Fear returns and pushes risk aversion back toward recent extremes. JPY charges stronger again and EURUSD back toward recent lows.

Another round of selling swept through the equity markets. Recent news of mutual fund and hedge fund redemptions raises worries of further liquidation pressures when liquidity is thin. (An article in FT out overnight says that $45 Billion was redeemed in September alone for hedge funds and the previous day we read of a record in mutual fund redemptions by a similar amount). So, while this may simply be a "retest of the lows" scenario for equities - and the related FX crosses that follow the "axis of risk", as long as these very large market entities face liquidation pressures the indices can go anywhere. The abovementioned FT article also points out the risk of end of year liquidation pressures from hedge funds, and this may continue as a theme or worry as Jan. 1 approaches. The only market participants that could step in here are governments who are already trying to prop up the entire financial world and those with the biggest money bags - the likes of the sovereign wealth funds. Unfortunately for them, some of their initial forays into markets saw them burned badly, so they may be unwilling to step in even at these levels.

Yesterday we talked about the shifting focus to Main Street fall-out from the banking crisis. This proved justified as the US registered the worst Retail Sales drop in 16 years (measured as three consecutive monthly drops). The falls in some discretionary categories like clothing show that the consumer has quickly begun to yank in their spending. We should worry about the October numbers as well and the general sentiment going into the Christmas shopping season in a month's time. After all, during September, the S&P500 was mostly trading between 1150 and 1250 rather than October's 850-1050.

The big news this morning in Europe was the generous Swiss rescue of UBS, with a plan to inject capital and offload $60 billion of toxic assets - this is a sweetheart deal for the bank and looks like the best of all worlds - the combination of the US and UK rescue plans - at least for the bank, if not taxpayers. The banking sector is extraordinarily important to Switzerland, so it's not surprising to see this kind of deal - the surprise is perhaps the fact that it took so long for this kind of intervention. There seem to be few implications for CHF at the moment, caught up as it is in the whole risk aversion theme, but it is nominally bullish for the franc.

In Europe, the German regional governments are complaining about being doubly exposed to the bank bailout plan - which could require some fine-tuning of the original €500 Billion plan advanced recently. In the UK, some of the banks are complaining about the harshness of the terms of Brown's plan, saying that it will cut too deeply into future earnings (have some cake and eat it, too, please....). EURGBP sways back and forth as these issues come to light - it looks like GBP could gain the upper hand if EURGBP drops below 0.7700. Watch the 200-day moving average at 0.7830 as a key resistance level.

The Scandies were waylaid by the risk aversion yesterday, and EURSEK squeezed well through 10.000 in thin evening markets. EURNOK also smashed to a new, near 10-year high just below 9.000. These have retraced sharply this morning as bargain hunters are bidding up equities on the European open.

In general, while some of the risk spreads have come in, a few of them stalled yesterday (like Libor) and over in credit-swap land, the bank credit spreads are falling, but non-financial companies' credit spreads are rocketing higher - so this is far from an across the board green light in the risk department. This and the potential liquidation issues are the most pressing themes at the moment.

Also keep an eye on the equity situation once again and tread lightly in these markets until this volatility begins to ease somewhat. The pattern of stronger USD, JPY, CHF and weaker everything else on risk aversion and vice versa on stronger risk appetite is likely to continue until this volatility fades somewhat and some more nuanced themes can develop.