Risky assets have been sold off sharply since the European open. Market sentiment is still extremely fragile and fears are continuing to grow about global growth after that dire Philly Fed print out of the US yesterday. The report was horrible, and showed that manufacturing activity had plummeted back to 2009 levels. There was one glimmer of hope however, although it contracted, capital expenditure remained in positive territory. However, a fall to -30.7 is very bad news for stocks since the SPX 500 tracks the Philly Fed closely. Manufacturing activity is closely aligned with GDP, so a sharp fall in this index does not bode well for growth further down the line and thus corporate profits.

Earlier this year the markets thought that the global economy was going through a slow patch, but it looks like a deeper downturn in global growth is taking place. This is now getting priced into the markets and European stocks are suffering heavy losses yet again. The German Dax is leading European stocks lower, having fallen by 26 per cent since the start of this month. After falling more than 3 per cent today stocks have stabilised at this low level for now.

There is a dearth of economic data today, but rumours are swirling around the market. There are rumours of traders being asked to stay late in Tokyo in case of BOJ intervention to weaken the yen, the SNB may be poised to act this weekend and the best of all is the rumour of an emergency Fed meeting - that is when we know things have become really bad. Stocks are also getting hit from August options expiries that are exacerbating the selling.

Right now global stocks have retraced nearly 50% of the recovery from March 2009 lows to May 2011 highs and USDJPY is back below 76.50. Interestingly, investors seem to be taking the SNB seriously and USDCHF and EUCHF has remained fairly well supported today. The dollar has fallen sharply as the euro has strengthened. An announcement that the Spanish government had passed austerity measures to try and reduce its deficit may have helped prop up the euro so far this afternoon.

As stocks have collapsed gold hit a new record high at $1,880. Interestingly, near-term gold contracts are trading at a higher rate than longer term contracts. This is called backwardation and signals that investors are spooked by the current environment, but don't necessarily think it will persist. There is still much uncertainty out there, although we know growth will fall, we don't know how deep it will be and whether the West's economies will experience a double-dip. Added to that Europe's policy makers seem unwilling to pull out all of the stops to halt contagion from the sovereign debt crisis. Although we would note that Europe's bond markets have been fairly calm in the past week even as risky assets have sold off sharply, this suggests the ECB may be active in the market.

Europe's banking sector continues to weigh on the overall markets. Fears are growing about a funding freeze for some of Europe's banks. Not only are some banks under-capitalised relative to their US peers, but they also having exposure to Europe's weakest economies and they hold massive amounts of sovereign debt. Rumours were swirling that some banks are unable to access funds in the market and are having to use central bank dollar swap facilities. This happened back in 2008. Back then banks wouldn't lend to each other and it caused the collapse of Lehman Brothers and the near collapse of Bear Stearns and Merrill Lynch. This week the Fed provided $200mn of liquidity to the Swiss National Bank this week via its swap facility lines for foreign central banks. Swiss banks have come out and denied the funding was for them; however, someone borrowed that money, which suggests that a bank in Europe is in trouble. So the rumour mill continues to grind....

Ahead today watch out for US Treasury yields. They fell to record lows yesterday; it will be interesting to see if investors continue to buy up US debt as fear grips the markets. If Treasuries remain bid then we could see a recovery in the dollar as we saw yesterday, which may pressure dollar crosses into the European close.

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Kathleen Brooks| Research Director UK EMEA | FOREX.com

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