LONDON — Stocks fell on Monday and the euro hit a three-week low against the dollar as worries about Greek and Italian fiscal deficits and a regional election rout for Germany's ruling party cast more doubt on the euro zone's ability to solve its debt crisis.
Data on Friday showing U.S. employment growth halted in August fuelled concerns that the world's biggest economy is slipping back into a recession, sending Wall Street sharply lower on Friday before a long weekend .
The euro zone faces a week packed with political and legal risks, beginning with the German Federal Constitutional court ruling on Wednesday on claims that Berlin is breaking German law and European treaties by contributing to bailouts of Greece, Ireland and Portugal .
The yield premiums investors demand to hold Italian and Spanish 10-year government bonds rather than benchmark German Bunds hit their highest in a month.
"Not a great start to the week. There is a lot going on for banks, especially in the light of a low-growth environment and the backdrop in the euro zone not improving," said Mike Lenhoff, chief strategist at Brewin Dolphin.
The MSCI world equity index fell 1.5 percent on the day. It is just over 4 percent above an 11-month low hit during market turmoil in early August and has lost nearly 10 percent since January.
European stocks fell 2 percent while emerging stocks lost 2.2 percent.
U.S. crude oil fell 1.6 percent to $85.07 a barrel.
The dollar rose 0.4 percent to set a one-month high against a basket of major currencies.
The euro had fallen to a three-week low of $1.4111 before trimming losses.
As many European financial institutions are saddled with losses on bond holdings, traders are also worried that their funding could face more strains, putting pressure on the euro.
Bund futures rose 100 ticks to a record high. Italian 10-year yields rose to their highest since Aug. 9 at 5.467 percent, dragged away from the 5 percent level to which European Central Bank buying had eased them.
Besides the German court ruling, a meeting of finance ministers of Germany, the Netherlands and Finland will also be closely eyed as they discuss the nagging issue of collateral for loans to Greece.
Debate over the effectiveness of ECB bond-buying is likely intensify at the bank's monthly policy meeting on Thursday.
"We will probably get the ... assertion that 'all euro zone countries must stick to their fiscal plans as agreed with the euro zone authorities'," said Richard McGuire, rate strategist at Rabobank.
"Singling out Italy — there is a risk that that would be counterproductive because it would put Italian yields under significant pressure and therefore undo much of the work that the ECB has done."
© 2023 Thomson/Reuters. All rights reserved.