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Back Trading After Long Weekend? Batten Down Hatches

European traders logging on Tuesday morning for the first time since Thursday found a shakier marketplace than they left.

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The delayed reaction to worse-than-expected U.S. jobs data on Friday afternoon combined with increasing worries about the euro zone debt rearing its head yet again sent indices including the UK’s FTSE 100, France’s CAC 40 and Italy’s FTSE MIB down. Spain’s Ibex 35 also fell, and its 10-year bond yield hit 5.83 percent, its highest level since early December, as worries grew about Spain and other euro zone economies.

The euro is testing the key psychological point of 1.30 against the US dollar.

The early gains of 2012 are now being clawed back as worries mount that massliquidity injections by central banks around the world have not been enough to mend the Western world’s economic woes.

Europe’s banks are suffering particularly badly, with the Eurostoxx banking sector down substantially since hitting its mid-March high following the second mass liquidity injection by the European Central Bank .

Many banks used these cheap loans to buy up sovereign debt for their countries, which has made the relationship between sovereign debt and the banking system increasingly symbiotic. Spanish and Portuguese banks are among those who are known to have increased their buying of sovereign debt. Euro zone countries are auctioning up to 15.3 billion euros ($19.9 billion) worth of debt this week, with France in the market Tuesday and Italy Wednesday.

“The problem for Europe is that banks and sovereigns share a symbiotic relationship, so when the banks are weak so are the sovereigns and vice versa,” Kathleen Brooks, research director UK EMEA, FOREX.com, wrote in a research note.

She compared the situation in the Spanish banking sector, which is very closely linked to the country’s real estate sector, to U.S. banks in 2007-09. Spanish property prices are believed by many to be due another correction.

The Governor of the Bank of Spain said Tuesday morning that Spanish banks could need recapitalization.

“The U.S. banking sector has come out the other side but some institutions are mere shadows of their former selves,” Brooks warned.

Spain is often tipped as the next candidate for a bailout from the troika of the ECB, International Monetary Fund and European Commission. Its annual gross domestic product (in 2010), the fourth largest in the euro zone, is worth almost twice as much as the combined annual GDP of Portugal, Ireland and Greece, the previously bailed-out euro zone members.