Thursday November 5, 2009 - 13:15:13 GMT
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Bank of England Policy Decision Could Trigger Volatile Moves
Yesterday the Federal Reserve laid out the groundwork for another 30 days of increased demand for higher yielding assets by remaining committed to low interest rates for an â€śextended periodâ€ť of time. Traders reacted on Wednesday as if this news was already in the market. This makes today important because the inability to follow-through to the upside in the currencies, crude oil and equities could trigger a massive liquidation break.
The Bank of England is the wildcard today. This is because the trading action in the GBP USD this week seems to indicate that speculators have taken out the possibility of an extension of the central bankâ€™s asset purchase program. Since the U.Kâ€™s poor Third Quarter GDP number was released two weeks ago, traders had been pricing in the likelihood of an extension of the BoEâ€™s $285 billion asset buyback program. This stimulus plan was designed to pump money into the economy and increase the money supply, hoping to encourage banks to make more credit available to the private sector.
Whatever the BoE does will be a market mover. If it votes to extend, then look for the British Pound to break. If it leaves it intact or cuts funding, then look for the Sterling to break 1.6700.
U.S. equity markets traded sideways-to-lower overnight. Yesterday the December E-mini S&P posted its high for the day early in the session and never looked back. This came as a surprise because the Fed said nothing that could be interpreted as bearish. Yesterdayâ€™s action could be indicating that investors are becoming more concerned about valuation rather than momentum. The key area the S&P has to overcome is 1062.50. The inability to take this price out should weaken the market. 1041.75 should act as a pivot price. A sustained move under this price is likely to encourage more selling pressure to 1026.00 then 1015.00.
Treasury futures are trading higher this morning. The December Treasury Bonds have been taking the possibility of higher rates hard, but seem to be holding a key retracement zone at 118â€™24 to 117â€™18. This zone is acting like a balancing point between the August 7th bottom at 113â€™17 and the October 2nd top at 123â€™25.
Look for the T-Bonds to remain inside 117â€™18 to 118â€™24 until traders become more certain about the direction of interest rates. This could come tomorrow following the release of the U.S. Non-Farm Payrolls Report.
The upside momentum in the December Gold seems to be slowing. Traders backed off from the long-side yesterday when the market approached $1100. All of this weekâ€™s upside activity has been fueled by speculators anticipating more buying from central banks. The direction of the Dollar has really not been a factor but things could change today if the Dollar begins to mount another strong rally. This could weaken gold and send it back to the old top at $1072.00.
Despite December Gold making a new all-time high, the trend in December Silver remained down. This divergence between gold and silver indicates that the move in gold was related strictly to excess demand. Some traders may also be using Silver as a hedge.
Pressure could be on December Crude Oil today if demand for higher yielding assets declines. Lower equity prices and a stronger Dollar could help contribute to the weakness. Yesterday the weekly supply and demand report showed a surprise drop in supply by 4 million barrels. This could be a sign of increasing demand. This market is being run by speculators now so if demand for higher risk assets falls then look out below. The trend will turn down if 76.55 is violated. The top is 81.99. Yesterdayâ€™s failure to take this price out on good news could be indicating a possible top.
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