By Margreet Dietz
As several Europe Union members prepare to auction government debt this week, the appetite of investors to buy the stuff, as well as the risk premium they demand, will be key to the mood of financial markets.
Bond yields in the euro zone soared last week, in particular in Germany but also Italy and France. Equities were hammered on both sides of the Atlantic.
On Wall Street, the Standard & Poor's 500 Index dropped 4.7 percent for the week, the Dow Jones Industrial Average shed 4.8 percent and the Nasdaq Composite Index lost 5.1 percent. Europe's Stoxx 600 Index fell 4.6 percent.
As a sign that equities might decline further, the premium European banks pay to borrow in US dollars through the swaps market is at the highest since the collapse of Lehman Brothers in 2008, according to Bloomberg News.
“There is more evidence of a flight from all things Europe,” Conor Howell, head of ETF trading at Christopher Street Capital in London, told Bloomberg. “What’s unnerving right now is the recent breakdown of the positive correlation between European equities, the euro and bund yields. Since mid-November, bund yields have risen, yet equities and the euro are heading lower.”
The euro extended losses last week, hitting the lowest level against the greenback in nearly two months on Friday, as the three-month cross-currency basis swap ballooned as much as 1.61 percentage points below the euro interbank offered rate.
Concerns about a break-up of the euro zone are persistent.
"There appears to be no credible plan in sight to solve the euro zone debt crisis. It shows that there are legs to the market view that the euro zone might be dismantled," Joe Manimbo, senior market analyst at Travelex Global Payments in Washington, told Reuters.
And there could be more trouble brewing for Greece. The country might miss its target for privatisation revenues next year because of the worsening economic climate in Europe, the head of the agency responsible for selling state assets told the Kathimerini newspaper, according to Reuters.
Another failure by Greece to meet budget targets risks further frustrating international lenders. Under the terms of last year's 110 billion euro bailout, Greece is meant to sell state assets worth 50 billion euros by 2015, Reuters said.
Meanwhile, Welt am Sonntag reported on Sunday that Germany's Angela Merkel and France's Nicolas Sarkozy were stepping up their efforts to combat the crisis, including with a quick new Stability Pact because it would take too long to change existing EU treaties. The plan could be announced this week. How the two nations will bridge the gap in their opinions on the best way to resolve the debt crisis remains unknown.
In the coming days, France, Britain, Italy, Belgium and Spain are holding debt sales which will provide fresh clues on investors' confidence in the ability of the region to get their fiscal mess under control.
Last week, Italy paid a record 6.5 percent to borrow money over six months, and its longer-term funding costs climbed beyond levels deemed sustainable, while Germany's troubled bond auction of 6 billion euros was a stark reminder that no EU country is immune.
Belgium has suffered the consequences, too. Last Friday, Standard & Poor's downgraded Belgium's credit rating to AA from AA+. The cut followed those of Portugal and Hungary whose ratings were relegated to junk status earlier in the week.
At least Belgian political factions on Saturday reached a deal to cut the nation's budget deficit, clearing the way to form a government after a stalemate of more than 500 days - one reason why S&P said it cut the country's rating.
This week, top euro-zone officials are headed for Washington. US President Barack Obama will meet on Monday with European Council President Herman van Rompuy and European Commission President Jose Manuel Barroso, and the sovereign debt crisis will no doubt form a major topic of discussion.
The next day euro-zone finance ministers are meeting back home to discuss ways to bolster the region's bailout fund.
US economic data on tap this week include new home sales and the S&P/Case-Shiller home prices index, and consumer confidence.
Even with low confidence, Black Friday sales may have gained from a year earlier as shoppers paid more for goods and unleashed some pent-up demand, Craig Johnson, president of consulting firm Customer Growth Partners, told Bloomberg.
Revenue from the Thanksgiving holiday might increase to US$27 billion, an 8 percent gain from the same period a year ago, Johnson said.
The Institute for Supply Management's manufacturing report is due on Wednesday, followed the next day by factory readings from Europe and China.
Also scheduled for release are the weekly jobless claims numbers on Thursday and the monthly non-farm payrolls report on Friday. While employers are expected to have hired more staff this month, it wasn't at a fast enough pace to put a dent in the overall unemployment rate.
In Europe, investors will watch British Finance Minister George Osborne's autumn spending statement on Tuesday. The government's independent fiscal watchdog, the Office for Budget Responsibility, is expected to cut its forecasts for growth.