A big test for global markets, including Australia’s, will come this week with a record $US101 billion of US Treasury bond and note auctions in that will highlight the sudden upsurge in fears about the level of sovereign debt sparked by the warning about the downgrade of Britain’s AAA credit rating because of rising spending and debts.

The fall in US bond prices, the US dollar and share prices (an unusual triple hit) for much of Thursday and Friday has left sentiment strained, especially ahead of long weekends in the UK and US markets, the two most important in the world.

In the mood markets have been in for the past two months, last week’s sell off would have been a mere blip: after all, there’s been a flurry of ‘green shoots’ sightings, with more to come this week.

Figures this week from the US will confirm the extent of the first quarter slump, with most economists looking for an improvement, while industrial production figures from Japan will tell us that the slide there has bottomed: that’s what the Bank of Japan reckons as last week it upgraded its outlook for the Japanese economy for the first time in three years. US investors are also looking for good news on confidence (and from Europe as well) and US housing.

In Australia we start the data flow towards our first quarter growth figures on Wednesday week. Goldman Sachs JBWere forecasts a fall of 0.3% for the quarter, to produce our first recession since 1991.

But debt and spending (and inflation further down the track) have quickly emerged as surprising big concerns.

Now this week’s huge US Treasury auctions will be watched to see what demand looks like (the so-called covered ratio) and what yields do. They spiked badly in the US on Friday with 10 year bonds hitting 4.35%, the highest since last November. Australian 10 year bonds hit 5.21%, up sharply in the past 10 days.

If there’s any sign of indigestion in US bonds markets this week, what will happen as the US Treasury tries to sell the rest of the $US2 trillion of bonds and notes over the rest of this financial year?

If these stall, there’s only one way to pay this debt, and that will be to increase interest rates. That in turn will set off concerns about higher inflation, the dollar will fall, commodity prices will spike higher, led by oil and foods, and all of a sudden we have a replay of February to July 2008.

There are already some analysts starting to wonder if we will see a re-run of last year with activity in commodity markets driving oil and foodstuffs higher, will that choke off consumer demand and spending power and push a weak global economy back into the depths of the recession?

Since the markets peaked on May 8, stocks have given back some of their gains over doubts about the speed of the economic recovery. Australian shares are down around 3% since those peaks, as are US shares.

Asian shares are up 41%, thanks to China’s surge on sightings of a turnaround in the economy. Billions of dollars have flowed into emerging market economies in the past six weeks: the Australian dollar has risen strongly.

Oil prices rose above $US62 a barrel last week and finished Friday above $US61 a barrel, compared with lows of just above $US33 a barrel last December.

OPEC meets this week and against this background, is encouraging traders to believe that prices will rise higher.

If OPEC and the International Energy Agency have both cut their global oil forecasts this month for the rest of 2009, why are prices rising and why does OPEC also see the price hitting $US75 a barrel, especially when OPEC countries have started producing more oil than their cuts allow?

That’s usually a sign of price weakness, not pressure as more and more investors pile into oil looking for gains as the US dollar weakens.

Three US banks fell over last week, including two on Illinois on Friday night: that’s 36 failures now for the year so far.

Fed Vice chairman Donald Kohn said on the weekend that the central bank is likely to keep interest rates near zero for a while as the US economy pulls out of a steep decline.

While encouraging, Kohn’s comment should also be seen as an admission that as “green” as some of the shoots seem in the US economy, there’s no belief that they will strengthen any time soon into a much stronger recovery.

Mr Kohn made clear the Fed is starting to become concerned about the medium term employment situation as sectors in the economy continue contracting, like housing and finance.

“The effect of the crisis, the shifting of labour across markets, the effects on productivity have been very much one of the topics at the Fed,” Kohn said in response to questions at the conference he spoke at.

This was a topic raised for the first time in the minutes of the late April Fed meeting. Mr Kohn said the Fed is looking at how this impacts productivity in the economy and how those changes may have affected the difference between how the economy grows and its full potential.

From what was in the minutes and what Mr Kohn says, there seems to be a growing belief that labour reallocation issues could restrain both the recovery to trend growth levels and the ability of the economy to reduce the overall unemployment in coming years.

That will be one of the issues of 2010. For now it’s the huge bond auctions in the US, Japan, Europe and the UK that will dwarf ours.

But there is a “green shoot” in any downgrade of the UK: it will make Australia’s Triple A rated bonds that much more attractive to international investors.