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The congressional "super committee" created to slash $1.2 trillion in federal spending over 10 years was likely to concede failure in its efforts on Monday, congressional aides said.

While a breakthrough could still happen before the committee's Wednesday midnight deadline, it was considered unlikely that the group could bridge deep partisan differences over taxes and spending.

How financial markets will react to such a lack of progress is a tough call, partly because investors have been distracted by Europe's more immediate debt crisis.

For one thing, expectations could hardly be lower, especially with an election year looming and memories of this summer's ugly debate over raising the country's debt ceiling.

Also, any budget cuts would not take effect until 2013, so a failure would not trigger an immediate government shutdown or interrupt important services.

"I never expected they were going to reach an agreement and the market is clearly going to be disappointed but I think ... the market will find support at 1,200 because in the end the market really never thought they were going to do it," said Ken Polcari, managing director at ICAP Equities in New York, referring to the benchmark S&P 500 index.

"Therefore, as long as there is no news out of Europe, we will see a disappointed market but we won't implode," he said.

But a sharp sell-off in U.S. markets on Thursday afternoon was blamed in part on vague rumors that the talks to trim federal spending had stalled. After the impasse over raising the country's debt ceiling, the United States lost its triple-A credit rating, an event that is still fresh in investors' minds.

While Moody's Investors Service has said a failure by the committee to reach an agreement would not by itself lead to a rating change, Fitch Ratings has not ruled out a "negative rating action" on the United States if the economy grows less than expected or if the super committee fails to agree on at least $1.2 trillion in deficit-reduction measures.

Such an action would most likely be a revision of the U.S. rating outlook to negative from its current stable position. When Standard & Poor's downgraded the United States in August, it said at the time that U.S. fiscal plans fell short of what was necessary to stabilize debt dynamics.

"This thing is incredibly difficult to handicap," said Jacob Oubina, senior U.S. economist at RBC Capital Markets. "But the last thing you want is to introduce another element of volatility into the markets, and that's exactly what these guys are going to do because they can't get their act together."

The biggest concern is not the cuts as such but the sense that Democrats and Republicans are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that's near 10 percent of gross domestic product under control.

"There are two diametrically opposed groups here, each against what the other side is trying to do, and both see benefit to failure because they can campaign on that," said Gregory Whiteley, who helps manage $19 billion at DoubleLine Capital in Los Angeles. "So expectations are pretty low."

Clashes between Democrats and Republicans over the right mix of spending cuts and tax hikes almost scuppered a deal to lift the debt ceiling in August, raising the threat of default and spurring Standard & Poor's to cut the United States' credit rating.

THREAT TO GROWTH

Some investors do fear that deadlock may imperil White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed, and that would be another negative for growth at a time when the economy can least afford it.

RBC economists said that if those measures, along with some investment tax credits, expire at the end of this year, it could shave 1.2 percent from U.S. growth in 2012.

That could roil Wall Street stocks, which have been on a roller coaster ride since August and were on target Friday for their worst weekly showing in two months.

Stocks could lose 5 to 10 percent in the short run if anxiety about Washington policy gridlock really takes hold, said David D'Amico, president and chief strategist at Braver Capital in Boston.

"If they don't come out with anything and they force cuts and it becomes a political sideshow and the public and consumers become somewhat disgusted again with Washington, you could have a real sell-off in the marketplace," he said.

LOW EXPECTATIONS

While not expected, a deal to cut the full $1.2 trillion would probably provoke a relief rally in markets, investors said.

Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego, said that could be a green light for hedge funds and other money managers who are underinvested in stocks because of recent market turmoil to kick off a year-end rally.

"Expectations are low after the debt ceiling debacle, but if they get to $1.2 trillion, it would instill some confidence in the political process," he said.

Bond investors say deadlock probably won't hurt the bond market, either, since Europe's problems should sustain a safe-haven bid for Treasuries.

Jack McIntyre, who helps manage a global fixed income portfolio at Philadelphia-based Brandywine Global, said that's why he remains overweight the dollar relative to the euro even as he favors currencies from faster-growing emerging markets over the greenback.

The 10-year Treasury note was yielding 2.01 percent on Friday. Among major developed markets, that was above comparable yields only in Germany and Japan.

And if stocks do wobble, another round of monetary easing from the Federal Reserve, which has toyed with the idea of pumping more money into the system by doing additional purchases of mortgage-backed debt, could help support asset prices.

LONG RUN RISKS

In the long run, though, the parallels with Europe's most troubled countries becomes more striking and harder to ignore.

Harm Bandholz, chief U.S. economist at UniCredit said America is treading a path similar to the one that led Italy, Greece and others into trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden.

As governments in Rome, Madrid and elsewhere found out in recent days when their borrowing costs spiked to euro-era highs, that can only go on for so long. "The U.S. is still running at full speed in the wrong direction," Bandholz said.

Additionally, about 71 percent of marketable U.S. debt will mature in the next five years, said Lawrence Goodman, president of the Center for Financial Stability in New York. That's well above the historical average and makes the country vulnerable to refinancing risk.

"Markets continue to give the U.S. a pass on its excessive deficit," he said. "But what's happening in Europe should be a powerful lesson, especially given our maturity profile."

(Additional reporting by Sam Forgione, Chuck Mikolajczak and Ryan Vlastelica in New York and Stella Dawson in Washington)

While authorities have touted the fact that they are returning 60 percent of the collateral and cash that had been frozen in the wake of the broker's October 31 bankruptcy, a closer look shows that in fact only about 40 percent of customers' total funds have been authorized for release so far.

The remainder, more than $3 billion, ostensibly remains on hand to cover a shortfall originally estimated by MF Global to regulators at just $600 million.

Because the bankruptcy trustee, regulators and exchanges have made no comment on the missing funds in weeks -- and have given no information as to how much cash they are retaining -- customers are left guessing exactly how much might end up in the creditors' process of the bankruptcy.

After weeks of intense lobbying by customers and exchanges, trustee James Giddens last week won court approval to release another $520 million in funds from MF Global accounts that contained only cash as of October 31.

But that has still left thousands of customers in an uproar. Clients who had a mix of cash and trading positions have yet to see a dime of their excess funds, they say. The trustee is planning a third cash transfer to cover these clients, but no timing for that tranche has been announced.

"The whole process is a mess," said Jason Skole, a private investor who had invested $200,000 at the start of this year in a small hedge fund who traded through MF Global.

"Those who had just cash positions will get some of their money. All I've got is 60 percent of the small amount of collateral I had backing trades," he said. He says around $185,000 of his money is still frozen at the bankrupt firm.

MONEY TRAIL

The tale of the customer's funds goes like this. On October 31, exchange operator CME Group estimated in a court filing that there was a "requirement" of some $5.5 billion in segregated customer funds -- including, presumably, the missing funds that could not be immediately located.

Over the following weeks, while authorities poured over sloppy and haphazard records, the trustee identified two pools of money that could be partly returned to customers.

The first was $2.5 billion in collateral that was being used as margin to cover existing trades. Those trading positions were transferred to new brokers along with 60 percent of the value of the collateral, or about $1.55 billion.

The second was $869 million that was left in MF Global accounts that contained nothing but cash -- either because customers had liquidated all their trades before October 31, or because they simply had no positions open as it failed. The bankruptcy court ruled last week that those account holders would also get back 60 percent, or about $520 million.

Those two pools of funds only account for about $3.4 billion of the original total $5.5 billion. The customers whose accounts hold that remaining $2-plus billion have never been explicitly identified, or told when they will get their funds.

It's clear that some cash is being held back in order to cover the missing money that regulators say MF Global may have taken from customer accounts, an unprecedented violation of one of the fundamental tenets of commodity brokers.

What has not been clear is why officials have declined to be more specific about how much money they believe should be in those accounts, regardless of what is missing.

"...The Trustee should publish a report showing how much funds have been accounted for, how much has been distributed and how much he is still holding," said Ronald Filler, director of the Center on Financial Services Law at New York Law School.

"Once the accounting nears completion, one would hope that another 20 percent or more will soon be distributed, leaving an adequate amount to cushion any shortfall. If the Trustee holds on to the remaining 40 percent without explanation, then one could possibly presume that the shortfall may be greater than $600 million. Let's hope not."

One answer became clearer on Friday: Some, perhaps most, of those unexplained funds are being held by customers who had both open trades and large sums of money on account at the stricken brokerage, ex-MF Global customers said. While these customers have been reunited with their open trades, their cash is still frozen.

The result? More than $3.3 billion or 60 percent of total customer funds at the time of the bankruptcy are still frozen.

Kent Jarrell, a spokesman for bankruptcy trustee James Giddens, said in a statement they were working on a third bulk transfer to "true up" the value of distributions so that all former customers get 60 percent of their net equity, but said they could not guarantee all customers would be made whole.

"At present, the assets the Trustee has control of in commodities segregation are substantially less than the estimated allowed commodities claims," Jarrell said.

"There is no assurance of a 100 percent return."

CME Group referred all questions to the trustee.

MOUNTING ANGER

While customers were initially outraged at the thought that MF Global had tapped into their segregated funds, that rage has increasingly been targeted at the trustee and the bankruptcy court for the handling of an unprecedented collapse.

"The (bankruptcy) Trustee is creating new protected classes within a pool of segregated customer assets," said John Roe, a spokesman for the Commodity Customer Coalition, a group lobbying for the speedy release of funds representing 7,000 former MF Global customers.

"(This) has dangerous implications in future Future Commission Merchant (FCM) bankruptcies. How is this in the interests of customers, FCMs, bankruptcy creditors or the system as a whole?"

It is still unclear what happened to the $600 million of customer funds unaccounted for since MF Global's Chapter 11 filing, and whether MF Global might have illegally mixed customer funds with its own or used them for its own proprietary trading.

The Commodity Futures Trading Commission, federal prosecutors and the Securities and Exchange Commission are all investigating the bankruptcy.

(Additional reporting by Nick Brown in New York; editing by Marguerita Choy, Jonathan Leff and Edward Tobin)

With light trading volume expected due to the U.S. Thanksgiving Day holiday on Thursday, intraday swings are likely to be wide and frequent as traders instantly react to headlines out of Europe.

In addition, a 12-member "super committee" in Congress has until midnight on Wednesday to strike a deal involving tax increases and spending cuts to rein in federal spending. Investors are concerned that failure to reach a deal would result in automatic reductions that would harm the fragile recovery.

But with Wall Street poised for a technical rebound after finishing the worst week in two months last week, some say there are a lot of variables that could spark a rally.

If the super committee can come up with a workable deficit-reduction plan and if progress can be made in Europe, "the stage could be set for a fourth-quarter rally that might surprise even the most bullish traders," said Randy Frederick, managing director of trading and derivatives for Schwab in Austin, Texas.

"Of course, those are some mighty big 'ifs.'"

GERMAN BUNDS

European debt yields, an important risk barometer for investors these days, have shown exceptionally high correlation to equities. For the past several weeks, stocks have quickly reacted to moves in Italian, Spanish and French yields.

Now, there could be a new worry in German Bunds.

"We do have a new uncertainty that has gotten a bit of attention over the past few days and that is the sell-off in the German Bund market. There has been heavy selling by Asian real money investors in Bunds the last few days," said Chuck Retzky, director of the futures division of Mizuho Securities USA in Chicago.

"The Bund market is considered to be one of the safe havens for investors' money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if U.S. Treasuries will see a similar sell-off in the future," he said.

On Friday, the Dow and S&P erased losses as the yield on Spanish 10-year bonds eased.

Spanish elections set for Sunday could help support a rise in the euro against the dollar in the very near term because the opposition party, which is seen as favoring austerity measures, is expected to win.

TECHNICALLY SPEAKING

The S&P 500 .SPX fell 3.8 percent last week, ending its worst week in two months, but the index closed above its 50-day moving average near 1,200, showing signs of strength to move higher.

"Our expectation is that the recent market sell-off is not the beginning of a whole scale, multimonth downside collapse, but rather is likely the latter stages of a pause following a surge in October, and another upside rally attempt will develop shortly," said Robert Sluymer, an analyst at RBC Capital Markets in New York.

"The overall technical set-up has not materially changed in the past few weeks."

Last week, the Dow Jones industrial average .DJI fell 2.9 percent and the Nasdaq .IXIC lost 4 percent.

This week's economic data includes existing home sales for October on Monday and third-quarter preliminary GDP report on Tuesday. On Wednesday, durable goods orders, personal income and outlays and weekly jobless claims are due. The markets will be closed on Thursday for Thanksgiving.

(Reporting by Angela Moon; Additional reporting by Doris Frankel in Chicago; Editing by Kenneth Barry)

Monti easily won confidence votes in record time in both houses of parliament last week, just days after his predecessor Silvio Berlusconi lost his majority and quit -- the latest EU premier to fall victim to the Europe-wide economic emergency.

The new government of technocrats, supported by almost all Italy's main parties, will focus first on enacting austerity measures passed by Berlusconi that aim to balance the budget in 2013 and halt the rise in Italy's monumental debt pile.

But with the economy looking certain to slow, additional measures will be needed and Monti, who is also economy minister, spent his first hours in office reviewing the latest data.

Italian newspapers said on Sunday that new budget measures were likely to be unveiled within two weeks, with a property tax abolished by Berlusconi set to return, plus moves to tackle tax evasion and a cut in payroll taxes to lift employment.

As the broad outlines of his program emerge, Monti will travel to Brussels on Tuesday for talks with Herman Van Rompuy, president of the European Council, and Jose Manuel Barroso, president of the European Commission.

On Thursday he will have lunch in Strasbourg with French President Nicolas Sarkozy and German Chancellor Angela Merkel.

Europe's two main powerbrokers showed growing exasperation with Berlusconi, believing he had failed to grasp the severity of the crisis, and there was obvious relief in Paris and Berlin over the arrival of Professor Monti, a former EU commissioner.

"Up until now Italy was part of the problem, now it is part of the solution," said Daniel Gros, the head of the Center for European Policy Studies in Brussels.

EUROBOND DIVISIONS

But Monti will find himself at odds with Merkel over ways out of Europe's financial crisis, which has roiled markets and raised fears for the future of the euro single currency.

While Germany has rejected calls for common euro zone debt issuance, Monti enthusiastically endorsed the measure before taking office, writing in the Financial Times in July that eurobonds "are the only answer to Europe's crisis."

He is only likely to make headway on this issue if he can show Europe that he has a firm grasp on Italy's finances and a clear vision of how to cut its debt, currently running at a perilous 120 percent of gross domestic product.

Although he secured huge support in last week's vote from a parliament spooked by a sudden jump in Italian borrowing costs, he could face a battle as he tries to win backing for greater austerity or implementing a pledge to liberalize the hidebound economy.

Berlusconi said on Sunday he expected Monti to stay in office until the end of the legislature in 2013. While he was ready to back a new property tax, Berlusconi warned that other measures, such as a mooted wealth tax, were not acceptable.

"The government is made up of highly competent technocrats. That does not mean they have carte blanche on everything. We will be very attentive on every single measure," he told Corriere della Sera newspaper.

"Monti cannot ignore us. (My party) is the biggest party in parliament and will be an irreplaceable point of reference for this government," he added.

(Editing by Tim Pearce)

"The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend.

Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy, and Beijing's worry about a worsening global environment could translate into an impetus for pro-growth policies at home.

China launched a massive fiscal stimulus package with a price tag of 4 trillion yuan ($650 billion) in late 2008 to avert a big impact from the global financial turmoil.

According to Xinhua, Wang did not speak this time about any major policy change but reiterated that banks should be more flexible lending to the agricultural sector and small firms.

"As for our country, which relies highly on external demands, we must see the situation clearly and get our own business done," Xinhua quoted Wang as saying, referring to exports.

China's central bank, which sometimes has to report to Wang, who is in charge of China's financial sector, said last week that it is ready to fine-tune monetary policy if needed.

At a meeting of local government officials and financial executives in the central province of Hubei on Saturday, Wang said local financial institutions such as city commercial banks and credit cooperatives should not seek to expand their business beyond their regions.

Wang also urged banks to pay close attention to the international financial situation. Xinhua did not give further details.

(Reporting by Zhou Xin and Benjamin Kang Lim; Editing by Paul Tait)