The stalemate in Greece continued overnight, with political parties still unable to reach agreement on forming a new government, keeping alive concern that the debt-laden country might fracture the euro zone by abandoning the common currency.
Any new government needs to stick to the strict terms of its second international bailout to receive the funds required to avoid bankruptcy. An unresolved deadlock would prompt new elections at best, leaving Greece's future in the euro at a heightened risk.
"There's a real risk for the market that at some point Greece will have to leave the euro if they don't find political cohesion," ING strategist Alessandro Giansanti told Reuters.
And that's a worrisome scenario indeed. The cost of borrowing rose further in Spain and Italy as the potential of a Greek precedent-setting departure from the euro might set an example for these countries struggling to reign in spending and lower budget deficits to levels set by European Union standards.
Today, Spain sold 2.9 billion euros of bills, while Italy auctioned 5.25 billion euros of debt.
Spanish 10-year bond yields extended their rise to 6.29 per cent after the auction from 6.219 per cent before the sale, a jump of 33 basis points from Friday's close. Italy's 10-year yield soared 28 basis points to 5.75 per cent, even with demand rising at the bond sale, according to Bloomberg News.
"It's turning into a perfect storm: a loss of confidence in the [Prime Minister Mariano] Rajoy government's ability to stop the rot and, perhaps more worryingly, renewed fears of a disorderly Greek exit from the euro zone," Nicholas Spiro, managing director of Spiro Sovereign Strategy, told Bloomberg. "Differentiation between Italy and Spain is becoming less pronounced as the Greek crisis escalates."
Europe's Stoxx 600 Index dropped 1.8 per cent for the day by the close in London. The euro fell 0.5 per cent to US$1.2854, while shedding 0.6 per cent to 102.63 yen.
In afternoon trading in New York, the Dow Jones Industrial Average fell 0.82 per cent, the Standard & Poor's 500 Index dropped 0.88 per cent and the Nasdaq Composite Index declined 0.80 per cent.
The S&P 500 last traded at 1,341.45.
"If we break 1,340, we might have risk all the way down to 1,300, but if we hold above it, that's a cause for optimism," Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, told Reuters. "That said, there's still great uncertainty with how Europe will react if Greece exits, as well as concerns about liquidity and the impact of recession there on the US economy."
That concern was reflected in a gauge of corporate credit risk. The Markit CDX North America Investment Grade Index rose 4.9 basis points to a mid-price of 113.5 basis points in its eighth consecutive daily rise, the longest stretch of increases since January 2010, according to Bloomberg.
Still, Wall Street has its own concerns. Shares of JPMorgan Chase dropped 1.8 per cent, following Friday's 9-per cent plunge, after it said Ina Drew, its investment chief, would retire. JPMorgan holds its annual general meeting tomorrow.
Elsewhere, the economic picture shows indications of fading. Senior members of Brazil's government now believe the economy will expand less than the official 4.5 per cent forecast this year and are bringing internal projections more into line with private-sector estimates of about 3 per cent growth, four officials told Reuters.
"Data is coming out weaker than what everyone expected, especially in the industry sector. Projections of growth of around 3.2 per cent are more accurate," one of the officials, asking for anonymity, told Reuters.