From Dan Denning in St Kilda:

--Your editor has the same feeling this morning as he did on Monday, May 16th. That was the day the Space Shuttle Endeavour blasted off for the last time. Your editor stood on the causeway in Titusville, Florida and watched the shuttle ride into the sky on a plume of fire, just like clockwork.

--The financial markets have the same sense of counting down to the inevitable at the moment. Only instead of blasting off, they feel like they're about to blow up. Markets are contending with the super failure of the so-called "Super Committee" in the US Congress to agree on a plan. This failure was consistent with the quality of US political leadership for the last 30 years. But it's not even close to being the biggest problem in the world right now.

--That distinction belongs to Europe. The looming breakdown of the Euro is a massively deflationary event for stock and commodity prices (although not US bonds, as you'll see in a moment). It's going to dominate the news until the moment reaches its crisis. At the crisis may be at hand.

--The core of Europe's credit quality is now under scrutiny. The ratings agency Moody's said that higher interest rates in France could threaten the country's credit rating. It's on the edge. And Credit Suisse was even more succinct in a note to clients. The note concluded:

We seem to have entered the last days of the euro as we currently know it. That doesn't make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen - probably by mid-January - to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.

--You can take it to the bank that if the bond market in Europe closes, the banks will be soon to follow. The banks are full of government bonds. And you can't have a crisis in the former without a disaster in the latter. That disaster is rapidly approaching.

--This seeming inevitability is what drove down the S&P 500 by nearly 2% overnight. Imagine what would happen if the US or France was suddenly downgraded again by the ratings agencies. You'd see the same nasty cycle of asset sales to raise cash that you saw in 2009, only a LOT worse.

--But we are in the zone where strange things happen that don't make a lot of sense at first glance. For example, check out the chart below of 10-year US Treasury note prices. They are rising. As bond prices move inversely to yields, this means that 10-year interest rates in the US are falling even as they are moving higher in Europe. The flight to US bonds is nearing 2009 levels. But what does it mean?