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

UK 100 called to open +25pts, with risk appetite improved in the US and Asia after much-watched Spain’s budget announcement lacked any major surprises, coming in slightly ahead of expectations, and leading markets to see it as a possible paving of the way for a full bailout request.

The nation is sticking to its 2012 6.3% deficit target (revised down several times already – so be careful) and the 2013 4.5% target (really that credible? That was the 2012 target, once) will be met by spending cuts (round #5) rather than tax hikes (voter friendly?) and reforms/initiatives that go beyond EU recommendations – EU and Madrid worked together to pre-empt conditionality likely attached to any request for aid.

Markets liked this as it shows Spain serious about doing what is necessary, hopefully avoiding the awful path that Greece has taken and allow a more rapid transfer of bailout aid than in previous cases, limiting contagion risk and market uncertainty.

However, there’s still no guarantee Spain will ask for help. Previous bailouts have centred on collapsed banking sectors. The results of Spain’s bank stress tests are due today and as long as required funds for recapitalisation do not exceed the €60bn figured bandied around, this can be covered by the €100bn promised by the EU in June.

By using the European bailout fund ESM and avoiding the piling of more debt on the sovereign, this could maintain enough confidence to keep Spanish borrowing costs at manageable levels, seeing PM Rajoy remain reluctant to concede defeat and ask for help. We may be avoiding one negative feedback loop between sovereign debt and banks, but have we just found another vicious circle between Spain needing a bailout but market optimism bringing down borrowing costs enough to see Rajoy able to play chicken.

Asian markets also helped by continued expectations that China will announce more stimulus, especially after its intervention of the last week (explained by a week holiday next week though?). The country’s MNI Business sentiment also improved significantly. Ratings agency Fitch cut China’s 2012 growth forecast, not expecting any loosening of policy, but not expecting a hard landing either. Peer Eagan Jones, has cut Spain’s rating.

Overnight, lots of macro data, with UK Consumer confidence flat. Japanese data mixed with Jobless, Retail Trade and Housing better, Inflation was, however, mixed, while Industrial production was worse. French GDP was in-line and German Retail sales were better (albeit with downward revisions to last month).

The UK 100 has maintained its bounce of support at 5,750 thanks to the improved sentiment, however we still expect  the 10-day trendline of falling highs as resistance and an initial hurdle before the 3-4 month upside trend resumes.

The macro calendar is busy today. The UK Index of Services is expected to rebound in July, of interest given its significance to UK GDP, which is in the doldrums. Eurozone Consumer Price Inflation (CPI) is seen cooling to 2.4% from 2.6%, a bit of relief for consumers thanks to lower commodities prices. Canadian GDP is seen slowing, but still growing 2.0%, far better than its neighbour to the south. Thereafter, US Personal Income & Spending (seen growing at a similar ate to last month) is a gauge of how confident US consumers feel. Earning more and spending it? Or earning less and spending less? Chicago PMI updates on business optimism in a key regain, while the Uni of Michigan provides another guide to consumer confidence.

In commodities and FX, Gold has rebounded again back to near recent highs on a weekending in USD versus GBP and EUR. Oils still enjoying their rebound.

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

• UK                    GFK Consumer Confidence     In-line
• Japan               Manufacturing PMI                Improved
• Japan               Jobless                                     Better
• Japan               Consumer Inflation                 Mixed
• Japan               Retail Trade                            Better
• Japan               Industrial production              Worse
• Japan               Housing Starts                         Better
• France             GDP                                         In-line
• Germany         Retail Sales                             Better
• See Live Macro calendar for all details

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

• Electrocomponents warns on full-year after growth stalls
• Providence Resources to sell onshore UK interests
• Harvey Nash Group says expects full year results in line with expectations
• Mitchells & Butlers says sales improved over summer
• SSE says on course to meet 2012/13 targets
• Thomas Cook says turnaround plan on track
• Goals Soccer Centres in placing to boost balance sheet