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The euro fell and European stock markets weakened on Monday as investors judged that last week's pact to bind EU economies closer together would fail to quell its financial crisis.
U.S. equity markets looked poised to echo the weakness with key stock futures contracts pointing to lower Wall St open and boding ill for a run-up to the Christmas holiday when thin volumes may exacerbate moves.
Markets are chiefly concerned by a perceived failure of leaders to break the deadlock over more decisive involvement of the European Central Bank, which many analysts say is the only way to put an end to the crisis.
They also worry that Friday's deal shows Europe's only answer to the crisis is scything budget cuts which will result in years of poor growth and potentially derail the overall effort to put public finances back on track.
"The austerity measures will have a profoundly negative impact on economic growth and will make 2012 a very challenging year in economic terms," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
World stocks as measured by MSCI world equity index were down 0.27 percent on the day and are off over two percent for the past month.
The key European index, the FTSEurofirst 300 index, trimmed early losses but was down about 0.5 percent on the day.
The single currency hit a session low of $1.3261 after triggering stops below Friday's trough of $1.3280, and was down around 0.8 percent on the day. It is now about 6 percent below its October peak and 11 percent off its 2011 high of just under $1.50, struck in early May.
"There is a deflated feeling for the euro this morning after the EU summit," said Beat Siegenthaler, currency strategist at UBS. "People were looking for a greater response and more importantly the ECB refused to significantly step up their bond buying."
The sell-off pushed 5-year Italian government bond yields up 36 basis points to above the key 7 percent level ahead of a fresh debt sale due on Wednesday. The rise came after traders said the ECB had intervened to buy short-term Italian debt.
However, euro zone bank-to-bank lending rates have fallen to the lowest level since May as money markets continued to react to last week's cut in ECB interest rates and its decision to start providing banks with 3-year liquidity.
AUSTERITY FEARS
At the centre of analysts' criticism of the EU deal are doubts that it will make its fiscal rules any more enforceable in practice than they have been in the past.
In the short-term the biggest worry for many is that most of the economies in trouble do not look capable of generating enough growth to pay off their debts – and budget cutbacks will just make that calculus worse.
"In and of itself these proposals aren't fiscal union at all," said Megan Greene, senior economist at Roubini Global Economics. "They just really institutionalize the asymmetric adjustment that's been occurring in the euro zone already with the peripheral countries making all of the adjustment, (and) the core countries making none of it."
"As the peripheral countries continue to implement harsh austerity measures, it will undermine GDP growth. So we won't see growth in the euro zone for a few years as long as this is the case."
German bund futures were over 70 ticks higher at 136.36, after opening lower. German 10-year yields were 8.9 basis points down at 2.013 percent.
Moody's Investors Service said it would revisit the ratings of European nations in the first quarter of 2012, after last week's summit failed to produce decisive initiatives and left the euro area prone to further shocks.
"The absence of measures to stabilise credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat," it said in a report.
The chief economist of fellow agency Standard and Poor's in Europe said there would need to be more summits and that time was short.
"Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side," Jean-Michel Six told a business conference in Tel Aviv.
Leaders probably needed another shock before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets – which he said was a genuine possibility in the near term.
