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During the month of October, the market shot up like a rocket on hopes that the Greek situation was drawing to a close and third quarter earnings season would be stellar, but on both counts the end result came up less than expected.

There were solid results from Qualcomm (NASDAQ:QCOM), Google (NASDAQ:GOOG), and various mining companies, but the banking sector seems to be mired in accounting gimmicks to boost earnings which does not bode well for the sector or recovery.

Europe remains on the verge of a recession, the US is seeing high unemployment, uncertainty is emanating from Washington DC, and China is experiencing a slowdown - it is hard for me to see the final demand that will lift the global economy out of its malaise.

The week started with the financial markets being shocked back to life as Greek Prime Minister George Papandreou called for a referendum on the bailout package. As stories began to filter out, this odd move was not as bizarre as what was happening behind the scenes. A day later, various military leaders were sacked and replaced as the opposition cried that the bailout was not fair and the real problem was Papandreou.

Now the line is drawn in the sand. Up first, a no-confidence vote on Friday which may see a collapse in the Greek government followed by elections. Polls are showing the Greeks want to be a part of the EU but do not like the reforms. Apparently, the Greeks want their cake and the ability to eat it too. Unfortunately, that is not the case in this day and age.

The IMF has laid down the law by withholding the next tranche of funds until after the election and Angela Merkel has drawn a line in the sand telling Greece that if they have to choose between the stability of the EU and Greece, the EU comes first. Tough choices will have to be made.

This trumps the November 23rd deadline for the deficit panel to come up with specific reductions or face across the board budget cuts starting in 2013. Just when everyone thought it was safe to go back in the water, the global financial markets have been thrown back into turmoil.

The 1 year Greek bond yields have spiked above 230% at the close on Thursday with 2 year yields soaring above 100%. The market is now pricing in a haircut greater than 50%.

Investors should be reducing risk and leverage at this time while looking to get defensive ahead of a strong pullback. The danger in financial stocks is not what lies on the balance sheet but what has been stashed away off balance sheet. Already we have seen Dexia, Proton Bank, and MF Global (OTC:MFGLQ) fall in this crisis and there are likely more dominoes to fall before this is over.

In the meantime, now would be a good time to go short the major stock markets like the S&P 500 (SDS, SH), Nasdaq OMX (QID, PSQ) along with the France iShares ETF (NYSEARCA:EWQ).

France is the preferable short to Germany because France would be at risk of losing its AAA credit rating in the event of a banking crisis or recession and uncertainty surrounding the upcoming Presidential election, while Merkel would gain points from the German voters by standing up to Greece.

The iShares S&P Financials Index (NASDAQ:EUFN) is an attractive short target for those looking to get short exposure to the European banking sector, if that is available to you.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SDS, QID over the next 72 hours.

Source: Global Markets Thrown Back Into Turmoil - Time To Reduce Risk And Get Defensive