Investors are finding themselves in limbo

Investors continue to be perplexed by the mixed signals
S&P 500 Index futures are currently down 0.7 percent indicating a lower open as Europe yet again bleeds for the third trading day presumably on fears about the region's banking system and economic growth outlook.

The confusion is increasing by the day as macroeconomic is still not reflecting what valuations in the stock market are implying will happen to the economy, namely a recession. Neither does Bloomberg US Financial Conditions Index reflect an impending collapse in the financial system. One of the two sides, perception in risk asset or economic facts, has to give as both cannot be true given current data.

On the economic data frontier investors will get U.S. factory orders from August expected (14:00 GMT) to come out unchanged down from July's figures of 2.4 percent MoM. As better than expected U.S. ISM manufacturing figures could not help lift risk assets, it is hard to see why factory order, and even better than expected, should change anything. The perception among most investors and economists are that we are heading into a recession and before we get more evidence that it is not the case stocks will continue to be sacrificed as investors shift capital into liquid U.S. treasuries, U.K. gilts and German bunds.

Growth stocks are trashed as investors seek protecting; banks are dominating the headlines
In Europe, the Euro STOXX 50 Index is down 2.8 percent driven by declines in growth oriented sectors such as consumer discretionary, industrials and financials with particularly German automakers being hit the hardest with an average decline of 6 percent in today's trading.

French banks yet again are dominating the headlines with news out that Dexia, BNP Paribas and Societe Generale, some of the top foreign holders of Greek sovereign debt, have not written down their Greek debt enough to reflect current market prices. With potential write-downs on peripheral sovereign debt and weak balance sheets the banks may have to raise additional capital in order to comply with the future Basel III capital ratio rules. The three banks are all down with Dexia taking the lead with a decline of 14.5 percent as the banking is finding it more difficult to obtain funding for its operations. The present situation in Dexia is telling us that politicians believing the debt issues in peripheral Europe has yet to spread to core Europe is living in fantasy land.

A bit more positive, at least relatively, UBS was out this morning guiding that it expects third quarter net income to be positive despite last month's trading scandal involving unauthorised trading by a trader at the bank's London office. Investors seem to be relieved as the bank's shares are only down 0.6 percent compared to steep losses in other European banking stocks.