Unless something happens over night tonight the U.S. markets are in for a tough day. Europe is coming to grips with the fact that the “jig is up” for the European banks. The German DAX is down well over 5% and a lot of the banks have been suspended from trading all over Europe.
It appears that the “jig is up” for Europe and there will likely be quite a bit of back splash back onto the U.S. As discussed by Societe Generale over the weekend: “A perfect storm hit this summer and, as a result, the US and Europe are growing at near-stall speed. Outright recession, however, needs a trigger, which we believe will remain absent.” The only part I disagree with is the absence of a trigger. While an outright trigger event may not be present at the moment it won’t take much from these levels to create one.
However, we have been talking about the accelerating risks in the markets and the economy for quite sometime now and expecting Fed intervention by the end of September. Most likely the implosion of Europe combined with the weakening state of the U.S. markets and economy will all but guarantee action sooner rather than later.
The chart shows the critical support level on the market right now. Any violation of that support line and we are going to potentially have to start considering a much bigger decline and taking immediate action. We still recommend moving into more cash and fixed income as detailed in this past weekend’s newsletter on the website.
The important point is that this is NOT the time to be adding “risk” exposure to portfolios. It is quite the opposite. Macro risks seem to be accelerating at the current time and it seems quite obvious that just one small event could send the entire house of cards tumbling down.