LONDON - In some cultures, the number 7 is mystical and magical; in the euro zone, it's a Mayday call.

Yields on the bonds of two of the currency bloc's largest economies -- Italy and Spain -- were either at or within a whisker of 7 percent in the past week, creating huge concern about future funding and prompting a selloff in riskier assets.

Widely considered the level at which funding costs become too high to be sustainable, extended periods of 7 percent yields have previously prompted bailouts for Ireland and Portugal.

Italy and Spain are too big for this, particularly combined, so it is almost certain that the coming week will be dominated by investors watching to see whether this can reverse or at least be contained.

Weekly bond-buying data from the European Central Bank, released on Monday, will give some idea of how much the authorities had to fight to keep yields just where they were.

The European Commission also publishes its consultation paper on common euro zone bond issuance, something Germany strongly objects to.

With the end-of-month deadline approaching for the euro zone to produce firm plans for leveraging the EFSF bailout fund, markets will also be keenly watching central bank officials and bloc finance ministers.

The point for financial markets is that after months or worrying about whether contagion will take hold from Greece and other smaller countries' debt problem, it already has done.

We saw selling pressure moving to the core members, including the Netherlands and Austria, said Nick Stamenkovic, macro strategist at RIA Capital Markets.

And with yields rising in France and Belgium as well it could even be argued that core Europe now only consists of Germany. But Bunds have begun acting in a way that suggests they may be losing some of their safe-haven appear.

Add to that the behavior of euro/dollar cross currency basis swaps. The cost to European banks of swapping euros for dollars rose in the past week to its most expensive level since the collapse of Lehman Brothers.

Europe may not actually be on the brink, but markets are beginning to act as if it is.


With such a crisis under way, it is hard to imagine that anything else could demand too much investor attention. But while Europe wallows, the U.S. economy has been pulling out of its mid-year-slump.

Recent readings on the U.S. economy have steadily topped analysts' expectations. Many now think the fourth quarter will prove stronger than the third, when the economy expanded at a 2.5 percent annual rate.

The coming week offers up the Richmond Federal Reserve's manufacturing report and U.S. durable goods orders. Better-than-expected results would add to the improving mood and set markets up for the bellwether jobs data a week later.

Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin, contrasts what is happening in the U.S. economy with the euro zone, which is sliding toward recession.

In the U.S., you have a Federal Reserve that is taking exactly the opposite tack to the ECB, he said. It has been making very positive noises in its efforts to support the U.S. economy. And there is not at this stage any real drive toward fiscal austerity in the States.

The problem for Washington is that the euro problems could easily undermine the U.S. resurgence. For example, a surge in the dollar if the euro became unstable would undermine exports.

The euro zone's economic decline is expected to be highlighted in the coming week in manufacturing surveys and various consumer soundings.

It all points to more volatility on financial markets -- with euro zone sovereign debt yields center stage.

(Editing by Hugh Lawson)