Well, at least we have moved past Greece. Now we need to bring in the IMF and China.
Trading volume is light today (Monday), for good reason: this can still go either way. We are not really falling, just moving sideways.
We need a credible plan to ring-fence Italy and Spain. If we get that, markets will move up and stocks will start to trade on fundamentals.
The big worry: Italian debt is starting to trade at junk bond levels. Italian 10-year yields passed 6.6 percent, again at new highs. The Vanguard High Yield Corporate Fund, one of the largest junk bond funds, now yields 7.1 percent. (Check sovereign credit default swaps (CDSs) here .)
At this point, the main issue is whether Italy will be able to roll over its coming debt (the next bond auction for Italy is November 10). If not, they will have to go to the EU or the IMF for assistance.
The concern is that the tools available are not sufficient to address the crisis. This is what Europe has now:
1) a very small EFSF that does not look like it is going to get big outside contributions,
2) modest bank recapitalization, and
3) bond purchases from a reluctant ECB.
These are the options for Europe:
1) expand the EFSF
2) use and expand the IMF's Special Drawing Rights (SDR) (essentially a cheap line of credit)
3) expand the ECB balance sheet. Buy more sovereign debt — and make it clear the ECB will keep on buying.
U.S. economic data is light, but Chinese inflation numbers on Wednesday will be important. They peaked at 6.5 percent in July...lower numbers will give cover to the Chinese government. Stimulus in China can offset some of the hard landing scenarios out there.
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