Financial markets stabilized on Tuesday although investors remained cautious ahead of the EU summit later this week. As the market digested Moody's downgrades of Spanish banks, it was then reported that country's cumulative central government deficit had increased to EUR35.4B in May. In Italy, Prime Minister Monti won the first 2 of 4 confidence votes needed to approve the country's labor market reform. In the US, housing data exceeded expectations and this sent Wall Street higher. The DJIA and the S&P 500 Indices rose +0.26% and +0.48% respectively. In the commodity sector, gold erased the gains made the day before as better-than-expected US data reduced hopes of Fed's QE3. Brent crude jumped to the highest level in 4 days as the strike in Norway lowered North Sea output. The front-month contract soared +2.20% to settle at 93.02.

Spain reported that the central government deficit reached 3.41% GDP in the first 5 months of the year, compared with the annual target of 3.5% and last year's level of +2.59%. According to Deputy Budget Minister Marta Fernandez Curras, the deficit has started on a downward path and we expect that to intensify. Yet, he pledged that the government is determined to meet the budget target. Meanwhile, Italian Prime Minister Mario Monti won the first 2 of 4 confidence votes, calling to pass his labor reform. Tentatively, the reform will be approved on Wednesday if the final 2 votes were passed. The reform has been criticized by both by labor unions and the business establishment.

At a parliamentary hearing, the BoE Governor King indicated his concerns about the sovereign debt crisis in the Eurozone. He stated that he was pessimistic about the situation in the bloc and believed that it was only half way through the crisis. Regarding the British economy, he said he was very much struck by how much has changed since we produced our May Inflation Report and he was keen to undertake further asset purchases and that there was nothing in principle against another rate cut. This signaled that further easing by the BOE is likely in coming months.

In the US, the S&P/Case-Shiller Composite-20 index fell -1.9% y/y in April, better than market expectations of a -2.0% drop and March's -2.6%. This upstaged consumer confidence which slipped -2.9 points to 62 in June. Us durable goods orders probably added +0.5% m/m in May, following the +0.2% gain a month ago. Pending home sales might have risen +1.3% m/m in May after a -5.5% decline a month ago.