We start the week with another bout of risk aversion as global stocks fell and investors sought safety in German and US bonds. We continue to have Greece casting a pall over financial markets as we had some worrisome headlines over the weekend.

First, here's a reaction of key markets, with a major theme being falling equities and commodities, and rising bonds.

From Bloomberg: Stocks fell and commodities dropped to a 10-month low as Europe's finance chiefs prepared to weigh the risk of a Greek default. U.S. futures pared losses, while the cost of insuring German government debt rose to a record. The MSCI All-Country World Index sank 1.1 percent at 7:20 a.m. in New York, after slumping last quarter by the most since 2008. The Stoxx Europe 600 Index slipped 1.5 percent as BNP Paribas SA, France's biggest bank, lost 5.4 percent. Standard & Poor's 500 Index futures retreated 0.2 percent after sliding 1.3 percent. The S&P GSCI index of commodities fell 0.5 percent, copper dropped 2.6 percent. The 10-year German bund yield traded five basis points lower, while the 30-year U.S. Treasury yield declined three basis points. Credit-default swaps on German debt climbed five basis points to an all-time high of 117.

Greece will miss its 2012 deficit target of cutting its budget deficit to 6.5% of GDP. Instead the 2012 deficit will be 6.8% of GDP as Greece passed another €6.6 billion of austerity measures last night in order to meet that goal. That moves Greece a little bit closer to securing the next trench of aid - around €8 billion - from the IMF and EU. The expectation is that with Greece's government set to slash thousands of public-sector jobs in this latest round of measures in order to meet the demands of international creditors, that it will get the aid.

From Bloomberg: The austerity measures were detailed after the cabinet meeting last night, which also approved the 2012 budget and the plan to dismiss state workers. The government by December will identify 30,000 public workers who will be put on reduced pay and either retire early or eventually be fired. The plan aims to save 300 million from the government wage bill in 2012.

The fact that Greece will miss its target was the bad news, but the fact that the government pushed through further austerity measures to secure its desperately needed aid a bit of good news.

We have European finance ministers meeting today and tomorrow to weigh the threat of Greek default, grapple with how to shield banks from the fallout, and consider a further boost to the EFSF rescue fund. This can mean we have important headlines coming out of euro early in the week.

The Bank of France Governor Christian Noyer said that he was open to the idea of leveraging the EFSF. He acknowledged that more money for the bailout mechanism will not be forthcoming and therefore leveraging existing commitments to provide greater intervention capacity is something that he would personally allow. We had EU Commissioner Ollie Rehn also talked about the possibility of leveraging the EFSF, something the market have been expecting since last weekend.

Overall, the euro was weaker against the dollar falling to 1.3313 before rallying in the European session to try and close the gap that the EUR/USD pair had to open the weekend near 1.3380. The euro slid quite sharply against the yen, but did manage to gain on the pound after a sharp fall on Friday.

On the fundamental side we had euro zone's manufacturing PMI hitting a 25 month low in September - registering a reading of 48.5. This was however slightly better than economists had forecast and stronger than the preliminary reading. Germany's manufacturing PMI was at 50.3 from 50.9 in August, which is the lowest of September 2009. The French final PMI reading fell to 48.2 from 49.1 in August, Italy's so it's manufacturing PMI up to 40.3, from 47.0 in August, and the Spanish PMI fell to 43.7, down from 45 point. August.

Nick Nasad
Chief Market Analyst