U.S. Equity Markets firm after EU agrees on Financial Aid Package
stock markets are trading higher after the European Union, led by France and Germany,
agreed on a bailout plan to help Greece. The news spread quickly
throughout the equity markets as traders covered short positions initiated
after Thursday reversal to the downside. The early reaction to the upside could
set the tone for the day as it may be an indication that traders will be
looking for risk today, now that the fear of a breakdown in the Euro has been
June Treasury Bonds are trading higher and inside of
yesterdayâ€™s range. Overnight this market found support at a .618 retracement
level at 115â€™06. Further selling pressure could force a challenge of an old
main bottom at 114â€™15. Yields have risen quite a bit this week because of the
increased supply of government debt hitting the markets. Not only is the
government looking to borrow, but corporation have also begun to look for
investors. This increase in competition for debt is encouraging the investor to
ask for a higher yield. Todayâ€™s T-Bond auction results could move this market
as well as the stock market this afternoon.
The weaker Dollar is helping to trigger a rally in June
Gold. The main trend is down, so donâ€™t expect this market to rally too high.
Based on the short-term range, expectations are for this market to run into
resistance in a retracement zone at $1109.30 to $1115.10.
June Crude Oil is trading firm this morning because of the
weaker Dollar and stronger Euro. The main trend turned down earlier in the
week, but there was no follow-through to the downside to trigger further
weakness. Traders are ignoring the bearish fundamentals at this time and
instead are focusing on the direction of the Dollar and events out of the Euro
Zone. Look for this market to remain rangebound unless 83.80 is taken out on
the upside or 79.77 is violated on the downside.
Although the Euro Zone situation will be on the minds of
traders throughout the day, this morning, U.S. GDP and Consumer Sentiment could
be an early session catalyst.Economists
are looking for GDP growth for the fourth quarterâ€™s second estimate to be up
5.9%.The University of Michiganâ€™s
Consumer Sentiment Index is expected to come in at 73.0. A downward revision
will reflect the negative attitude of consumers without jobs. In addition,
higher gasoline prices may weigh on the index.
After falling to take out Thursdayâ€™s low, the June Euro
strengthened on the news that Euro Zone leaders agreed on a financial aid
package for cash-strapped and debt-laden Greece. In keeping with its mandate
not to provide direct bailout aid to a European Union member, the EU nations
agreed to provide approximately $30 billion in loans should Greece have problems borrowing
money to service its high debt levels.
Although this news has triggered a short-covering rally in
the Euro overnight, traders are approaching the news with caution. The initial
reaction is that the deal could ease tensions and calm fears that Greeceâ€™s
sovereign debt problems will spread to other Euro Zone nations. Most traders do
believe that this deal is enough to stop the slide in the Euro, but not enough
to turn the bearish trend around.
At Thursdayâ€™s New
York session close, such a bailout deal looked pretty
remote. The Euro was breaking into the close of the session, driven lower by
comments from European Central Bank President Trichet saying that a bailout
from the International Monetary Fund would be bad for the Euro. His feeling was
that help from the IMF would make the EU look weak and unable to take care of
its own financial problems. Going home after the U.S. close, traders felt that a
deal was far from being made.
Traders became more optimistic about the prospects of a deal
when a plan endorsed by France
was agreed upon. The new deal calls for a mix of IMF and bilateral loans.Afterwards, Trichet embraced the proposal
saying he was â€śextraordinarily happy that governments of the Euro area found
out a workable solution.â€ťHis statement
amounted to an about face from a statement earlier in the day when he said that
an IMF role in the funding of a rescue plan for Greece would be â€śvery, very
Trichetâ€™s acceptance of the plan was mostly responsible for
the overnight short-covering rally. His acceptance of the proposal helped ease
concerns that Euro Zone officials would be unable to resolve the fiscal
problems in Greece.
Whether a turnaround in the Euro today marks a major bottom
is really up to the hedge funds at this time. Recent data suggests that hedge
funds and large speculators remain net short the Euro in a big way. Until these
large traders are forced to cover shorts or turn into buyers, expectations for
a rally will be limited. The whole process of debating about financial aid for Greece
has shaken investor confidence in the entire Euro Region.
Although the bailout news is triggering a short-covering
rally overnight, the Euro has not yet even reached the old bottom at 1.3440.
Regaining this price could trigger more short-covering, but unless this market
finishes over last Fridayâ€™s close at 1.3529 to produce a weekly closing price
reversal bottom, the Euro doesnâ€™t look very strong yet.
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