The diminishing amount of liquidity
The markets initially opened on a positive note with hopes for dovish signals (lower interest rates) from the ECB (European Central Bank).
By late morning, ECB Chief Mario Draghi's warnings about the outlook for the real economy outweighed any dovish signals and stocks closed lower with credit spreads wider.
Sovereign bond auctions out of France and Spain were marginally positive; France sold more than €3 billion and Spain sold more than €2.5 billion.
Portugal remained under pressure, however, with accounts trying to sell bonds and take profit finding that there is virtually no liquidity.
The problem in this market is the diminishing amount of liquidity.
And so (savvy) players are forced to keep their positions small and nimble so that they can take profit if the trade is working in their favor, or cut their losses if the trade is in their face.
Being bigger is a liability (hedge fund Centaurus that is shuttering is a case in point).
Legendary investor Barton Biggs put out a great letter to his investors with sagacious advice for players; it is worth perusing.
French bank Société Generale reported better than expected earnings continuing the positive operating momentum for global investment banks.
That being said rating agency Moody's stated in its bank teleconference call that the bank review process should be completed by the end of June; rating changes for the large global banks should start later this month.
Despite positive stress test results and relatively strong 1st quarter earnings Moody's likely downgrades will be driven by concerns around structural issues for global banks.
Interestingly, an appreciation in real estate prices could be a massive boon for U.S. banks that still have a fair amount of mortgage exposure.
While there are many headwinds facing the financial sector, the sector could offer value in the long term.
Figuring out how long that will take is the key.
Players will be watching payroll and unemployment numbers very closely on Friday.
Given how there are still a significant number of shorts in the market, positive employment numbers could send the markets sharply higher as players scramble to cover their positions.