The situation is Spain continues to deteriorate and it is beginning to look “like the beginning of the end” as the WSJ reports that Spanish banks have activated an emergency lending program which allows them to bypass the ECB’s collateral requirements and borrow directly from the bank of Spain. This is the same path Greece, Portugal, and Ireland took to their bailouts.

Spanish finance minister Luis de Guindos said Spain is not ready to sign over full fiscal sovereignty to the EU in a full blown ECB bailout, saying he wants clarification of the terms first. This comes as German Chancellor Angela Merkel leaves for Madrid to discuss the terms of a rescue of up to 300 billion euros beyond the 100 billion euro rescue already agreed upon.

It would appear that Germany is fully behind Draghi’s plan to buy bonds to rescue Spain as Jorg Asmussen, Germany’s ECB board member said today “The risk premia of sovereign bonds now reflects not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a breakup of the eurozone. Such systemic doubts are not acceptable” (Telegraph).

An equity strategist at Goldman Sachs is predicting a rapid sell off in September and is advising clients to buy S&P 500 puts. He cites market disappointment over ECB and Fed announcements in the coming week. The VIX would suggest that he is not alone, as volatility has rallied from 13.30 to nearly 19.00 yesterday while the S&P 500 has not budged.

Today’s US news was upbeat, with non-farm productivity increasing a better than expected 2.2% Q/Q. Tomorrow’s jobless claims, the ECB meeting, and Friday’s non-farm payrolls are all likely to be major market moving events that traders will be positioning themselves for today.