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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 | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

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