Positive market sentiment proved to be short-lived and investors trimmed their positions after the Chinese government denied plans to add stimulus to boost domestic economic growth. Deterioration in macroeconomic conditions in Spain and further rating downgrade sent the euro below 1.25 against the greenback. Gold was hit hard with the benchmark Comex contract plunging -1.29% to settle at 1548.7. Crude oil prices were also under pressure with the front-month contracts of both WTI and Brent crude hovering around recent lows.

Financial markets were lifted yesterday amid speculations that the Chinese government would add stimulus to bolster growth. However, Xinhua news stated that the Chinese government's intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth and current efforts for stabilizing growth will not repeat the old way of three years ago. This has inevitably dampened sentiment and led to expectations of further slowdown in the world's second largest economy.

Worries over the peripheral economies in the Eurozone have spread from Greece to Spain. On the dataflow, Spain's real retail sales plummeted -9.8% y/y in April, the largest decline since the data began in 2004. The country GDP is expected to contract more than -0.6% q/q in 2Q12, following a -0.3% drop in the first quarter. Concerning the recapitalization of Bankia, it's reported that the ECB has rejected the government's plan to recapitalize the bank with government bonds as it violated EU rules against central bank funding of governments. Meanwhile, Egan-Jones , a US rating agency, cut Spain's sovereign rating, for the 4th time since April, to B from BB-. The agency cited that Spain will inevitably be faced with payments to support a portion its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. The downgrade, together with the gloomy economic outlook in the country, sent the single currency below 1.25 against the US dollar.

On the dataflow today, the Eurozone economic confidence probably slipped -0.9 points to 91.9 in May while other confidence indices are expected to have dropped from the prior month. In the US, pending home sales probably dipped -0.1% m/m in April after a +4.1% gain in March.