It was bound to happen. Euro equities have started the week in the cautious camp, especially after last Friday's strong session, where the Dow ended the week punching through that psychological 14,000 level. It's not unnatural to expect equities to take a breather after achieving such a milestone. However, it's the Euro news flow that everyone should be focusing on. It serves investors a timely reminder that political risks remain healthy and looming within the Euro-periphery region.

To date, the Spanish Prime Minister, Rajoy, has moved to contain a political scandal over alleged cash payments to him and leaders of his party. Not surprisingly, Spain's opposition party has called for the PM's resignation. So far this morning Spain, along with Italy, is making investors nervous. It looks like the markets are back to focusing on bond spreads. The spread between Spanish 10's and Bunds is widening, as media reports accuse Spanish high-ranking officials of having receiving payments from a slush fund.

Not helping Spain is data this morning indicating that the number of people out of work in the country rose +2.7% in January. Spain, Europe's fourth largest economy, is failing to stop the employment bleed. It's a country where one in four are unemployed (+26%) and a country with the second highest unemployment rate after Greece. How long will it be before they officially ask for Euro aid?

Italian politics is also pressurizing the 'single currency.' The Italian federal election is only a matter of weeks away (February 24-25) and the country's 10-year fixed income benchmark bonds are ticking higher against Bunds as we begin the transfer to the North American trading shift. A number of reasons are causing this morning's unease. With Monti's poll ratings slipping, there is a risk of a possible 'hung' parliament leading to a move towards reform and not austerity. With 'Bad Boy' Berlusconi promising a fresh round of tax cuts, he is threatening to upset the apple cart!

Spain will also be auctioning around +€5b of 2's, 5's and 15-year bonds Thursday. This month sees high issuance from Italy and Spain and Thursday's auction will be a test of the peripheral rally's momentum, after moderate demand but low yields at last week's Italian auction.

Data flow is light this week in the US, with Tuesday's non-manufacturing ISM the main highlight. The market expects the headline to moderate, especially after last December's 10-month high. The reported data should be consistent with market consensus that US growth is improving.

The market expects the "Old Lady" to keep her policy unchanged this week. Analysts note that the main focus will be on the next appearance of the BoE's new Governor, Canada's Carney, ahead of the Treasury select committee. Expect the market to pay close attention to his views on QE and any policy changes in the policy target. The market will also try and decipher his views on governance at the old institution.

To date, GBP remains vulnerable to weak data and a dovish policy stance. Just across the English Channel, a less dovish ECB policy stance and ongoing Euro-lending indicator improvements has Sterling playing second fiddle!

Investors do not expect any surprises from the ECB this week. The institution is expected to keep its positive tone from the last meeting. The Central Bank is will likely highlight the developments in its large LTRO early repayment schedule. Draghi's should be smart enough to keep the rate-easing door ajar in the event of renewed data deterioration. This market expects to see more evidence of improving momentum in Germany.

The EUR opened the Euro session with an offered bias and has managed to retain that tone as we head Stateside. Spanish employment data, hedge fund selling and political rhetoric over a strong single unit causing economic problems are only some of the issues that this 17-member currency club is dealing with this morning. It seems that early EUR/JPY and EUR demand has given way to stop hunting below (1.3570). With Spec funds lightening up EUR longs, and some influential Japanese accounts recommending closing out short yen winning positions, the single unit is expected to struggle under this momentum selling first thing in the North American session.