Folks, the European contagion issue seems to have settled down on news that the European Central Bank will hold an emergency summit on Friday. Is this contagion issue over? Absolutely not. But Friday’s meeting might help to quell the panic in the French institutions. The French are the largest holders of Italian bonds, which means they’re the ones who are going to take the most heat in this scenario—similar to the Germans with Greece.

How does this affect our market? Well, these same French institutions have large portfolios that contain U.S. equities—either directly or indirectly through an index arbitrage position. Previously that position was, say, $7 billion. But thanks to this Italian story, that position needs to be trimmed back to, say, $5 billion in order to raise repatriate capital to deal with the bad paper it’s holding.

When institutions liquidate a large position like that, it’s like moving an aircraft carrier around in a bay: there isn’t much room for error, and it’s going to leave a big wake. That big wake in this instance was the overnight selloff I talked about yesterday. The news of the summit seems to have calmed the waters substantially, which is one reason we saw and continue to see a bounce.

Meanwhile, we’ve got a dollar that’s down, gold hitting record highs and QE3 looking like a strong possibility. At the same time, China beat expectations with a report that its second-quarter gross domestic product rose 9.5% from the previous year. We are watching Growthflation—this convergence of global growth and inflationary pressure—unfold right before our eyes. I’m looking to back up the truck here—in terms of maintaining purchasing power parity going forward 2, 5, 10 years, being unexposed could be the biggest risk.

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I had the pleasure of interviewing an old friend and colleague, Leo Melamed, on The Jack B. Show today. Leo is the father of financial futures and one of history’s great financial visionaries. He was integral in taking the CME from a butter-and-egg exchange to one of the world’s most important financial tollbooths. I’ve been fortunate to have met many great men, and Leo ranks highly among them. I encourage you to listen to the interview—it’s terrific stuff.

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