Risk aversion coming back (update 8) - EU bond contagion, China

We got a two way (risk averse) knock down on equities, as discussed in The Dow successfully creates another 'bulltrap', and Risk aversion coming back (update 7) - Ireland bailout/PIIGS tumoil just begining (update 3) - Poland 1st victim re: CDS spreads as bond spreads widen the market is now pricing in a bond contagion from Europe, essentially what that means is that the bond spreads of high risk debt widens against 'everything' which in turns erodes the value of the bond/s worth, on top of that is the insurance to cover a default on a bond, the CDS spreads, which are widening also; this can be attributed two the EU/IMF bailout of Ireland that in turns has put stress on the other 'peripheral' (PIIGS) countries such as Portugal, Spain and Italy. So now we are going into the big leagues of 'bailouts' as countries like Spain and Italy are larger economics to Ireland. The general fear is does the EU have a enough cash and can they afford to insure (via German, ECB backstops) against other EU countries asking for a bailout. The market doesn't think they can, therefore it is now wise to factor in a possible default by one of those countries (Portugal, Spain, Italy) and then a restructure of debt payments (bond holder losses) that do not involve a bailout by the EU/IMF. This country may be Portugal.

All and all this will effect risk and risk aversion will be in full swing, any bond losses from a default could be the precursor for a major correction on 2010. The interesting aspect to that was discussed in Contrarian play on the upcoming Permanent Open Market Operations (POMO) by the FED ala 600billion buy up of US Treasuries and an early post titled An interest rate wipeout coming , is that the Federal Reserve 600billion stock market prop has been a flop, with POMO operations occurring everyday. There is no indication that stocks will rally with so much risk around. I called a contrarian play on the start of the Fed's T-Bill buyup and POMO operations, that they would NOT cause a rally in market. I was right. But in saying that, we have an overstretched market on thin liquidity, which is lethal for buying into a bull-trap, both dumb money and smart 'dumb' money have been buying into closing of stock rallies (HFT 'grinds'), only to be sold at the start of the next day trading; this patten may go on for awhile, as the market edges down towards supports, that may then set a 'flash crash'. This is something that needs to be watched.

China has been speeding up in a hyper inflation way, with China now panicking to maintain price stability, I think this is the start of the China inflation driven crash, which should finally correct their property market, but the correction will be brutal. As discussed in China's 'Goldilocks Omen'. A major Chinese economic correction is now on the cards.

When an stock index, the Shanghai composite ,can crash in one day and strip 3% value in minutes. We have a problem



The other risks to the market are geopolitical South/North Korea, and social/political unrest in Europe stemming from Ireland, France, Spain, Italy.

We are now entering a time of major economic, social and political problems