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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%.

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Downgrade of Spanish Banking Sector Sent Financial Markets Lower

Gold lost some downside momentum ahead of 1523.9 support but there is not sign of bottoming yet. Further decline is still expected with 1564.4 resistance intact. Break of 1523.9 should target 1500 psychological level and below. Meanwhile, above above 1564.4 minor resistance will turn bias neutral and bring consolidations. But break of 1613 support turned resistance is ended to signal reversal. Otherwise, we’ll stay bearish even in case of recovery.

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Gold Daily Technical Outlook

Silver lost some downside momentum but there is no sign of bottoming yet. Further decline is still expected with 28.43 minor resistance intact, for 26.145 support and below. On the upside, above 28.43 minor resistance will turn bias neutral and bring consolidation first. But upside should be limited below 31.09 support turned resistance and bring another fall.

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Silver Daily Technical Outlook

Crude oil lost some downside momentum but there is no sign of bottoming yet. Further decline is still expected with 95.48 minor resistance intact, for 90 psychological level and below. Though, we’re expecting support from 61.8% retracement of 74.95 to 100.55 at 88.55 on initial attempt to bring recovery. So we’ll start to look for bottoming signal. On the upside, above 95.48 should flip bias back to the upside for a test on 100.68 support turned resistance.

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Crude Oil Daily Technical Outlook

Natural gas rises further to as high as 2.658 so far today as rebound from 1.902 extends. Further rally might be seen. But at this point, we’d still expect loss of momentum to keep upside limited at 2.742 and bring pull back. Below 2.387 minor support will turn bias back to the downside for a retest of 1.902 low.

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Natural Gas Daily Technical Outlook

Gold rebounded for the first time in 5 days. The benchmark comex contract slipped to the lowest level in 2012 at 1526.7 before ending the day at 1536.6 yesterday. The yellow metal has declined more than -7% since the beginning of this May. In the past, gold displayed safe haven appeal during uncertain situation. For instance in 2009-10, the metal surged to record highs as investors lost confidence on fiat currencies. However, at the current round of financial instability, investors fled to the US dollar instead and the negative correlation between gold and the greenback has showed a rising trend.

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Commodities Rebound after Massive Selloff but Likely be Short-lived

The failing euro currency is set to take a big fall in the next six weeks as talk surrounding a Greece exit from the shared currency gains momentum, with European politicians, bankers and even comments from the World Bank add to pressure on the Greek’s to bring back the drachma.

Economists have also warned that the Greek financial system could crumble within weeks or days unless the ECB (European Central Bank) steps up support.

Greece’s President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Greek drachma.

He cited central bank warnings that “great fear” might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties in May this year.

Run on Greek Deposits

Greek banks have lost 30 percent of their deposits since late 2009. The total fell to 171 billion euros in March. “The surprise is that there is still so much left. I can’t believe it will stay much longer.” said Simon Ward from Henderson Global Investors.

Greeks have withdrawn hundreds over a billion euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches.

Not a Matter for the ECB?

ECB President Mario Draghi said that under the EU treaty, it wasn’t his job to decide what happened to Greece.

“I want to state that our strong preference is that Greece will continue to stay in the euro zone. Since the treaty does not foresee anything on an exit, this is not a matter for the ECB to decide.”

Meanwhile, the European Central Bank has stopped offering liquidity to some Greek banks it does not consider solvent, and international concern about the euro zone rose as Athens called new elections that look set to be won by parties opposing austerity measures.

Risk of Contagion

The risk of the contagion spreading from Greece to bigger European economies that are vulnerable due to high debt or weak banks has sent stock markets and commodity prices tumbling, and driven Europe’s single currency towards its lowest levels this year.

“The core question will be not Greece, but Spain and Italy.” World Bank President Robert Zoellick said on Wednesday.

Political colouring of Europe’s leaders is rapidly changing. Ms Merkel has just suffered what she described as a “bitter and painful defeat” in an important state election. Her Social Democratic opponent argued that absolute austerity was wrong.

Then on Tuesday, the new French president, François Hollande, turned up in Berlin to meet the German Chancellor saying much the same thing. And in the Netherlands, traditionally a defender of financial rectitude, the tide is turning. Dutch voters, shortly to go to the polls, are becoming disenchanted with austerity.

Big Fall for the Euro Ahead?

As far as Greece is concerned, the majority of Greeks want to remain a country that uses the euro as their currency, however most are also opposed to the severe austerity measures being forced on them.

There is no real possibility that Greece can have it both ways, therefore one has to go and our prediction, along with many others is that a new government of Greece will have to return the country back to the drachma. This will have a big effect on how financial institutions view the stability of the euro currency and with that in mind, a realistic fall of up to 30 percent should not be ruled out. The only question remains is how fast can the euro fall from here.

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Euro currency set to take a big fall in the next six weeks as Greece exit gains momentum

The US Dollar Index is on a winning streak higher in currency trading this morning, rising for a 14th session, its longest rally since 1985 as the euro falls further into uncharted territory with more talk of Greece returning to the drachma.

On A Rally – Dollar Index

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 81.565 – 09.47 GMT today, from the session open of 81.504.

Euro Battering

The euro has suffered a serious battering this week, tumbling to a four month low of $1.2747 against the US dollar on Wednesday, May 16, as investors study the Greek situation with a growing sense of unease and reports emerge of Greek depositors withdrawing funds from Greek banks as the country’s fate hangs precariously in the balance.

Meanwhile, the European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.

Steen Jakobsen from Saxo Bank said outflows from Greek banks are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.

“This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion,” he said.

Banking giant JP Morgan believe that Greek banks have already exhausted their collateral. A refusal by the ECB to ease rules would amount to expulsion, forcing Greece “to issue its own money.”

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US Dollar Index on winning streak higher, rally not seen since the 1980?s

Market sentiment remained weak as the Greek situation worsened and the ECB announced that it would suspend lending money to the country’s banks. The Fed released a mildly more dovish minutes for the April meeting, indicating further easing cannot be ruled out if the economic situation deteriorates further. US data, however, delivered some pleasant surprise that lent some supports the market financial markets.

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Overhang in Greece Continues to Weigh on Markets

According to the DOE/EIA weekly report, total crude oil and petroleum products stocks jumped +2.87 mmb to 1073.97 mmb in the week ended May 11. Crude stockpile increased +2.12 mmb to 381.64 mmb as stockpiles all 5 PADDs. Cushing stock alone rose +1.00 mmb to 45.13 mmb. Utilization rate increased +1.9% to 88.3%.

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Crude Oil Inventory Soared More than Expected Last Week