Is it the end of the world? Maybe, but as far as we are concerned, not yet. In spite of the great turmoil in sovereign debt markets, and the general sense of doom and pessimism, most underlying indicators of financial sector health are in good form. Today USD Libors are showing some movement, but overnight markets are calm, ABX and similar derivatives indices remain reasonably stable, with difficulties so far limited to some losses in bourses and risky currencies. All that says, to us, that the climax of this latest bout of risk aversion is far from being reached. The USD has some way to go, and its short-term uptrend will probably not come to an end until gold tests the 1250-1330 area, since gold buyers are the least willing to capitulate to risk sell-offs for now. While the dollar is probably headed lower in the longer term, the Euro is excluded from this trend, because we are very doubtful that the currency will survive in its present form. So in other words, we are bearish on the dollar, but even more bearish on the Euro, and since we are not as convinced as many others are that the center of power is shifting to Asia within the next ten years, the only longer term asset that we would feel like holding for the longer term is gold at the moment. At least for now, with interest rates close to zero, gold seems like a suitable choice, in spite of its obvious tendency to bubble.

The Eurozone remains in focus, and as David Corbell from IFRMarkets remarks with zest, Portugal is next in line to "call in the cavalry after Ireland has raised the white flag" recently. Yet even the fearsome hordes of Genghiz Khan would not inspire enough conviction to stage a permanent recovery for the periphery at the moment, as economic shocks are being amplified by political chaos in many of the countries in trouble. Portugal is the latest European nation to go on general strike today, and for sure, the string will not stop there. Managing an economic crisis of this magnitude would be an Atlantean task in any context, but when leadership is lacking or handicapped as well, it is probably time to give up all hope on the patient. Markets, to be sure, will intensify their brutal assaults on the infirmary of Europe, and the outcome is unlikely to be pretty.

The biggest blunders of the year probably belong to Germany's Angela Merkel, who seems determined to convince speculators that the Euro is in grave danger, in spite of their reluctance to sell the currency very aggressively so far. What the Chancellor has in mind while broadcasting her daily comments that the Euro is at peril is difficult to assess. Perhaps the conflict between her responsibility towards the electorate, and the need to maintain the coherence of the Eurozone is weighing too heavily on her nerves, compelling her to express herself vociferously in order to relieve some of the pressure. Still, the Finance Minister has not been any less alarmist, so the recent panic maybe better characterized as more of a German phenomenon than something specific to the psyche of the Chancellor. Or is Mr. Schaeuble merely duplicating the voice of his head of government? In any case, today her comments were refuted publicly, and she herself was rebuked by high-ranking European officials, including J. C. Junker of Luxembourg, who is also the head of the Eurogroup, and ECB Governing Council member Ewald Nowotny of Austria. The E.U., in short, is far from being able to devise creative solutions, and instead seems to be in complete disarray defending against market forces.

Ireland remains in focus as the government tries to pass the budget before December 7^th, and prepares for early elections

Speculation is rife on the size of the exposure of European banks to peripheral debt, leading to some cynicism that when the E.U. manages a bailout, it is engaging in yet another typical bank bailout of the type that has been a characteristic feature of this crisis. It is hard to know exactly how high the exposure of the German or French finance sector to the problem regions are, but the fact that these questions are even being raised leaves one to wonder how much credibility is still being attached to the ECB's stress tests back in summer. On the other hand, in some sign that the the banking sector is not as dangerously exposed to the periphery as some analyses suggest, 3-month Euribor has not seen a sharp response to all the trouble in the bond markets, and the fact that the Germans are so enthusiastic about forcing the sharing of the bailout burden would make one assume that they feel reasonably confident about the health of their own banks.

European CDS and cash markets remain under considerable stress, with Greece today rising further above the 1000 bp mark, and Spain breaking an all-time record by reaching 310 bps at one point. Portugal (500+) and Belgium are also reported to have broken new records, as Ireland approaches 600 bps once again. By contrast the turmoil has lead to strong demand for German bunds, bringing yields down and contributing further to the widening of spreads between peripheral and core debt.

In Asia, the Korean market showed remarkable resilience after yesterday's artillery fire exchange, losing only 0.2% of its value against an initial sell-off that brough the KOSPI index down by almost 2.5% at one point. Markets in the region were lower in general however. The Chinese have fixed the USDCNY central parity rate at 6.6589 vs. 6.6469 yesterday, on the last leg of three-days of higher fixes. It is clear by now that the Renminbi will be maintained at around these levels for the rest of the year, in line with numerous comments by officials that appreciation this year will be limited to around 3%. Interestingly for forex traders, Thailand is reported to be considering a tax scheme on FX transactions and while such a measure would be a distant prospect for the Western world for now, such a move is never a happy step for this government and tax-free section of the finance world.

Doomseekers turn their eyes to LATAM, focus on Mexican, and Brazilian exposure to Spanish banks

There is significant volatility in Latin American CDS. In this context, this section is being quoted from a BNP Paribas report via the Financial Times blog. As the article says, Spain is a very significant actor in the Latin American region, which seems to have been overlooked by the markets for a while.

"Mexico is much more exposed to Spanish banks than Brazil. The share of the total banking assets in the hands of Spanish banks in Mexico runs at 34%, according to the last Financial System Report by Banxico, while in Brazil, Spanish banks' assets represents 10% of the total assets.

Even if one could argue that Mexican economy is one of the lowest leveraged in Latam (total credit as a % of GDP runs at 30% in Mexico, while in Brazil it represents 47% and in Chile 67%), the credit market is in a clear recovery process and a sudden wave of tightening in lending standards will hit Mexican economy significantly.

Different from Brazil, public institutions in Mexico are not relevant for the banking sector. In Mexico, none of the seven biggest banks (listed by Banxico) are statedowned. In Brazil, the biggest bank in total assets is statedowned (Banco do Brasil), as well as the fourth biggest bank (Caixa). That said, Mexican banking sector does not have the 'cushion' of the public sector (when we refer to the consumer credit) to shield the local financial system from any systematic risk from abroad. We are not saying that Brazilian banking system will be immune, but just that Mexico is more vulnerable. At any rate, in both countries, Brazil and Mexico, banks run with the capitalization index (Basel methodology) above 17%, against the 8% minimum required."

In the U.S., various influential voices are criticizing the Fed harshly that it is exposing the economy to unforeseen dangers by inflating the money supply recklessly. Yet these voices will probably become silenced the moment the economy's show of strength becomes blurry. Indeed, as the Chairman suffers to explain and emphasize whenever he discusses his policy decisions, the basic indicators of economic health remain almost universally weak in spite of the finance sector rally, and the improvement in confidence that has come with the risk rally of the past months. Withdraw the expectation of Fed support, and cheap, unlimited supply of cash into the system, and sluggishness will return, worsened by the recent troubles of the Eurozone. So, unlike many other commentators we don't see a meaningful chance of the Fed reversing course or restraining itself any time soon, with the present posture maintained until the end of the Obama presidency. Of course, USD is well poised for a strong rally from the present levels, and this sort of speculation suitably contributes to the momentum.