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Tuesday November 3, 2009 - 13:48:47 GMT
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Risk Aversion Drives Dollar Up and Equities Down

The U.S. Dollar is trading sharply higher overnight as investors are once again becoming more risk averse.  This week, investors are facing three major central bank meetings and the U.S. employment report.  Investors are worried about the central banks removing government stimulus, and its possible negative impact on the economy, particularly the financial sector.


Yesterday, U.S. manufacturing and home sales fueled a rally in the equity markets early in the session, but fear that a recovery in the economy will lead to the government and the Fed cutting stimulus helped kill the rally and break the market.  Although the stock indices finished higher for the day, buyers were tentative. 


Investors want to know the Fed’s exit strategy before committing to the long side of the stock market.  The market appears to believe the Fed will raise rates in the middle of 2010, but is uncertain as to how or when the Fed will start to withdraw stimulus money.  This uncertainty triggered profit-taking last week, but yesterday’s action indicates that traders are beginning to get short as traders are now selling rallies.


The financial sector in particular is getting hit hard by selling pressure.  This weekend’s bankruptcy filing by CIT is an indication of just how fragile the financial sector continues to be.  Each week more and more banks are being taken over.  Higher gold prices and a rising VIX Index are all indicators of worry and fear.


Downside pressure is on the equity markets overnight.  Both Asia and Europe are down.  This is leading to the call for lower U.S. equity markets on the opening.  Thin trading conditions ahead of tomorrow’s Fed meeting could create volatility and huge two-sided swings very similar to yesterday’s trading action.  Look for traders to go after 1020 to 1015 in the December E-mini S&P 500. 


Treasury futures are trading better this morning.  Yields are falling as traders move money from equities to the safety of the U.S. Treasury market.  There is not much speculation going on in the December Treasury Bonds and Treasury Notes this morning.  Trading is expected to be tight and rangebound ahead of the Fed meeting on November 4th, but ranges could be expanded if the stock market breaks hard.


The U.S. Dollar is trading sharply higher.  Traders are becoming more risk averse.  This is driving traders out of the higher yielding currencies like the Euro and Swiss Franc.  Falling commodity prices are putting pressure on the Canadian Dollar.  The thought of an extension of the Bank of England’s asset purchase program is pressuring the British Pound.  The Japanese Yen is flat but could rally sharply higher if the U.S. stock market breaks.  Overnight the Reserve Bank of Australia hiked its benchmark interest rate by 25 basis points, but guidance suggested no rate hikes for a while.  The Aussie broke on the news.  This is helping to put pressure on all higher yielding currencies.


The weaker Dollar is putting pressure on December Gold but losses have been limited.  It’s been reported that the International Monetary Fund sold 200 metric tons of bullion to the Reserve Bank of India for about $6.7 billion.  This got the gold market agitated yesterday and triggered the strong surge.  Banking issues and failing equity markets is putting fear in the markets which is giving gold support.  It’s not all about the Dollar at this time so don’t expect gold to move lock-step with the U.S. Dollar’s swings.


December Crude Oil is expected to open lower.  The stronger Dollar is putting pressure on commodities.  Fear that the economy may stall if the Fed and the government begin to cut off stimulus is putting some pressure on energy prices.  Supply and demand figures suggest the recent rally was speculation.  Look for weakness to take this market to $73.70 to $71.83.  Once the speculators throw in the towel on the long side, look for a sharp break.


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