Shadow-fighting between sheepdogs and sheep

US regulators have now moved to try to calm markets: http://www.ft.com/intl/cms/s/0/3602091a-d7e0-11e0-a5d9-00144feabdc0.html#axzz1X76F4SXC

This is classic shadow-fighting. Announce a legal action after markets close on a long weekend, and then, before that long weekend itself closes (i.e. just before midnight last night UK time) announce that the suit MIGHT be settled out of court, and for something like a tenth of the value of the original action.

Certainly, this should calm markets today - whether it does so remains to be seen, because this is merely a public statement about a possible deal, whereas the legal action is already underway, so how the markets will respond depends on the chances they assign to the deal going ahead versus the legal action going ahead.

Equally clearly, FHFA has the upper hand, though the banks are no doubt lobbying as hard as they can against the legal action, and negotiating as hard as they can in relation to the possible deal. My guess is that the deal will be reached, and on terms not too unfavourable to the banks - though the key is not only the terms of the deal but more crucially WHEN the deal is reached.

The impact on the markets today? NOT as severe as I wrote last night - we have pulled back from Armageddon, at least so far this source of trouble is concerned. So watch the Eurozone problems much more carefully, because the Eurozone will therefore get that much less relief from the opening of American markets later today. In other words, we may still get close to Armageddon between now and the Thursday rescue package that I expect from Merkel. Sphere: Related Content