This is a pretty simple story today: If Spain goes into full sovereign bailout, that puts Italy into play. The European Union cannot allow that to happen, because if it does, the euro will likely break up.
The EU officials have to step up with bigger and broader packages.
So how do you fund Spain without asking for a full bailout? The EU is going to have to be more liberal in their support mechanisms, and the Germans are going to have to go along with it.
That's why the markets are down so much today: The chances of full-scale bailout of Spain has increased. Spain's economy minister said the country did not need a full-scale bailout over the weekend, but the implosion of the regional governments is a new wild card.
Valencia requested aid on Friday, but reports out over the weekend from Spanish newspapers indicate a half-dozen other regions may also seek aide. There are 17 independent regions, plus two autonomous cities (Ceuta and Melilla), so there's plenty more regions that could jump on the bandwagon.
They have an 18 billion aid euro package to backstop the regional governments only three weeks ago. The newspaper El Mundo said a recent study concluded that Spain’s regions need up to 26 billion euros in aid.
It doesn't take much imagination to see how this can reverberate right down the food chain. The Italian newspaper La Stampa reported that Italian cities are facing problems, and over the weekend the New York Times discussed how Sicily might be the "Greece of Italy."
Spain's market regulators are banning short sales of ALL stocks for three months. Italy said it will ban short selling for an entire week — not clear if it’s just bank and insurance, or all companies. Huh? One week?
Meanwhile, Greece is once again in the news. The European Central Bank on Friday said it would no longer accept Greek government bonds as collateral — that means Greek banks will have trouble accessing the ECB for liquidity, which means no funding.
The so-called troika (the ECB/EU/International Monetary Fund) are in Athens tomorrow to review the country's progress toward reducing its debt (none), and open negotiations on a new bailout package.
The IMF, according to Der Spiegel, may withdraw its support for Greece as it no longer believes the country can bring its debt-to-gross-domestic-product ratio below 120 percent any time in the near future. The Greek government is indicating it will unveil new austerity measures this week to counter that belief.
Regardless: All of this increases the chances Greece will default.
The next euro zone "summit meeting" of European leaders is not scheduled to take place until October. They are supposed to have developed a roadmap for the proposed banking union by then. But it looks like the ECB is going to have to step in and begin serious bond buying, though the Germans won't allow it. This is part of the "doom loop" that is now pushing the euro zone into a new crisis.
The euro is at a two year low against the dollar, the U.S. dollar index — a basket of six currencies, including the euro with a 60 percent weighting — at a two-year high, with commodities under pressure. Copper is down five percent in the last two trading sessions.
1) Earnings: Eaton beat on bottom line, but revenue was light. This is a good company to watch for the global economy: It is a global player in electrical equipment and power generation and gets 60 percent of its revenue overseas.
"The uncertainty in Europe, as well as slower economic growth rates in China, India, and Brazil, resulted in weakness in a number of our end markets," said CEO Cutler. "We now believe our end markets for the year are likely to grow by 3 to 4 percent, a reduction from the 5 percent growth we had forecast in April. We also anticipate that the impact of foreign-exchange rates on revenue will be more negative than previously forecast..."
2) Earnings: Beating very low expectations, but revenue is still a problem. With one-fourth of the S&P 500 index components reporting so far, 70 percent of those reporting have beat (above the 62 percent historic norm) on the bottom line, but only 41 percent have beat on revenues.
On average, the companies that have reported earnings are beating by 6.5 percent, but revenue is beating by NEGATIVE 0.3 percent.
A lot of demand in technology is being pushed off into the fourth quarter, partly because both Apple and Microsoft have product launches that are being put off until then — Windows 8 for MSFT, and the iPhone 5 for AAPL.
—By CNBC’s Bob Pisani
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