We are now into the second week of 2012 and frankly I can’t see any fundamental reason to be bullish about things. The European debt Crisis continues to accelerate, with France’s borrowing costs rising dramatically and the yield on Italy’s ten-year back above 7% despite massive intervention on the part of the ECB.

Indeed, it’s quite telling that the one country that kicked off the entire EU Crisis, Greece, still hasn’t gotten its fiscal house in order: there’s only 37 billion Euros’ worth of aid left from the first bailout of 110 billion Euros… and the EU has yet to hammer out details of the second Greek bailout, worth an additional 150 billion Euros.

If the ECB/ IMF/ Central Banks cannot solve the Greece situation… what hope do they have of tackling the larger issues of Italy and France? Heck, even Germany now sports a Debt to GDP ratio that exceeds Maastricht Treaty requirements and they haven’t recapitalized their banks.

As a result of this, shares of even the supposedly “rock solid” German banks have come under stress, breaking down into the gap established during the 2008 Crash.

Aside from Europe, we find signs of a brewing solvency Crisis in Japan, an economic slowdown in China, Iran is playing war games with the Strait of Hormuz, and the US is entering a second recession within the context of a larger Depression.

Against this highly deflationary backdrop, the one primary prop for the markets is hope of more juice/credit from the world Central Banks. However, even that prop is rapidly losing its strength: the gains of the last coordinated Central Bank intervention lasted just a few weeks before the market rolled over again.

Moreover, if the world Central Banks are about to launch another massive wave of liquidity, the commodity space sure isn’t picking up on it…

 

Gold has broken its post-Crash trendline:

While Copper appears to be forming a massive Head and Shoulders top:

Does this mean that the markets are about to plunge straight down? No. But these charts do serve as massive warnings that anyone expecting another round of QE or some other huge monetary stimulus from the Central Banks may be in for a RUDE surprise.

With that in mind, this week’s action will go a long ways towards explaining where we’re heading from here. Start of the Year buying is over and holiday ebullience is fading fast. Put another way, the market is on very thin ice.

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Graham Summers