I know many of you don’t like to hear, "I told you so," but if you don’t subscribe to the blog you can always take the advice that I proffered last week: “I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!“ Anyone who truly believes that the current pan-European fiasco is not going to end badly will most assuredly get their feelings hurt.

In the following Bloomberg article that ran this morning, titled "Greek Debt Deals Hidden From EU Probed as 400% Yield Gap Shows Bond Doubts," I took the liberty of adding extended analysis, data, and my rather strong opinion. I query, imagine if a media organization with the reach of Bloomberg took advantage of the unbiased Deep Dive analytical ability of an entity such as BoomBustBlog on a regular basis. There would probably not be a recognized need for sell side research. Just a thought to ponder as you read though the article:

Yesterday’s news of a disappointingly large drop in German industrial orders (-2.2%), today Germany reported an unexpected drop (1.5% ) in July exports and only a 0.1% rise in July industrial production—one tenth of what the consensus forecast. The data is not exceptionally worrisome. Taken together it simply underscores that the strong pace of Q2 growth may have been the peak and that the slower German growth going forward will allow the weakness of much of the rest of the region to become more evident.

The Canadian dollar is little changed ahead of what promises to be a more exciting North American session. The Bank of Canada is likely to continue to be the only G7 country raising rates and the August Ivey PMI. A 25 bp rate hike by the Bank of Canada is mostly anticipated, with the better US economic data last week, pushing the consensus more decisively toward a hike, after a string of softer Canadian data gave rise to doubts. This would lift the overnight rate to 1.0%.

The value of a currency is “the single most important price in a nation’s economy.” So claims Paul Volcker.

If this is the case then the eurozone continues to have problems.

Bonds have come back off the boil as investors try to figure out whether or not the European banking system might weigh any further on the global recovery following a recent poke at its methodology. Yields slumped on the news that Europe’s bankers might not have fully reported government debt on its books but as the shock wears off it seems that investors might be willing to return to business as usual. The lack of transparency in the reporting, even if were true, fails to answer the obvious question of whether or not the latest news increases the likelihood of a government default. It is hard to say at this point, however, that markets have brushed aside the report. However, firm action from the Bank of Canada quickly soured sentiment mid-morning reminding bond traders that recovery is out there – somewhere.

Nothing that has come out over the last couple of days on Europe is exactly new; it has been festering all summer. However, the speed and ferocity of the renewed EUR splurge, without a really good catalyst, has caught us by surprise. The WSJ article, I mentioned yesterday, is irrelevant, but the market has been fiercely rummaging through their June notes to recycle the obvious.

In euros' defence, the Eurocrats have wheeled out the Clown-in-Chief at the European Central Bank (ECB) - “ECB's Quaden sees no double dip in Europe." Sounds great, but this is from the guy that didn’t even see the single dip coming.

Global equity markets are weaker. The MSCI Asia-Pacific Index was off 1%. The Nikkei led the regional decline with a 2.2% decline, sparked in part by heightened concern about the impact of the yen’s rise on corporate sales and profits. The Philippine index was one of the region’s bright spots in the region with a 0.8% rise, led by consumer services and basic materials. We continue to note good foreign demand for Philippine shares. European bourses are off a little more than 0.75% near midday in London. Financials are leading to the downside amid heightened funding concerns. Capturing the attention today, the National Bank of Greece announced intentions to raise ~$3.6 bln in new capital (Greek financials are off ~4.5% while the overall Athens Stock Exchange was off 2.5%).

The heightened concerns that are weighing on European financial shares are also being felt in the bond market. Ireland and Portugal are paying historic widen premiums over Germany with today’s moves. Greece is paying the most since before the early May EU/IMF package. Comments by the head of the EU’s stats agency that the full details of Greece’s secret financial transactions have not been disclosed. Portugal’s bond auction went off without much fanfare and the spread narrowed a bit. The US Treasury auctions $21 bln of 10-year note.

The burning question on investors’ minds following the accusation that the Eurozone banking stress tests were flawed was whether or not the immediate shuttering of risk appetite was the start of a bigger meltdown. In overnight currency trading the sensation is that the reaction was overly bearish. The Aussie has swept through the top of its range, while the British pound has spiked higher and the yen is on the wane. No one wants to say it but just perhaps the newspaper accusation that Europe’s banks understated their sovereign holdings is little more than a storm in a teacup.

As the frequency and magnitude of government intervention into financial markets have increased in recent years, central bank meetings have taken on a new level of importance. This week will see plenty of activity on this front; in the next few days, several governments across the globe will announce their decision on how to move interest rates–if at all–and perhaps provide additional insight into their assessment of some major world economies. The U.S.’s neighbor to the north, Canada, kicks off the activity on Wednesday with an interest rate decision that should be watched closely around the world.

The Bank of Canada will release its interest rate decision today, one of eight days annually that the central bank makes such a decision. As the Canadian recovery has gained steam, so too has the central bank’s willingness to hike rates and ward off potential inflation; the last two decisions have seen interest rates rise by a quarter of a percent each time, and today is expected to continue that trend. Rates are currently sitting at 0.75% for the Canada, and are forecast to rise to an even 1%. This hike in rates will be closely monitored by investors in currency markets, as it would widen the gap between Canada and the U.S.

Tuesday’s Asian and European sessions held one very clear message: no one is risking a single dime, it is all about safety now.

Investors rushed into the safety of the German Bunds even from the early hours of the European session, and continued to buy the (relative) shelter of the debt market during the U.S. session. In the currency market, the Japanese Yen, Swiss Franc and the U.S. dollar were in high demand, as institutional traders avoid taking any risks at the moment.

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Currency traders saw price action in Eur/Usd, Usd/Cad, but very little else of note in the previous trading session that guides to fair value ahead of a busy week of economic releases. Most other pairs shared Usd gains and losses in equal measure in a very disjointed period of trade.

Last week the worries about Black September abated as equity markets rallied, and the currency traders likewise took on a little more risk. A few negative weekend events caused the markets to tumble as the psychology changed. In Japan, the central bankers, politicians, and the exporters continued their discussion about the damage caused by the strong yen but all they did was talk, and the yen then soared against other currencies. Rumors late last week that the Europeans and the US would not join with the Japanese in intervention to weaken the yen may have been true so the Japanese did nothing. With Japan's forex reserves increasing last month to $1,070.15B, near the record of $1073.71B in Nov 2009, perhaps they do not wish to sell a few trillion yen and add to their portfolio of currencies.

Weakness in Japanese equities set the tone for equities, and combined with a WSJ article questioning the integrity of the European bank stress tests, announced last July, this provided the bears with more ammo. This story was confirmed by a story from Germany that euro banks need an additional €125 of new capital this year. This seems like chump change considering that the US Treasury was able to sell $33B 3 year notes at .79% today, but it still gave the bears some courage.

European countries on the periphery have not been frozen out of the capital markets. They have sold their bonds (in Greece’s case, bills) at higher, though not exorbitant rates. At the same time economic growth in the region accelerated markedly in Q2 over the near stagnation in Q1. On the hand, the vulnerability of the US economy is sufficiently obvious that the Federal Reserve adopted what is essentially an easing bias and will resist a passive contraction of its balance sheet. The Obama Administration is in the process of a unveiling a new infrastructure renewal, business investment, job-creating package, which, if as suggested may be worth as much as $100 bln is thought too small to call a second stimulus. Its approval by Congress is not clear cut amid partisanship ahead of the November mid-term elections.

All is Not as it Seems

Risk aversion took a step forward following analysis by Wall Street Journal staffers, claiming flaws in the methodology of the July stress-testing process across 91 European banks. The contention is that banks have understated the value of government paper they are holding, which underestimates maximum potential losses in the event that a government defaults. The story unleashed yesterday also claims that certain banks failed to include paper issued by specific nations, which might help explain why so many Eurozone analysts missed the mark at the time. Yields across the globe have claimed back much of last week’s losses as data warmed up especially in the world’s largest economy.

Anecdotal stories include empty shops in Greece and concerns over the lack of government's in Belgium and the Netherlands. French unions are on strike today in Paris. Irish bank solvency has re-emerged as a key issue. Today a European bank took 60 mln dollars from the ECB's Fed swap line. The ECB noted that last one one bank--perhaps the same one as this week--took 40 mln dollars from the swap line at a rate as much as 4-times greater than LIBOR.

The euro high in the North American session has been $1.2772. Chart-based resistance looks to be in the $1.2800-20 area, the high from the European session. Hourly RSI's are over-extended and that leaves the euro caught between poor fundamentals/sentiment and near-term supportive technicals. Range trading is the most likely result near-term.

Weak German manufacturing orders were sufficient to push the euro through support near $1.2750 and, although short-term technicals are over stretched given the nearly 2 cent pullback from yesterday’s highs, new lows are likely in the North American session. The $1.2580-$1.2600 is seen a critical support and the European high near $1.2820 may cap upticks. Sterling is pulled in both directions today, with the negativity of the demise of the large property company being blunted by the anticipation of some M&A flows and better BRC sales figures. Support near last week’s lows (~$1.5325) remains intact the next target comes two cents lower. Meanwhile the market is hesitant about selling dollar-yen aggressively below JPY84. Watch the JPY106.70 trendline support for the euro. If that goes it could help send the euro through the $1.2750 support.

Global equities are trading heavier. The MSCI Asia-Pacific Index snapped a four-day advance with a 0.2% decline. The Nikkei fell 0.8%, the largest decline in the region, while the Philippine market continued to be the best performer in emerging Asia with a gain of the same magnitude. Over the past five sessions it has gained almost 6%. Foreign inflows have increased markedly over this period. China’s Shanghai Composite edged slightly higher, reaching a fresh 4-month high. European bourses are being sold from 4-week highs, led by a sell-off of financials and basic materials. Most bourses are off by around 1% near midday in London and the early call is for US indices to open around 0.5% lower.

Equity markets were hit early in the session as a wave of sell orders were allowed to pass through the Asian cash market without reply and allowed the Japanese Nikkei to break 9200 support.

European banking stress-test headlines then weighed on the German Dax which broke lower to test 6100 support, which in turn allowed S/P futures to test 1095. This has been a session of trade that has allowed oil to test 72.50 support. and the dollar index to test 82.80 resistance at the 50-day SMA area.

• Europe's recent "stress tests" of the strength of major banks understated some lenders' holdings of potentially risky government debt, according to the Wall Street Journal

Accusations that the European banking system got the all-clear from a quack rather than a qualified doctor has the single currency return to under-the-weather status. A Wall Street Journal report says that some of the 84 banks that passed the European stress tests two months ago either excluded government paper issued by certain governments or understated their entire holdings on account of holding short positions in others. Risk appetite is suddenly off again after a comforting resumption for better economic data and an inspiring rally for global stocks late last week.

The upcoming week features less US figures after the Non-Farm Payrolls. Rate decisions in Japan, Australia, Canada and Britain are the highlights. Here’s an outlook for the major market moving events.

Monday is Labor Day in the US and Canada. The markets will be more quiet than usual, but Friday’s Non-Farm Payrolls will still echo in the markets.