A very difficult scenario, as investors try to work out what the impact on world markets if a series of European States topples into bankruptcy.

This is not just an academic question, as many financial institutions from banks to pension funds and even other sovereign nations hold vast sums of Southern European debt. A default by the Greeks and possibly by Spain, Portugal and/or Italy would have ramifications across the borders of the world. The rise in Greek 2yr yields to a peak of over 18pc yesterday (it has now dipped back to 15.6) showed that some holders are not willing to risk a complete loss and are dumping at virtually any price. Junk status is a bit of a misleading term as most sub-investment grade debt trades just a few percent over the more premium issuers.

It was interesting to see yesterday a clear indication of the market’s concerns with the Asian focused banks, HSBC and Standard Chartered, not being as hard hit as the more UK/EU centric banks like RBS, Lloyds and Barclays.  Concerns over their exposure to sovereign debt will not go away any time soon, but for now at least the markets seem to be taking a respite.

The FTSE seems to be in two minds with the bears and the bulls in almost perfectly matched positions of strength. Yesterday saw us rally and fall several times as news flow impacted fear and greed, the most noticeable moment being when the news of Spain’s downgrade (and the fact that even after the downgrade they still remained on negative watch), which knocked a promising afternoon rally into the dustbin.

Despite the moves in and out of gains yesterday, volatility actually fell.  The trending lower and lower of the US’s Vix index shows just how this grind higher has been very gradual, but the moment you get some nasty surprises, and the market can bite back at you aggressively.  The Vix is still not as high as the sharp correction we saw in February, so the recent moves have not led to a mass of investors insuring against their long positions.

On the whole, most investors are still bullish of equities, which are yielding far more than you can get at the bank, so the recent correction is seen as a good buying opportunity by many.  The FTSE has receded to the lower upward trend line, so there’s natural support for the market around here.  Resistance is expected around 5640 and then 5700, but the modest gains so far this morning show how there are still many investors waiting for the time being, in case prices get a little cheaper.

The effect on the euro was pretty immediate after Spain was downgraded and now many fear that they have got onto the slippery slope that will ultimately led to them and others having their debt rated as junk.  But this morning euro investors are being cheered by decent German unemployment numbers, which show how their government measures have helped to drag the German labour market out of the mire.  The euro’s weakness has really assisted their exported too, so German carmakers haven’t had it so good for a number of years.

Gold is continuing its step-by-step higher, with bulls making an attempt at taking out yesterday’s high resistance at 1174 and then 1180 may not be enough to drive us back to test the 1200 mark before too long.

Crude’s declines earlier in the week were short-lived, as the market found support from previous resistance and the bulls have the upper hand again this morning.  $85 will be their next target, but prices will need to be complimented by a run higher in equity markets too.