"With Spanish and Italian bond yields pushing higher as the threat of contagion looms, how do you see this playing out for equities, gold and the European bonds themselves?

"Many thanks for the excellent coverage."

David Fuller's view Many thanks, not least for an important and challenging question.

The answer is that I do not know, and neither does anyone else because the situation goes right to the heart of the euro's survival in its current form. There is not much precedent for today's European single currency problems, although events have been drifting in this direction for over two years. Astute observers such as Tim Price lost confidence in the containment or muddle through prospects long ago and the markets seem to be catching up with that view. The more bearish phases increase uncertainty among investors and traders, leading to further deleveraging.

What we do know is that the process of deleveraging and a flight to cash often includes indiscriminate selling. There has certainly been a whiff of panic in the markets over the last two days. This has caused a temporary downdraught which is certainly not the orderly consolidation that I would have hoped for following the preceding two to three-week rally for stock markets.

What we really know regarding the eventual consequences of this long, drawn out sovereign debt crisis is actually very little in terms of practical value today. However, what we can see is very helpful. For the duration of this single currency problem, I think it is a good idea to have charts for the 10-year bonds yields of the 'crisis' economies in one's 'Favourites' section of the Chart Library. We need them all because the attack in terms of higher yields often rotates from one to another. First it was Greece (weekly & daily), then Portugal (weekly & daily) and most recently Italy (weekly & daily). We should also keep a close eye on Ireland (weekly & daily) and Spain (weekly & daily) because they have been in the firing line. We should also include German 10-year yields (weekly & daily) in this group because they are viewed as the 'safe haven'.

When yields for one of the countries above break to the upside, as the daily chart for Italy's 10-year yields did last Wednesday, and it was not alone, we have been warned. Upside follow through intensified the warning. You can see that Italian 10-year yields accelerated higher yesterday and also today - a 5-day advance of 100 basis points - before falling back this afternoon. The acceleration led to panicky deleveraging in some stock markets and other assets this week, before the partial pullback in Italian yields steadied nerves somewhat.

Where government bond yields are in clear overall upward trends, as you see with the periphery Euroland countries above, their stock markets will inevitably underperform. Yield spikes can lead to contagion selling in other stock markets, and not just in Europe, as we have seen yesterday and today. However, if we ask ourselves, what lasting effects will this have on ASEAN stock markets, India, Australia, etc, the answer is not a lot. Therefore setbacks due to contagion selling create buying opportunities in markets which are not directly embroiled in the same problems.

Commodities have had an unusually high correlation with stock markets in recent years. Therefore when global stock markets are weak, precious metals and most other commodities will be susceptible to contagion selling. The main exceptions have occurred when supply shortages were a concern for the commodities in question. The converse has also been apparent, with prices for many commodities rising when stock markets are rallying.