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Quadruple 'witching', Europe officials make volatile market
September, 16th 2011

A meeting of European finance officials to discuss the sovereign crisis, paired with the quadruple witching expiration of futures and options guarantees more stock market volatility Friday.

For a second day on Thursday, stocks rode higher on a wave of positive news from the euro zone, even as investors continue to believe the problems are far from solved and that Greece could ultimately be forced into debt restructuring. The ECB, Fed and other central banks, just before the New York open, announced a coordinated program to provide more dollar funding to European financial firms through three month loans.

European banks need dollars to lend to US customers and repay their own dollar loans. Fewer dollars have been available, as their usual sources, such as money market funds, pulled back as the sovereign debt crisis flared up.

The announcement from central banks pushed the euro higher and risk assets rallied. Stocks were already poised to go higher, after Wednesday`s commitment from the leaders of Germany, France and Greece that Greece would remain a member of the euro zone and comply with financial reforms.

In the US Thursday, the Financial Stability Oversight Council met via conference call to share information and discuss recent developments in global markets, according to a Treasury official. The group is led by Treasury Secretary Timothy Geithner and includes Fed Chairman Ben Bernanke and the heads of the FDIC, the SEC and the Office of the Comptroller of the Currency, among others.

The council was formed as a result of Dodd-Frank legislation with the mission of monitoring systemic and emerging threats to the financial system.

Markets overlooked disappointing US data, including hotter-than-expected consumer inflation data, an increase in jobless claims and a weak Philadelphia Fed survey, though improved over last month.

The euro was up 0.9% at 1.3876, after moving above 1.39 temporarily. The Dow rallied 186 points to 11,433, and the S&P 500 was up 20 at 1209. As in European markets, financials were the big winners and the S&P financial sector gained 2.6%. After the bell, Research in Motion was the standout when its shares tumbled more than 18% after the company reported a steep drop in earnings and weaker-than-expected sales.

What to watch

The attendance by Geithner at the European finance ministers` meeting has sparked speculation that he would push some of the types of programs the U.S. used during the peak of the financial crisis, like the TALF.

CNBC`s Steve Liesman Thursday quoted an unnamed G-7 official, as saying that the European officials are considering a program similar to the the US Term Asset-Backed Securities Loan Facility. The European version being considered would be for government bonds. The official could not say whether the program would be approved, just that it is under consideration.

In the TALF program, the Fed`s balance sheet was used to leverage private sector funds in order to bring in spreads. The idea being floated in Europe would use funds from the European Financial Stability Facility and the European Central Bank`s balance sheet, in order to bring in spreads on peripheral sovereign debt, Liesman reported.

A number of strategists believe the markets have become overly optimistic about the meeting in Poland, and they do not expect a major announcement. "People are going out on a limb here," said George Goncalves, Treasury strategist at Nomura Americas.

The 17 governments of the euro zone are expected to vote on expanding the powers of the 440 billion euro EFSF over the next several weeks, so that it could go beyond its original purpose of providing funding to troubled countries.

"This is the beginning of building safety nets. I could be wrong and they`re going to do something bolder, but it`s hard to do bold actions now in the fiscal court of public opinion," Goncalves said, adding its easier for monetary officials to move quickly.

There are at least two times when markets will hear from European officials Friday. European Commissioner for Economic and Monetary Affairs Olli Rehn speaks in Wroclaw, Poland at 6 a.m. ET. There is also a later press conference at 12:30 p.m. ET.

Besides watching Europe, there is Treasury data on international capital flows at 9 a.m. and consumer sentiment at 9:55 a.m.

Markets mayhem

So far this week, the S&P has gained 4.75%, and Friday`s expiration of futures and options has no doubt added to the turbulence.

"On the open, the futures will expire and options on indexes will expire, but the single stock and ETF options don`t expire until the close, and they`ve been creating a lot of the volatility we`ve been seeing," said Patrick Kernan, who trades S&P 500 options at the CBOE.

"We`re pushing the market harder" because of expirations, he said. "That probably was at work today and part of yesterday."

Kernan said he has seen investors adding calls this week, while during the sell off of recent weeks, they were mainly adding downside protection. Now they are looking for both upside and downside.

The VIX, the CBOE`s volatility index, fell 7.6% Thursday to 31.97, and Kernan said it now implies a 2% daily move in either direction for stocks.

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