland may be next.

Unfortunately, the euro rally is likely less complicated: It is simply dramatically oversold—at 1.44 last week versus the dollar, $1.36 Monday? Some may also be expecting easing from the European Central Bank (ECB), which might offer some temporary relief, though negative long-term for the euro.

Some sort of Greek end-game is coming. The resignation of Juergen Stark from the ECB seems to have given the go-ahead for the German to express their fears openly. Peter Altmaier, a senior member of German Chancellor Angela Merkel's party, said Greece would only get the next tranche of its bailout if it convinces the European Union (EU), the ECB and the International Monetary Fund (IMF) that it is tackling its debt in a convincing manner, which it so far has failed to do so.

Speaking of ringfencing: French banks such as Societe General, Credit Agricole, and BP Paribas are down about 10 percent in Europe on the heels of concerns that Moody's and other credit rating agencies will downgrade their debt due to high levels of exposure to Greece. The three largest French banks had about $8 billion of exposure to Greek sovereign debt.

The Greek government says they have enough cash for the next several weeks. That means they are essentially dependent on money from the next tranche of the EU/IMF bailout, amounting to 8 billion euros ($10.9 billion). But the Greek government already has failed to meet its budget targets to qualify for that next tranche. It announced new property taxes over the weekend to make up for the holes, but we are now in a hall of mirrors, where every new failure to meet targets results in an announcement of new taxes, which depresses the economy still further.

Elsewhere:

1. So much for cutting rates: China essentially dashed hopes that it might ease its tightening bias by announcing that inflation was still too high, even thouh it dropped to 6.2 percent in August.

2. Wells Fargo among the first of the strategists to come out and cut 2012 earnings estimates for the S&P 500, to $98.70 from $103.50.

Last week I noted that MKM's Michael Darda said 2012 S&P 500 company earnings estimates could go as low as $80 before rebounding.

3. Tenet Healthcare said it sees full-year 2011 adjusted operating earnings at the lower range of its guidance, as the hospital operator saw a rise in Medicaid volumes and a fall in Medicare reimbursement.?

4. McGraw-Hill Cos. said they are splitting up into two public companies. One company will focus on education and the other center on markets, featuring the Standard & Poors unit. Mcgraw-Hill shares rose 2.2 percent on the news.

5. Vishnay Intertechnology reducing its guidance for the third quarter of 2011. The world’s largest manufacturer of discrete semiconductors and passive electronic components now expecting its revenue to be $625 million to $655 million. The company down 9.3 percent pre-open.

6. The Federal Reserve may be inquiring into whether Capital One Financial proposed purchase of ING’sonline-banking operations could be "too big to fail." The Wall Street Journal reporting that the Fed believes this merger would create a bank so large and complex that if it failed, it would jeopardize the financial system. ING shares fell 7.83 percent on the news.

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