Friday August 28, 2009 - 12:41:24 GMT
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Demand for Higher Risk Assets Drives Equities and Energy Higher
Traders are looking for a higher opening in U.S. equity markets this morning based on a follow-through rally overnight. Yesterday, equity markets fell sharply lower but were quickly bought up when crude oil reversed its intra-day trend and started to rally. This move ignited renewed interest in higher risk assets.
Treasury markets finished lower yesterday and are called lower this morning. This weekâ€™s auctions were well received but the turnaround in the stock market led to a sell-off signaling that traders are still looking for higher yields. Demand for treasuries could drop today as more attractive yields in Japan could lead foreign investors to shop elsewhere for a better return on investment.
Yesterday it was reported that U.S. Second Quarter GDP eased to a 1% decline after posting a drop of 6.4 % during the first quarter. Today traders will react to July Personal Income and Spending. These reports are expected to show declines as consumers continued to hold on to their money. Michigan Sentiment will also be reported. The forecast is for an increase in consumer confidence because of the strong rise in equity markets.
The U.S. Dollar is trading lower against most major currencies overnight. This weakness is a continuation of yesterdayâ€™s action which saw the Dollar settle lower after a late session surge in U.S. equity markets and crude oil.
Overnight a report showed that the U.K. economy contracted less than previously estimated in the second quarter. Economists had been forecasting a decline of 0.8% for the U.K. Second Quarter GDP. The actual number showed a smaller contraction at 0.7%. Some analysts feel that this is a sign the worst of the recession may be over.
Technically, yesterdayâ€™s closing price reversal bottom on the daily chart was confirmed overnight with follow-through buying. Based on the short-term range of 1.6627 to 1.6152, traders should look for a minimum retracement to 1.6390 to 1.6446.
With the main trend down, look for new selling after this retracement zone is tested. Fundamentally, pressure is still on this market because of the Bank of Englandâ€™s decision to increase the amount of funds available for quantitative easing. Traders also feel that the U.K. will lag the U.S. and Euro Zone economies during the recovery from the recession.
Look for a higher opening in the September Euro this morning. It looks as if traders are beginning to lean on the Euro to recover from the recession before the U.S. Dollar.
This morning European confidence in the economy increased twice as much as traders had forecast. This gave the Euro a boost following yesterdayâ€™s strong late session rally. Increased demand for more risky assets like equities and commodities also helped generate fresh support for the Euro.
Technically, the Euro cleared a major series of retracement levels to put it in a position to rally further. The main trend is up with 1.4449 the next target. The first sign of weakness will be a break back into the retracement zones.
Stronger equity markets overnight are helping to put pressure on the September Japanese Yen as traders may be renewing their interest in the carry trade. For almost the entire month of August, Japanese investors have been repatriating funds out of fear of a correction in U.S. equity markets. Japanese investors have also been buying Yen because of the possibility that Chinese financial officials will cut liquidity in order to clamp down on over capacity and reckless lending practices. Technically this market has to hold uptrending Gann angle support at 1.0603 or this market could collapse to the downside.
The inability to break the September Canadian Dollar through support at .8987 despite bearish comments from a Bank of Canada official earlier in the week has triggered a short-covering rally overnight. The BoC is concerned that a high priced Canadian Dollar will hurt economic growth.
Yesterdayâ€™s late session reversal in crude oil and equity markets helped ignite a short-covering rally while driving the market into a retracement zone at .9198 to .9247. Higher energy and stock prices today could help support this market today.
The weaker Dollar could boost December Gold today. The direction of the Dollar continues to exert the biggest influence on this market because of the lack of inflationary news. December Copper traders are still monitoring the situation in China. Talk is circulating that China will soon take action to curb over capacity and reckless lending. This could lead to a slowdown in demand for industrial metals.
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