london 08 06, 2012, 15:30 IST
European shares retreated from four-month highs and the euro slipped from a one-month peak on Monday, with investors reluctant to extend the recent gains without more clarity on the next steps in Europe's three-year long debt crisis.
Markets had ended last week with a strong rally after robust U.S. jobs data eased concerns about global growth, and the European Central Bank set out a plan to buy the bonds of heavily indebted countries to ease government funding pressures.
But with Germany yet to approve Europe's new rescue fund, Spain's 10-year bond yields dangerously high and Greece yet to secure bailout funds, investors were worried about what could happen next in the euro zone.
"The ECB has clearly said that it will support countries that reform themselves," said Christian Schulz, senior economist at Berenberg Bank.
But he said the market is now waiting to see if Spain or Italy will ask for international help and under what conditions, and whether European paymaster Germany would approve any rescue.
"The ball is now in Spain and Italy's court given that (President Mario) Draghi indicated that ECB support would be available as soon as these two potential recipients trigger some kind of official European support programme," analysts at Deutsche Bank said in a note to clients.
"While the near-term tail risks of a Spanish bond market implosion should be reduced there are still execution risks given the eventful couple of months ahead of us," they said.
In Greece inspectors from the International Monetary Fund, the European Commission and the European Central Bank - known as the troika - concluded a visit to Athens on Sunday saying they would return in September to give their final verdict.
In Spain, Prime Minister Mariano Rajoy has so far signaled only that he may seek a full-blown aid package, and has not yet made a decision on the matter.
MARKETS PAUSE
After the gains of the past week, European equities paused for breath on Monday. The FTSEurofirst 300 index of top European company shares was little changed, holding near its four month closing high of 1,081.37 points posted on Friday.
Last week's rally was the ninth consecutive weekly gain for the main the European index.
The euro was down 0.2 percent at $1.2360, well below a peak of $1.2444 hit in Asian trade, which was its strongest level since July 5.
"When you think about the fact that something positive will probably materialise even if it takes some time, the euro could see a bit of a rebound," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
But traders in Europe were more sceptical. "We haven't had any concrete improvement in the situation in the euro zone," said Niels Christensen, currency strategist at Nordea in Copenhagen.
German government bond prices were edging higher, but again this followed last week's selloff, with many traders worried about the uncertainties over what steps political leaders might take next.
"I guess everybody is keeping their positions (minor) because we are seeing roller coaster moves that nobody can explain," said Charles Berry, a trader at Landesbank Baden-Wuerttemberg. "Volatility will be high, that's the only thing I can guarantee."
Ten-year German bond yields were down 4.9 basis points at 1.38 percent, not too far from a record low of 1.126 percent hit in July.
Spanish 10-year government bonds extended Friday's rally but remained close to levels beyond which funding costs are perceived to be unaffordable over the long term.
Ten-year Spanish yields fell 12 basis points to 6.82 percent, while for two year maturities, where any ECB bond buying would be concentrated, yields were down more sharply at 3.65 percent.
