An unsacred alliance of slowing global growth, the sovereign debt crisis in Europe and the US debt downgrade have mounted up to a perfect storm providing massive headwinds to global financial markets.
The downgrade of US debt caused flurry activity with politicians & central bankers trying to find a way to ride the storm and calm the markets. The ECB announced between the lines of their overnight statement that they are ready to buy Spanish & Italian bonds. Even if a positive at all, the fact that they didn t find a way to say it clear is still pointing to a deep discordance within the ECB.
Also from G7, G20 and EU telephone conferences over the weekend the message is the same: Politicians are in close contact, ready to provide liquidity to the markets and no reason to panic overall. A message which may have landed on more fertile soil if politicians haven t acted like chicken in the weeks behind.
A bit more mixed signs came from China, maybe the most important creditor to both the US & Europe: "It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibilities and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy," said a commentary in the People's Daily newspaper, the mouthpiece of China's Communist party. While Chinese officials are quoted saying that there s no reason to overreact other sources are voting for an increase of EUR & JPY holdings.
Nothing Japan will be happy about as the BoJ may intervene further to stop the rise of the currency, an effect doubted by Moody’s which also stated that ongoing intervenes may have negative impacts on the rating.
So far, we see risk off everywhere with Equities down while Vol & Gold are rising. Even if sovereign bonds are rallying this morning on the back of the ECB announcements we would not read this as the worst is over but as people happy to play the Trichet Put. In such an environment with new waves of Liquidity lurking on the horizon, weak hands selling & -13% over just a week everything is possible, even some rebounds.