Late yesterday, Berlusconi promised to resign. U.S. markets started to rally, with the Dow closing up 101 points. Overnight, the Asian markets also rallied. Then, the European bond markets opened, and interests rate on Italian bonds promptly shot well above 7% for ten-year bonds, a critical level historically. (Short term interest rates rose even more, inverting the yield curve, which usually predicts a recession.)
The “cat is out of the bag” now, and the bond vigilantes are attacking Italy as they did Greece. This is the last stand against chaos in Europe, and it will be not be easy. Italy may be too big to save. If the ECB flinches, it will be ugly indeed!
Futures indicate the Dow will lose about 200 points almost immediately. Whiplash is possible, so go find your neckbrace now!