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Market Meltdown!

There’s really only one story to discuss today and that is Italy. Italian bond yields are soaring and I mean soaring and the market reaction is not pretty. In a story of “be careful what you wish for”, Italian Premier Berlusconi is said to be stepping down next week but today’s crisis may actually reverse those wants and return him to power.

Since the announcement that he would step down after austerity measures were implemented, bond yields jumped to above 7% for the first time in the Euro-era. This is an unsustainable level and the uncertainty over the new Italian government is weighing heavily on the market.

Stocks are lower in Europe and in the US, as are commodities. Risk aversion is high right now as Italy is the third 3rd largest Euro zone economy, as well as the world’s 8th largest. It is clearly too big to fail and it is doubtful whether or not it could be saved.

As bond yields rise, it becomes harder for them to service their debt and creates market dislocations as everyone runs for the exit.

Making matters worse, there is no news on the docket that could potentially save us today, with the exception of a Bernanke speech later this morning. I wouldn’t be surprised at this point if his speech today is not the one he started out with earlier this morning.

And that is the problem with contagion; at first it was Greece and now it is Italy. As the size and scope of the indebted nations gets bigger, the larger the problem occurs. And guess who is up next?

The United States. That’s right, the good ol’ US of A. The budget super-committee is working right now to attempt to fix our problems and if this is not a wake-up call, then nothing ever will be. The only thing keeping US yields low right now is the threat of Bernanke and the Fed tanking interest rates and the Dollar much lower.

While it will be a difficult task to do that, the potential of QE3 may mean negative real interest rates which could be disastrous for the markets.

For the sake of global harmony, let’s hope that the situation in Italy comes to a close rapidly. Just don’t be surprised if Berlusconi is the one who comes out on top!

By Mike Conlon, ForexNews