World markets: 'Calm before the storm'

Click here to track more world market data.

NEW YORK (CNNMoney) -- World markets drifted in a lackluster holding pattern on Tuesday, as investors took a downgrade warning by Standard & Poor's in stride ahead of a key meeting of European leaders later this week.

"The market seems fairly calm," said Tommy Molloy, chief dealer at FX Solutions at Saddle River, N.J. "This suggest to me the calm before the storm."

European stocks weakened. Britain's FTSE 100 (UKX) and France's CAC 40 were flat, while the DAX (DAX) in Germany lost 1%.

Asian markets ended lower. The Shanghai Composite (SHCOMP) edged down 0.3% the Hang Seng (HSI) in Hong Kong lost 1.2% and Japan's Nikkei (N225) shed 1.4%.

"S&P is looking for aggressive action this week before deciding whether to take rating actions," wrote Brown Brothers Harriman strategist Marc Chandler in a client note.

The ratings agency placed 15 eurozone countries on review Monday for a possible downgrade, citing the worsening debt crisis.

Euro debt crisis solution on horizon

French President Nicolas Sarkozy and German Chancellor Angela Merkel tried to quell those concerns Monday, by agreeing on a new fiscal pact that they say will prevent another debt crisis.

The pact, which will be presented in detail at a summit meeting of European leaders on Friday, would involve amending or rewriting the treaties that govern the European Union.

"We doubt the summit will deliver such a tall order, as we see a significant chance that the rating agency will be disappointed and take action," said Chandler.

"Friday has been underlined as probably the most important of the euro events that we have seen all year," said Molloy. "The events we've seen so far are best summarized by the cliché, 'kicking the can down the road'."

Meanwhile, borrowing costs across the eurozone continue to ease, giving investors some breathing room.

The French 10-year bond yield closed at close to 3% -- a level it hasn't touched in nearly a month. And the yield on the Italian 10-year bond eased further away from the 7% danger zone, dropping to 5.87% early Tuesday.

Italian stability is particularly important since Italy is the third-largest economy in the eurozone and one of the most prolific bond issuers in the world.

While a 7% yield doesn't automatically trigger a bailout, it is the level that was exceeded by Ireland, Greece and Portugal before those countries required bailouts from their European neighbors.

There have been growing calls for the European Central Bank to step up its bond buying program. The ECB had been staunchly opposed until recently, when ECB president Mario Draghi hinted that the central bank could become more aggressive in buying sovereign debt.