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Today there will be no discussion of the weather. Today platitudes, arcane phrases, vague promises couched in banalities will no longer do. Mr. Draghi has laid down the gauntlet of actually providing a solution for Europe by having the ECB act as Superman, Batman and the Avengers and show up and make the last minute rescue and I fear that anything short of this will now send the markets into a tailspin. Expectations run high, Mr. Draghi may well have over-promised and any sort of under delivery will not be taken well. Today may be the most critical meeting, ever, of the European Central Bank and it is Mr. Draghi’s reputation, the ECB’s reputation that has been put on the line by Mr. Draghi’s bold comments.

Spain is facing a regional, banking, and sovereign crisis all at once. The funds to prop it up simply do NOT exist. To argue otherwise is to ignore math and Germany.

The European Equities are in positive territory at the North American cross over. The CAC-40 was the initial outperformer following SocGen’s earnings. Despite reporting a drop of more than 40% in Q2 net profits year over year, the co. beat analyst expectations on Q2 CIB net and announced the completion of its cost cutting measures and traded up to highs of EUR18.57, though shares have since pulled back into negative territory. The FTSE-100 now leads the way despite a sharp decline in July’s UK Manufacturing PMI, which came in at 45.5, the lowest reading since May 2009. This saw GBP/USD also tumble to intra-day lows of 1.5619, though the pair has since stabilised around 1.5650. Elsewhere, comments from ECB’s Weidmann that “governments overestimate ECB possibilities”, going against general consensus and speculation that the ECB will announce further stimulus measures at tomorrow’s meeting, provoked a sharp drop in the riskier assets and the Bund to gain 8 ticks, though as it came to light that these comments were taken from an article published on June 29th, the move was pared.

European equities are trading in flat-to-positive territory going into the North American crossover with the FTSE-100 the primary laggard, being driven lower by individual earnings releases. Oil supermajor BP released a disappointing set of Q2 earnings, reporting a net loss of USD 1.39bln, pressing the stock lower by 4.25% at the midpoint of the European trading day. Data releases from Europe today have picked up in volume, but come alongside expectations, proving unreactive across the asset classes, as German unemployment changes matches estimates at a reading of +7K for July. The topic of a banking licence for the ESM has arisen once more, as German politicians have begun voicing their concerns on the issue, with a German senior lawmaker commenting that he cannot see an ESM banking licence becoming a reality. However, this appears to be another reiteration of the German political stance, and therefore not a particular shock to markets. With today the last trading day in the month, larger than average month-end extensions have proved supportive in the longer-end of the curve today, with notably large extensions in Germany, France and the Netherlands.

As markets continue to yo-yo and commentators deliver mixed forecasts, investors are faced with some tough decisions and have a number of important questions that need answering. On a daily basis we are asked what’s happening with oil prices alongside questions on China’s slowdown, why global trade will collapse if Romney wins, why investors should get out of stocks, why the Eurozone is doomed, and why we need to get rid of fractional reserve lending. Answering these and more, Mike Shedlock's in-depth interview concludes: "The gold standard did one thing for sure. It limited trade imbalances. Once Nixon took the United States off the gold standard, the U.S. trade deficit soared (along with the exportation of manufacturing jobs). To fix the problems of the U.S. losing jobs to China, to South Korea, to India, and other places, we need to put a gold standard back in place, not enact tariffs."

Charts are saying higher, gut instincts are saying not so fast. 

As usual, the stock market was vexatiously out of step with reality last week, soaring on word that the ECB plans to do “whatever it takes” to preserve the euro and the political union that it binds. For U.S. investors, especially those who believe in hope and change (and, presumably, the Easter Bunny), there was also the invaluable news that the U.S. economy is once again verging on recession – a development which is widely believed to portend yet more Fed easing.

Pushing them to build up more debt to push additional debt on over-indebted nations who clearly can't pay back their current debt is quite foolish. Recession and depression looms everywhere.

While in principle central banks around the world can talk up the market to infinity or until the last short has covered without ever committing to any action (obviously at some point long before that reality will take over and the fact that revenues and earnings are collapsing as stock prices are soaring will finally be grasped by every marginal buyer, but that is irrelevant for this thought experiment) the reality is that absent more unsterilized reserves entering the cash starved banking system, whose earnings absent such accounting gimmicks as loan loss reserve release and DVA, are the worst they have been in years, the banks will wither and die. Recall that the $1.6 trillion or so in excess reserves are currently used by banks mostly as window dressing to cover up capital deficiencies masked in the form of asset purchases, subsequently repoed out. Which is why central banks would certainly prefer to just talk the talk (ref: Draghi et al), private banks demand that they actually walk the walk, and the sooner the better. One such bank, which has the largest legacy liabilities and non-performing loans courtesy of its idiotic purchase of that epic housing scam factory Countrywide, is Bank of America. Which is why it is not at all surprising that just that bank has come out with a report titled "Shipwrecked" in which it says that not only will (or maybe should is the right word) launch QE3 immediately, but the QE will be bigger than expected, but as warned elsewhere, will be "much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy."

Many local governments across the US face steep budget deficits as they struggle to pay off debts accumulated over years. Increasingly, as a last resort, some have filed for bankruptcy. There have been 26 municipal bankruptcy filings since 2010 and the pace is clustering, as Governing.com is keeping track. As Citi's George Friedlander noted (and we discussed here), technicals (net flows) are still dominant and dragging yields lower and spreads tighter; in spite of contagion fears from cities with clear economic problems (specifically those in CA with severe housing price collapses) and also general fund debt that is not secured by a G.O. pledge. However, with the August 'cliff' in redemptions clearly not priced in yet - as fear has driven momentum into bonds recently - we fear more than a few will be wrong-footed when the net flow shifts.

As noted before, courtesy of the GDP revision, all the kneejerk reactions in the past 3 years to various GDP headlines (preliminary, first and final revisions at that), were all for nothing. In fact, today's GDP number will be revised and re-revised in the next two months, then re-re-re-revised at the annual revisions in 2013, 2014 and 2015. In other words, the number after (and likely before) the decimal comma is irrelevant. One thing however stands, and that is the trendline change in actual GDP compared to the change in debt used to "buy" said GDP. Which is why we present our favorite chart showing how much more total federal debt was added per quarter over the GDP. Bottom line: in Q2, the US added $274.3 billion in debt while adding $117.6 billion in GDP (from the revised data: Q1 GDP of $15,478 billion rising to just $15,595 billion in Q2). Probably what is more indicative, is that in Q2 the delta change between debt and GDP rose from 2.28x in Q1. But that too is largely noise and will be revised. What won't be revised is that over the past two years, the US has added 2.42x more debt than it has added GDP.

While the EUR was soaring, and Spanish bond yield were (very briefly) plunging in the past 48 hours, the reality behind the scenes was very different than what was blasted publicly in the headlines. Namely, Spain was on the verge of requesting a full blown sovereign bailout, one which would see it become the next country after Greece, Ireland and Portugal to fall under the Troika's control. From Reuters: "Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said. Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said. If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year." So why the sudden attempt to talk up European risk in the last two days? Simple - Germany did not agree to fund Spain's bailout. Which meant it was suddenly up to Europe's apparatchiks to jawbone markets into cooperation. "De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now," the official told Reuters."

European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress. In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.

• ECB's Nowotny - ESM banking license could be advantageous (Reuters) - just keep regurgitating headlines until they generate a short squeeze
• IMF Says China Downside Risks Significant as Growth Slows (Bloomberg)
• Moody's cuts outlook on EU stability facility to negative (Reuters)
• Rome places spending controls on Sicily (FT)
• Big banks' glory days feared to be gone for good (Reuters)
• China's CNOOC scoped Nexen, partnered, then pounced (Reuters)
• Germany backs Spanish austerity plans (FT)
• Are 2012 Games one too many for London? (Reuters)
• Euro Crisis Spreading East Damps Growth, Development Bank Says (Bloomberg)
• Japan Flags Yen-Sales Impact as BOJ Eyes More Easing (Bloomberg)

The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday’s, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night’s outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.