By Rudi Filapek-Vandyck

The world is experiencing a repeat of the Spanish Flu. The first time around, between January 1918 to December 1920, casualties grew up to an estimated 130 million with even far remote places such as the Artic and tiny islands in the Pacific Ocean ending up being infected by what came to be known as one of the worst and deadliest pandemics ever recorded in modern history. Taking into account that the global population at that time only numbered an estimated 1.86 billion people, the Spanish Flu the first time around managed to infect no less than 27% of the global population (some 500m people).

What will be the end result of the second time around? Nobody knows but there is a general discomfort creeping into financial markets that something Big and Nasty is brewing in Europe and it may not necessarily be cured in time by Germany, the ECB or the IMF.

The irony in all this is that even the first time around, the flu actually originated in the US, subsequently reached Europe and made its severity first known in Spain, which is why history labeled it the "Spanish Flu". It may end up not being very different the second time around.

One is being reminded that the financial advisor of former US President Bill Clinton once said: if I die I want to be reincarnated as the bond market. The bond market rules everything else. Right now Spanish bonds are in charge and with the yield on the 10-year creeping ever so closer to 7%, this ain't looking good. (Which is putting it mildly).

Last night, the Financial Times reported the ECB had refused to sanction Spain using government debt to re-capitalise troubled bank Bankia by using this debt as collateral to secure financing from the ECB. The key word on everyone's mind is now "bailout". A Spanish bailout is estimated to cost "upwards of E380bn". Are the Germans prepared to cough up that much? Probably not at this stage given Portugal and Ireland are watching closely in anticipation of their own rescue me-requests.

So the scene was set for yet another Risk Off session on Wednesday (US and European time). Equities in the US dived between 1-1.5% from the opening bell and pretty much meandered from there into the close of trade.

The S&P500 lost 19.1pts, or 1.43%, to close at 1313.32. The Nasdaq shed 33.63pts, or 1.17% to finish at 2837.36. The DJIA lost 160.83pts and closed at 12,419.86. European bourses booked similar losses, with the UK market, believe it or not, falling for the first day in five sessions, losing 1.7% overnight.

After reading the opening paragraphs of today's Overnight Report, none of the following should come as a surprise:

- The euro extended its descent to a near two-year low
- The US dollar has now advanced to its best level since September 2010
- The 10-year Treasury yield has fallen to a record low of about 1.65%
- The price of crude oil has dropped to a new 2012 low
- The price of copper has reached its lowest level for the year

Overnight, all 10 S&P sectors were in negative territory, led by energy and financials.

It is possible that in the US the focus might temporarily shift back to the domestic economy, as this week's calendar contains yet another Q1 GDP revision plus non-farm payrolls data on Friday. There is a real and present danger the GDP revision might print an outcome below 2%, which would not be good for sentiment, while expectations are the jobs data will bounce to 150,000 new jobs created. Note all recent releases missed the mark by a wide margin.

Overnight pending home sales data showed a drop by 5.5% in April; a four-month low. Economists had expected a gain of 0.1%, after a previously reporting 4.1% gain. Also, the March result was downwardly revised from a gain of 4.1% to a fall of 3.8% (double whammy thus). Pending home sales tend to lead new home sales results by around two months.

Also, the International Council of Shopping Centres, a trade group that tracks retailers, cut its monthly US same- store sales forecast to 2% from 3%, citing weakened consumer confidence leading to a slowdown in discretionary spending.

I doubt that in case of positive data surprises in the days ahead US investors will be able to shake off the troubles in Spain if at the same time the yield on Spanish bonds continue to climb. Last night, Spanish 10yr bond yields rose to 6.69%; a fresh six month high. The yield on Italian 10-year bonds rose to 5.908%, up 16.8 basis points on the day.

The euro fell from highs around US$1.2480 to lows near US$1.2365 and closed US trade near its low. The Aussie dollar fell from highs around US98.00c to US97.00c and ended US trade near its lows. And the Japanese yen rose from lows near 79.45 yen per US dollar to highs around JPY78.85 and ended US trade near JPY79.10.

US Nymex crude fell by US$2.94 to US$87.82 a barrel. London Brent crude fell by US$3.21 to US$103.47 a barrel. Copper recorded the biggest fall among the base metals in London, down by 2.7% on the day, followed by Tin, which lost 2.2%. However, the gold price closed higher following a mid session reversal. The June Comex gold futures price rose by US$14.70 or 0.9% to US$1,565.70 an ounce.

For what it's worth: the European Commission has called for direct euro-area aid for troubled banks. The EC touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain. Investors have seen this all before, however. Questions are being asked whether "Europe" can solve its own cancer. The concern is that the answer, ultimately, might be a firm "no".

(Having said all of the above, investors can be assured the powers that be are working frantically behind the scenes to put a stop to yet another chapter in the book called GFC. Don't be surprised if yet another announcement from German officials or from the ECB is being perceived as "sufficient for now" which then attracts the buyers back in and forces the shorters to cover their losing positions,.. and round and round we go in the merry go round that is otherwise known the world of financial assets post 2008.)

I will be on Sky Business twice today, first on Lunch Money (12-1pm) and later on Switzer TV (7.30-8pm).

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