Contagion Eyes Italy

We start off the week in overnight Asian trade on a sour note over, you guessed it, European debt fears. The latest round of concern comes from ratings agencies placing Italian banks on review for possible downgrades, it's not a matter of if, simply when. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) are  all infected and they will eventually go down, the real fear is what happens to the core of the EU, France and Germany after the periphery fails. It will take time before Spain and Italy follow in the footsteps of Greece, Ireland and Portugal, but they simply cannot afford to issue debt at the rates that are being demanded by the bond vigilantes, which will ultimately force them to seek funding they can afford. The problem is that the current bailout mechanism is nearly stretched to the limit, adding Spain and Italy will snap it like the rubber band stretched too far. We are already seeing ratings agencies issuing negative biases toward the French banks and soon it will be Germany and at that point, contagion will have overtaken Europe like the Black Plague.

Here's the opening FX trade for this week-the EUR/USD which reflects the concerns over Italian banks.

 The green arrow is the start of FX trade for the week, the Euro is down, but as usual, a lot can happen overnight.

The bigger picture shows the Euro topping, although I don't think the top s complete yet, so we should see relief bounces here and there, but the trend has most definitely ended, we are in stage 3 and when we move out of the volatile chop which may take the form of a triangle or a descending triangle, stage 4 decline will be next.

As for the US, watch what's happening with the nuclear power plant in Nebraska which has just had it's berm collapsed by the rising floods of the Missouri. Whether this becomes a critical crisis or not, it has many of the same hallmarks of Fukushima so sentiment is certainly going to lean toward fear.

Right now, Dow futures are down by about 45 points, but Asia has always been a better follower of US markets then an indicator of what will happen and as I said, a lot happens overnight.

We'll see where we stand in the morning and through the day.

For those of you using 3C, if you are interested, I have a version or two I'll be using this week you might be interested in.

Have a great week and be nimble this week!