Investors were curious about how long the Holiday cheer could last, and today they get their answer. Stocks finished sharply lower Wednesday, with all major indices down more than 1% and the S&P slipping into red territory for 2011. Earlier in the day a promising Italian 6-month bond auction sparked some optimism that European jitters were starting to subside, but the market never showed much excitement. Investors are instead looking skeptically toward a more pivotal long-term debt auction Thursday.
The Euro fell more than 1% versus the dollar and to 15-month lows below the key $1.30 level. A report that European banks are hoarding recent cash reserve injections provided by the ECB, rather than lending, signals that those banks fear the worst is yet to come. The liquidity crunch could accelerate in the early stages of 2012.
Next year will be a pivotal year for the under-fire currency, one in which the French and German bedrock of the Euro zone must decide whether to rescue or abandon it. Continuing to fire its own money at the problems facing the regions most-indebted countries will risk moral hazard, but giving up on the Euro and allowing a dissolution of the treaty could have catastrophic consequences in the short-term.
Many are tipping 2012 to be the year of the greenback, and today could have been a telling preview. Earlier this year analysts were lamenting the demise of the once-universal reserve currency, but it seems despite the Federal Reserve's best efforts, the Dollar will once again reign supreme. A strong dollar in 2012 does not bode well for US equities. The carry trade, the basis for much of the buying in late 2010-early 2011, will be off the table, and risk appetite will wane with the dollar potentially reclaiming its status as a safe-haven.
*DISCLOSURES: Scott Redler is short SLV
