The Social Democrats, Germany's main opposition party, won yesterday's election Mecklenburg-Western Pomerania with 36.1 percent of the vote, while Merkel's Christian Democratic Union had 23.3 percent, ZDF television projections showed.

The result in the eastern state where Merkel's election district is located means her national coalition has been defeated or lost votes in all six German state elections so far this year as voters resist her bid to prevent a euro-region breakup by putting more taxpayer money on the line for bailouts.

"Positioning has turned against the euro again and news flow isn't helping," Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, wrote in an e- mailed note. Merkel's defeat "simply adds to the sense that saving the euro is going to be made more difficult by opposition from within Germany."

Eoin Treacy's view The Eurozone's governments have endured a torrid few months. German public support for propping up profligate Mediterranean compatriots is cool at best. France's Nicolas Sarkozy appears more concerned with re-election and fighting corruption claims that governing. Belgium hasn't had a functioning government for 18 months, The Italian parliament, following the impressive announcement of an austerity package, doesn't appear to have the fortitude to implement it. IMF, ECB and EU inspectors left Greece over the weekend following the break down of talks on how the country is going to implement the agreed upon measures to cut its deficit.

I have argued for a number of months that the acquiescence of Europe's citizen's cannot simply be taken for granted as increasingly severe rounds of austerity are proposed by various supra-national organisations. Gaining agreement from the bailout "troika" to provide funds is only half of a potential solution. Countries need to also push through painful reforms in areas such as labour law, pensions, state employee perks, asset sales, tax collection etc. For countries that have previously relied on the ability to periodically devalue their respective currencies, this is all a very new and unwelcome experience. So far there is little evidence to suggest that the Greeks are willing to implement the reforms which will allow the next tranche of bailout capital to be released.

Greek 10-year yields spread over German Bunds continue to accelerate higher and a sustained move below 1200 basis points would be required to break the progression of higher reaction lows and question potential for a further widening. Italian 10-year spreads have rallied back to test the early August peaks above 350 basis points. Spanish spreads have also found at least short-term support and have so far held the medium-term progression of higher reaction lows. Portuguese spreads have at least stabilised above 800 basis points. Belgian and French spreads hit new highs today above 200 and 80 basis points respectively. Ireland remains the only one of the original problem countries to have been spared the recent selling pressure; at least so far.

ECB purchases of peripheral country debt allowed spreads to contract somewhat from early August. However since then, the political situation has deteriorated and German 10-year yields continue to post new lows. This is putting additional upward pressure on the above spreads.

Eurobund futures prices broke upwards to new highs last week and while overextended by just about any measure, the uptrend remains relatively consistent. A sustained move below 134 would be required to signal a failed upside break and disrupt the five-month progression of higher reaction lows.