The stock market rallied for the last two days on a Financial Times rumor that China would buy “significant” quantities of bonds and stakes in strategic companies from Italy.

There was not much truth to those rumors, and I never thought there was in the first place. Certainly the bond market never believed believed the rumors judging from yields on Italian bonds.

Please consider Stocks Decline as China Signals Reluctance on Europe Bailout

Japanese stocks dropped after Premier Wen Jiabao said debt-laden economies “must first put their own houses in order,” damping speculation China would rescue Europe from an escalating crisis that has sent global financial markets plunging.

“Developed countries must take responsible fiscal and monetary policies,” Wen said. “What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.”

China is willing to help, but only after Europe solves the crisis and no longer needs help.

QE2 Completely Unwound

Bloomberg reports Asia Stocks at Lowest in a Year as China Signals Europe Bailout Reluctance

Asian stocks fell, with the regional benchmark index set for its lowest in more than a year, after the Chinese premier said economies “must put their own houses in order” and not rely on bailouts from China.

Stocks fell today as Chinese Premier Wen signaled developed nations should cut deficits and create jobs rather than relying on China to bail out the world economy. Stocks had gained in the U.S. on Sept. 12 after the Financial Times reported that Italy aims to sell “significant” quantities of bonds and stakes in strategic companies to China.

The MSCI Asia Pacific Index fell 1.5 percent to 116.49 as of 12:43 p.m. in Tokyo after earlier rising as much as 0.3 percent. The measure is set to close at its lowest level since Aug. 25, 2010, having erased all the gains since U.S. Federal Reserve Chairman unveiled a $600 billion, second round of asset purchases that came to be known as QE2.

Asia Pacific Equities

Asia Pacific (click on link to refresh) is down across the board except for China which is up slightly. US S&P; 500 futures are off about 12 points. The important reaction, however, us not Asia or the US but the European markets, particularly the Italian bond market and European banks.

Mike “Mish” Shedlock
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