The focus of the Eurozone crisis has turned to Spain whose banking sector has been downgraded despite announcement of reforms a week ago. Peripheral yields soared and stock markets plunged. A point of postive news did come from Greece with the latest poll showing an increase in support for the New Democracy party. In the commodity sector, gold jumped for the first time in 5 days as the US dollar dropped amid disappointing US data. The benchmark Comex contract rose to a 4-day high of 1579.8 before settling at 1574.9, up +2.49%.

Moody's downgraded credit rating of 16 Spanish banks, citing that banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness. The rating agency believed the Spanish economy has fallen back into recession in first-quarter 2012 and it does not expect conditions to improve this year. Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain's biggest lenders, were cut 3 levels to A3. According to moody's, the downgrades were mainly driven by reassessment of each bank's standalone credit quality which is expected to deteriorate further in the coming year. However, the downgrades also reflected an assessment of reduced support from the Spanish government for 5 banks.

The downgrades also indicated that the reforms (including additional provision requirements for banks, availability of government capital injections, creation of a framework for bad banks and employment of independent audits) announced by the Finance ministry are views as insufficient to stem the problems in the country's banking sector.

In Greece, the latest polling result indicated that the pro-bailout New Democracy party has now 2 points leading over the SYRIZA party. If that's case in the reelection in June, the New Democracy party would be able to form a government with the Pasok party. A coalition government formed by these 2 parties is expected to be less aggressive in overthrowing the pre-agreed austerity measures and imply a lower chance of the Greek exit from the Eurozone.

While this has fueled some optimism, market sentiment was further dampened by disappointing US data. The Philly Fed Index surprisingly declined to -5.8 in May from 8.5 a month ago. The market had anticipated a rise to 12. Leading indicators contracted -0.1% in April, following a +0.3% gain in the prior month. These upstaged initial jobless claims which came in better than expected, rising +3K to 370K, compared with consensus of a gain to 375K.