Huge wave of risk aversion about to hit markets

The market may be underestimating Japanese FX intervention, as it's about to become more prolific. This can be seem via the now very concerning tensions between China and Japan as discussed in Inches away from an Asian trade war (update 4) - first shots fired China/Japan embargo (rare earths), if China begins to create embargo's or sanctions on Japan; Japan's only retaliation is massive YEN depreciation. This would attempt to keep their (Japan's) market competitive over China. In turn of course China will halt all YUAN appreciation against the US dollar. Asia/trade war/devaluation crisis would be one part of risk aversion, the other is Europe.

Irish CDS (credit default swaps) have blown out re WSJ article 23rd Sept 2010 :

LONDON (MarketWatch) -- The cost of insuring peripheral euro-zone government debt against default continued to rise Thursday, with the spread on Ireland credit default swaps, or CDS, widening further into record territory. The spread on five-year Irish sovereign CDS widened to 490.8 basis points from 464.2 on Wednesday, according to data provider CMA. That means it would cost $490,800 a year to insure $10 million of Irish debt against default for five years, up from $464,200. The spread on Portuguese CDS widened to 419 from 391.2, CMA said, while Italy widened to 204.8 from 195.3. The Spain five-year CDS spread was at 242.5 basis points versus 234.3 on Wednesday, while Greece widened to 828.6 from 813.6.

Any doubts on bond insurance is over coupon payments paid on later date/s and whether the bond seller will be able to honor those payments. You can blame the European Central Bank for allowing the indebted PIIGS yields on sovereign debt to blow out at high percentage levels. The ECB/EU and IMF have all encouraged investors to buy in at high yield levels; an unwritten belief that the ECB will backstop any bond purchases. Of course in free markets if yields are higher means risk is higher, thus the CDS market is adjusting accordingly, which puts further pressure on funding via the capital markets. Any further costs to insure 'junk' sovereign debt is passed on, usually with interest rates on lent capital (other banks), the costs to provide credit and the risks will increase (good to watch libor/interbank spreads). Therefore banks will be reluctant to provide credit to the consumer.