As another round of news and bond auctions from Europe begins this week, traders will watch closely sovereign bond yields that have kept markets on edge.
Yields rose in almost every Euro-zone country last week, and Germany failed to find enough bids for a 10-year auction.
The S&P 500 reacted by posting a second straight week of declines and its worst week in two months.
Politicians are scrambling to find a way out of a two-year-old sovereign debt crisis in the Eurozone and a visit to Washington from top European Union officials, as well as a meeting of Eurozone finance ministers, will provide the market with headlines and possibly add to uncertainty.
With the spectre of rising yields, France, Britain, Italy, Belgium and Spain are holding debt sales next week. The direction of bond yields will determine the direction of equity markets.
“Politicians are trying to buy themselves time so austerity measures kick in and impact budgets and deficits and markets become more forgiving and rates come down,” said Wasif Latif, vice president of equity investments at the San Antonio, Texas-based USAA Investment Management.
“The credit market and fixed income are a little bit more in the eye of the storm; that’s where the issue is rising, so equities are more reactionary,” he said. “You may continue to see more of the same.”
Investors have worried about rising borrowing costs in many Eurozone nations, but Italy, the third-largest Eurozone economy, has grabbed most of the focus.
On Friday Rome paid a record 6.5 per cent to borrow for six months and almost 8 per cent to issue two-year zero coupon bonds.
Many market participants have said that the sharply differentiated risk on and off trades that the Euro zone crisis has generated has seen equities being sold as an asset class, with little or no difference between strong and weak balance sheets and earnings reports. But a wedge has opened at least from a global perspective, as data show stocks of companies with more exposure to Europe are underperforming.
US President Barack Obama will meet today with European Council President Herman van Rompuy and European Commission President Jose Manuel Barroso, and Europe’s response to the two-year sovereign debt crisis is expected to top the agenda.
“The only thing that will come out of that is speculation,” said Todd Salamone, vice president of research at Schaeffer’s Investment Research in Cincinnati, referring to the meeting in Washington.
“It will come down to the US trying to convince European leaders to get something in place to solve this crisis.”
Not many hopes are set either on tomorrow’s meeting where Eurozone finance ministers are expected to agree on how to further strengthen the region’s bailout fund.
On Thursday, European Central Bank President Mario Draghi presents the bank’s annual report to the European parliament.