Don't forget that you can now follow's research team on Twitter:

The markets have recovered during the European session, and EURUSD is back testing 1.23 after falling to a fresh 2-year low below 1.2225 earlier as Asia digested the lacklustre payrolls figure from the US on Friday. Two things are weighing on the markets' appetite for risk at the moment. Firstly, the Eurozone sovereign debt crisis. Spanish bond yields are back above 7% today although they backed away from 7.1% earlier, after reports that the ECB was checking the level of Spanish bonds in the market. Secondly, the poor showing in the NFP payrolls data suggest that US labour market growth is slowing sharply after creating 200k plus jobs at the start of the year.

The markets get resistant to EU summits

Low expectations for the second quarter earnings season that kicks off tonight with aluminium maker Alcoa releasing earnings after the market close, may also be weighing on sentiment as markets adjust to an environment of high debt, a permanent headache from the sovereign debt crisis and weak growth globally (not just in Europe's peripheral members').

But there are some (dim) glimmers of hope; hence markets haven't embarked on a panicked sell-off just yet. German exports bounced back in May and rose 3.9%, versus expectations of a 0.2% rise. This reverses the 1.7% decline in April. However, what we know from US and Chinese data - big trading partners for Germany - is that something happened in May that caused global confidence to tumble, so German trade data may not be as strong for June.

Spain still on the hook for its banks

Added to this, the Dow Jones reported earlier that an EU spokesman had said there would be no need for a sovereign guarantee for banks directly recapitalised by the ESM/EFSF rescue funds. This should be good news for Spain as its banking sector is the epicentre of its debt problems. If Spain's banks become a European problem rather than a Spanish problem we may see Spanish bond yields begin to fall away from critical levels. However, for now the markets are in cautious mode and Spanish bond yields are not willing to react to headlines - they want concrete action.

It appears that the breakthroughs at last weekend's EU summit have only had a short-term impact on the markets. Now that we are on the 19th EU summit it is no wonder that the medicine they deliver has a diminishing impact on market action. The markets are building a strong resistance to platitudes from EU leaders; hence the short-term bounce in the markets last week and why Spain's bond yields are rising today. Essentially we need to get concrete agreement from Germany et al that it is willing to inject money to Spain's banks without leaving Madrid on the hook for any losses - we have heard nothing from German politicians to make us believe that is likely to happen any time soon, hence the markets won't rally on any rumours today.

Asian data is also weighing on the markets, although the prospect of a Q2 GDP miss in China (released on Friday- the market expects 7.9% down from 8.1% in Q1) seems to be priced in after the Chinese authorities announced a surprise rate cut last Thursday, the second such action in a month.

Market moves:

Risk assets have been fairly range bound during the European session as the markets wait for the EU finance ministers' meeting later today. Draghi was speaking in front of the EU Parliament in Brussels, but his commentary stuck to the same tone as his press conference last Thursday (central banks took bold action, the ECB remains committed to price stability etc. etc.) and had no meaningful impact on the markets. The ECB also announced it made no bond market purchases last week, although since Spanish yields rose above 7% today they may need official ECB support in the near-term, so we can't rule out the ECB expanding its EU210 bn SMP programme in the near-term.

EURUSD still looks vulnerable below 1.2325 and it will be difficult for this pair to extend today's gains without crossing this hurdle first. The problem is that below 1.2225 (today's low) there isn't much support on the way down to 1.20. Likewise, AUDJPY, a proxy for risk, dropped through its 200-day moving average earlier at 81.10. It is currently re-testing this level so watch where this pair closes today as it is a good barometer of risk appetite in the currency markets.

Stocks are flat to slightly lower at the time of writing. The Eurostoxx index fell sharply at the end of last week. It appears the markets are willing to take a breather here, although a top seems to be in place around 2,325 - a cluster of daily smas. Support lies at 2,180 - the 50-day sma. We may be slightly range-bound in stocks unless we get some direction from the EU finance ministers or from Wednesday's Fed minutes that could leave some residual expectation that the US central bank will keep the door open to more QE (traditionally risk positive). However, politically and economically the environment seems risk negative, at least for the near to medium term, which is bad news for the Aussie, euro and stocks and good news for safe havens like Treasuries, the dollar and the yen.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

23 College Hill | 3rd Floor | London EC4R 2RT

Now you can follow us on Twitter:

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.