Tue 11/29/11 4:35 PM – Markets Stall in US, Europe’s Shrinking Money Supply

Stocks moved up first thing this morning but could not hold the gains and finished in the middle. Corporate and high yield bonds were higher, high quality bonds were lower. Oil was up almost 2% while gold had a small gain.

In Europe, banks are cutting back on lending. One big reason is that the sovereign bonds they hold used to count as cash with regulators. But, with Greek bonds taking a 50% haircut and Italian and Spanish bonds taking the same road they have to hold reserves against the possibility of those bonds not being as good as cash, perhaps far from it. That means less money to lend out and that means more slowing of growth in the Eurozone and anyone doing business with them.

Also, corporations across the globe are making plans for how to handle the Euro’s collapse if it comes. If Italy, for example goes back to the Lira, what does that mean for money it owes corporations, especially since the new lira may not be priced at parity with the Euro on day one and very likely won’t going forward. Companies are looking to protect themselves and it is complicated, especially given that there are 17 countries now using the Euro as their currency and multinational corporations may do business with all of them, each presenting a different risk profile and perhaps different unwinding processes.