Firm Euro Helping to Boost Demand for Higher Risk Assets
The stronger Euro is helping to boost demand for higher risk
assets, underpinning global equity markets overnight. U.S. equity
indices finished last week higher, but the markets looked tired as the week-ended.
The stronger Euro is encouraging investors to ignore last weekâ€™s action and
instead turn their focus on the better returns being offered by equity markets.
Volume continued to look anemic last week but prices rose
anyway, making investors a little suspect as to whether this rally has enough
legs to continue at its current pace. Optimism because of the approval of the
EU/IMF financial aid package is renewing interest in holding higher yielding
At times last weekâ€™s rally looked labored despite a weaker
Dollar and signs that tensions regarding the fiscal concerns in the Euro Region
may be abating. This attitude appears to be shifting this morning. Last week traders
seemed a little hesitant to use the Greek news as a catalyst to drive the
markets higher, indicating that most are still reluctant to buy strength while
remaining in the â€śbuy the dipâ€ť mode. Risk sentiment appears to have shifted,
however as more details of the Greek plan emerged.
While the fundamentals may be encouraging a higher market, technically,
the March 25th closing price reversal top in the June E-mini S&P 500 was
confirmed which indicates further weakness is likely. The only way to negate
this developing formation will be with a rally through the recent top at
1176.50. The daily chart indicates that a trade through 1146.75 will turn the
main trend lower. If aggressive sellers hit this market, then look for a
retracement to 1128.25 over the near-term.
June Treasury Bonds finished the week sharply lower as
yields rose substantially. Increased supply of both Treasury and corporate debt
was the biggest concern amongst traders. Itâ€™s a buyers market with investors
given the opportunity to shop around for the highest yield. Although the Fed
says interest rates will remain low for an â€śextended periodâ€ť. The Treasury Bond action last week could also
be a signal that inflation is coming. Trading could be light and rangebound
this week until Fridayâ€™s U.S. Non-Farm Payrolls Report. A strong report is
likely to increase yields and send Treasury Bonds and Treasury Notes sharply
Technically, this market remains inside the 113â€™13 to 118â€™12
range with 115â€™29 to 115â€™10 a key retracement zone. The charts clearly indicate
that a break under 114â€™15 should lead to the first acceleration down. The
second acceleration point is 113â€™13. A break through both of these levels will
say a lot about where interest rates are headed. It looks as if the bond market
may be speaking a lot louder than the Fed when it comes to saying where
interest rates are trying to go.
The weaker Dollar is helping to boost demand for June Gold.
Based on the short-term range of $1133.90 to $1084.80, traders should look for
a minimum move into a retracement zone at $1109.30 to $1115.10. The downside
action last week has helped form another lower top on the weekly chart at
$1145.80. This longer-term chart shows clearly the developing downtrend. The
strength and direction of this market will depend on how much selling pressure
the Dollar receives.
The June Crude Oil weekly chart formed a new lower swing top
at 83.80. Based on the main range of 70.75 to 83.80, traders should look for
the break to continue with 77.28 to 75.74 the next downside targets. Although
the daily charts are beginning to turn a little bearish, a lot will be decided
by the direction in the Euro. A stronger Euro is likely to turn up the heat on
demand for higher yielding assets. This could encourage traders to buy crude
oil which would mean another test of the recent tops.
The U.S. Dollar is trading lower against most major
currencies as trader demand for risk is helping to pressure the Greenback. The
weakness in the Dollar is being attributed to optimism in the Euro Zone over
the potential positive impact of the new European Union and International
Monetary Fund bailout proposal for Greece. Before the New York session
opening, the theme of the day is demand for risk.
The June Euro is up for the second consecutive day as weak
shorts continue to cover after late last weekâ€™s EU and IMF proposal to help Greece should
it be unable to find financing in the capital markets. The proposal amounts to
a pledge to help Greece
out of the Euro Regionâ€™s biggest deficit if it runs out of traditional
financing options. Today, Greece
is expected to issue bonds priced in Euros. This will be the first test as to
how investors perceive the viability of the aforementioned bailout proposal.
The charts indicate the Euro has formed a new main range at
1.3817 to 1.3267. This range creates an upside target at the retracement zone
at 1.3542 to 1.3607. According to the CFTC Commitment of Traders Report, as of
March 23rd, hedge funds and large speculators account for a record net short
74,917 positions. The large number of shorts, the news regarding Greece
and the chart formation all suggest that this market is ripe for a
short-covering rally. Fresh buyers are likely to remain scarce until the Greek
economy can prove itself.
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