Why The "Markozy" Presser Was Disastrous

The much anticipated

between French president Nicolas Sarkozy and German Chancellor Angela Merkel was nothing short of a disaster earlier, and equity markets plunged as soon as they started opening their mouths. The two biggest points of the press conference were both seen as negative: Merkel said there will not be any Euro zone bonds anytime soon. Sarkozy did not rule out Euro zone bonds in the future, but that was well off in the future. The real major points which it seems like the markets reacted to was the fact that Sarkozy said the size of the Euro Financial Stability Fund (EFSF) is going to remain the same size. The EFSF has been seen as the silver bullet for the European Union in regards to their debt problems. At a few hundred billion dollars, the EFSF is nowhere near the size it needs to be to solve the Eurozone's problems. Italy's bond market is over $2 trillion, and is the third largest in the world, behind the U.S. and Japan. A few hundred billion dollars is not going to make a

much less the entire Euro zone. Italian Prime Minister Silvio Berlusconi has come out in recent weeks to try to calm the financial markets, and it looked like it worked, until today. The yield on the Italian 10 year debt was hovering around 5%, and even got under 5% last week on hopes that something would be done to help. The ECB purchased $32 billion in Italian and Spanish debt last week, and it looked like the problem was on its way to getting solved. Then Sarkozy and Merkel came out and turned on the cold water with the press conference. People are speculating why the market dropped after the press conference, but it is really does not have to do with the lack of a Eurobond. It is all about the EFSF. It needs to be raised and the two of them putting a damper on that will kill any hope of Europe's financial woes going away in the short term. The European Central Bank will ultimately need to invoke quantitative easing, or risk default of the PIIGS, and potentially the destruction of the European Union as we know it. There is no way a few hundred billion in the EFSF will do anything. Why have the EFSF at all then? It does not make sense. You do not bring a knife to a gun fight, and when you need a bazooka, you need a bazooka. A water pistol will not do. This "Markozy" press conference was nothing short of a disaster. Let's hope that the actions that come out with in the next few weeks will be better than what we saw today.

Traders who believe that Sarkozy and Merkel's proposals will go better than their press conference might want to consider the following trades:

Traders who believe that Merkel and Sarkozy will fail again may consider alternate positions: