Markets Overview: (Source: Bloomberg, FT, Reuters, DJ Newswires

UK 100 called to open +10pts despite Asia-Pacific equities following Europe and the US lower, after the downgrade of Spanish banks by Moody’s late last night (expected after the sovereign was cut), as well as the earlier news that that Cyprus is seeking a bailout (no surprise, given impact of Greek tragedy), Spain formally requesting the aid for its banks (well flagged after informal request) and the resignation of Greece’s new Finance Minister (health grounds).

Sentiment remains negative regarding potential for tomorrow’s European summit to resolve the region’s sovereign debt and banking crisis with Merkel lowering the bar of expectations again. Focus likely on burden-sharing debt, fiscal integration, growth pact and how to recapitalise Spain’s banks (which body to fund, ESM/EFSF/Other), but sure to produce more hot air than concrete measures.

Risk appetite remains tempered by the above negatives as well as fears that the global economic recovery is faltering. Even positive data from the US is being overlooked – New Home sales beat consensus estimates and Texas Manufacturing activity rebounded handsomely. After the awful raft of manufacturing data last week this was a welcome sight, although sceptics point to one swallow not making a summer. Did someone say summer….?

Safety thus sought in government bonds (US, UK, DE) and the US dollar (USD), which has kept commodities under pressure. Gold trickled off from its highs of $1,588, but in very tight range. US Crude off overnight highs, but still showing progress from lows of Friday. Brent Crude showing a similar pattern. USD strength keeping EUR/USD pair down around the 1.25 level, but GBP/USD seen move up after steep falls of last week.

Overnight, macro data shows improvement in China’s Conference Board Leading Index – good to see, given worries that the emerging nation is seen headed for a hard landing in terms of growth. There has also been press reports that the People’s Bank of China (PBOC) may lower interest rates in August to combat the economic slowdown. This will be music to the ears of those hoping for coordinated central bank intervention, with the US Federal Reserve (Fed) and Bank of England (BoE) potentially moving next month.

Macro data today likely to focus on the bond auctions by Spain and Italy for any additional signs of sovereign stress (bond yields higher) ahead of tomorrow’s summit. Closer to home, UK Public finances likely of interest before the afternoon focus moves to US Housing data and US Consumer Confidence.

Overnight Macro Data: (Source: Reuters/DJ Newswires)

• China               Conf Board Leading Index                    Improves
• Germany         GFK Consumer Confidence                 Better than expected
• Switz                UBS Consumption Indicator                Worsens
• See Live Macro calendar for all details

UK Company Headlines: (Source: Reuters/DJ Newswires)

• Carpetright profit -76% on weak UK sales
• Ocado says trade disrupted by Jubilee celebrations
• Stagecoach year profit dips on rail unit losses
• Domino Printing profit falls
• Serco says trading in line, UK improving
• Petrofac says expects to hit earnings targets
• Thomas Cook extends hotel sales agreement with Iberostar
• Falkland Oil & Gas says Edison is new exploration partner
• Gulf Keystone says Shaikan-5 well is successful

Morning Press Selection:

• EU could rewrite eurozone budgets – FT.com – EU Economy http://on.ft.com/LXjkcM
• Spanish banks are downgraded – FT.com – Europe http://on.ft.com/Ojm6dM
• Big users bet on more oil price falls – FT.com – Commodities http://on.ft.com/MvMFto
• How to shift Germany out of ‘can’t do’ mode – FT.com – Opinion http://on.ft.com/MuabEe
• No pain-free options for Germany – FT.com – Markets http://on.ft.com/MxFxtK
• Weather casts doubt on crop forecasts – FT.com – Commodities http://on.ft.com/MxFJt5