Equities move back towards lows as debt crisis worsens

The rally in equities that had started around late September and early October has broken down rather dramatically over the past two weeks.

The Standard & Poor's 500 Index closed on Friday at 1,158.67. Over the last two weeks, it fell 8.3 percent and is now 15.0 percent below its 2011 peak of 1,363.61 on 29 April.

The STOXX Europe 600 Index closed on Friday at 221.54. Over the last two weeks, it fell 8.1 percent and is now 23.9 percent below its 2011 peak of 291.16 on 17 February.

The lows set in September and October are now potential support levels for the indices. The S&P 500's Friday close left it 5.4 percent above its low of 1,099.23 on 3 October. The STOXX Europe 600's Friday close was just 3.1 above its low of 214.89 on 22 September.

Driving equities lower, of course, is the European debt crisis.

The debt crisis in Europe has taken a serious turn for the worse, with the core eurozone countries now being swept into the maelstrom as well.

Belgium's credit rating was cut one level to AA+ by Standard & Poor's on Friday.

The yield on Italy's 10-year note hit 7.26 percent last week despite the European Central Bank being in the market to buy Italian bonds.

A debt auction by Germany last week saw bids for just 3.889 billion euros out of a maximum target of 6 billion euros. Germany's 10-year bund yield rose 30 basis points to 2.26 percent last week.

The rise in bund yields amid falling stock prices is unusual. Throughout the development of the debt crisis, bund yields had mostly moved in the same direction as stock prices, reflecting the former's safe haven status.

The divergence of this relationship from its recent past suggests that Germany is no longer perceived as a safe haven. Indeed, there may no longer be a safe haven in the euro area.