• Markets Eye Spain
• Contagion Attacks Italy
• Investors Downbeat For Euro Meeting

Markets this morning are poised for the results of Spanish bond and bill auctions which, it is exepcted, will see the beleaguered nation paying its highest short-term borrowing rates in over six months.

Meanwhile, Italy will begin selling zero-coupon and inflation-linked bonds in their latest bid to combat a growing debt crisis. Recognising that contagion has prompted Italy’s hand somewhat, Michael Hewson of CMC Markets told this site: "With bond yields rising in Spain, Italy’s yields have also been dragged higher as fears remain as to whether Italian PM will be able to continue along with his current reform program.

“Today’s Italian bond auction of up to €3bn is likely to be another key test of demand with 10 year yields once again back above 6 percent, while Spain is also looking to sell three and six-month T-bills, just a week after selling one year paper at over 5 percent."

Top forex brokers downbeat ahead of summit

Both nations’ auctions come ahead of the meeting of European leaders on Thursday and Friday; a meeting which has investors feeling downbeat about the prospect of any concrete action to resolve the bloc’s problems.

"We are not anticipating anything from the summit that will clear up market doubts, said Orlando Green, strategist at Credit Agricole. “We might get some clarity on attempts to increase European rescue funds, and Spain's bank rescue package, but the risk is that it disappoints,"

Green – along with many other strategists at top forex brokerages – feel sure that domestic banks will end up taking on most of the paper available at today’s double auction.

Adding his voice to the general market gloom, Simon Denham, MD of Cpaital Spreads said: “Volumes yesterday were pitiful yet the markets dropped and across Europe and there was a large wave of uncertainty hitting equity investors. This week will climax with the two day EU summit where investors are increasingly doubtful that any sort of meaningful resolution will be agreed.

“The euro zone crisis is here to stay I’m afraid and probably for years to come”, he added.

Moody's slash 28 bank ratings

The Spanish and Italian auctions follow the downgrading of 28 Spanish banks by Moody’s, citing the fading ability of the nation’s government to support its own lenders as motivation for its action. The ratings agency also identified the threat posed to Spanish banks by the imploded Spanish property bubble.

Among the downgrades was a cut to Banco Santander's long-term rating to Baa2 from A3. But the rating is under review for further downgrade, meaning more cuts could be forthcoming to the euro zone's largest banks.

The market uncertainty which came as a result of the rating agency’s action left stock markets Monday in the Europe and the US flailing as bond investors pushed Spain's borrowing costs through the roof, a sure sign of faltering investor confidence in the country's ability to support its banks.

"The single currency remains the dog of FX pairs and suffered more losses yesterday", Denham added, turning to his live forex charts. "This morning flirtations with the 1.2500 level are keeping any prospect of a bounce at bay. It looks like only a completely unexpected outcome from the summit this week will turn the sentiment towards the euro, but for now the bears remain in control."

Sarah Cox, Markets Writer. ForexSpace.com.