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The current, 4-day selloff in the U.S. began after the Fed FOMC minutes last Wednesday (where there was disappointment about the lack of comment on QE3), then resumed on Friday after the disappointing nonfarm payroll numbers, and have been exacerbated by the spike up in Italian and Spanish bond yields. Some nervousness about earnings is also likely playing into the mix.
The spike up in Italian and Spanish bond yields is important. The bond vigilantes are back in Europe, arguing that the ECB (and the Fed) has only delayed the much-needed restructuring of global debt.
Of more immediate concern is the massive positions in European debt the banks hold. Remember, the ECB expanded its balance sheet by almost 1 trillion euros in the past 3 months by making cheap loans available to European banks; a good chunk of that money banks borrowed went into the purchase of sovereign bonds. Those banks are now sitting on big losses on those bonds.
What's next? Watch the action in bonds...they were supposed to sell off, but for the last two days, the biggest bond ETF in the U.S., the iShares Barclay Bond ETF , has popped up, yields dropped, on big volume.
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