Stocks Recover after Obama fails to Scare Investors
U.S. stock markets surged
following early weakness after President Obama failed to reveal any new plans
to regulate U.S.
financial markets. On the opening stocks were down because of escalating Greek
debt problems and fear that Obama would announce more austere financial market
Later in the day, stocks began to recover after selling dried up following
the release of better than expected existing home sales. President Obamaâ€™s
speech served as a catalyst after the mid-session and into the close. Traders
seemed to show little reaction throughout the session after the Euro touched a
new low for the year.
Although investors will be keeping one eye on the situation in Greece, they
seem to be reacting as if the problem is becoming manageable.
June Treasury Bonds and June Treasury Notes both posted daily closing price
reversal tops, perhaps signaling the end to the current rally. The Treasuries
began their slide after U.S.
equity markets bottomed. Traders had been buying T-Bonds and T-Notes in
anticipation of a break in equity markets due to Greece concerns, worries about
corporate earnings and President Obamaâ€™s speech.
June Crude Oil failed to break to the downside after stocks began to recover.
Todayâ€™s action surprised short traders because of the weaker Euro and the
stronger Dollar. Crude oil found buyers right after a slight penetration of the
recent bottom at 82.05. The strong close has this market in a position to turn
the main trend back to up on a trade through the last swing top at 84.64.
Traders do not seem to be paying too much to the supply/demand fundamentals
instead choosing to concentrate on the risk sentiment for direction.
The stronger Dollar kept pressure on June Gold throughout the day until
about the mid-session when demand for higher risk assets began to increase. On
the upside, $1147.50 to $1153.00 continues to remain a resistance zone. A break
through $1124.30 will turn the main trend lower.
After a healthy three-day rally, the GBP USD closed lower following the
release of a worse than expected U.K. retail sales report. March retail sales
showed an increase of 0.4%. The increase was less than economist estimates of
0.6%. Traders reacted by selling the British Pound as the report indicated the
possibility of slower growth in the economy.
Earlier in the week, the British Pound rose after the government reported
higher than expected consumer inflation. This news triggered a rally in the Sterling, but gains were
limited on election concerns. Recent polls are showing the May 6th election may
result in no party have a significant majority. This could lead to a hung
parliament meaning legislation to cut the U.K. deficit may be limited.
The Euro touched a new low for the year, taking out the late March bottom at
1.3267. Although the break to 1.3257 was met with profit-taking and bottom
picking, the fundamentals are still suggesting that this pair has a long way to
go before support is established.
By all reports, Greece
continues to move closer to sovereign debt default. It looks as if the bailout
from the EU/IMF proposed earlier in the month will not be enough to meet Greeceâ€™s
financial obligations. The cost to finance the debt is sky-rocketing so unless
there is a plan in the works to rewrite Greeceâ€™s financial obligations it
looks as if it has no choice but to default. Contagion is another concern for
investors. As the Greek financial situation worsens, so do the financial
problems in Portugal and Spain.
The spread between Greece Bonds and German Bunds continues to be the best
indication that there is risk of default. Yesterday this spread traded over 500
basis points. On Thursday, the Dollar rose against the Euro despite on-going
talks to activate the loan agreement between Greece and the International
Monetary Fund. Short-traders believe there is not enough money in this
agreement to help Greece
over the long-run.
Overnight Fitch Ratings issued a statement which could weigh on the Japanese
Yen over the near-term. In commenting on the level of Japanese debt, Fitch said
the Japanese government â€śis one of the most indebted in the world.â€ť It further
added â€śIn absence of sustained economic recovery and fiscal consolidation,
government debt will continue to rise, placing downwards pressure on sovereign
credit and ratings over the medium term.â€ť
The initial reaction by traders drove the USD JPY to 93.34, but weakening
demand for higher yielding assets helped the Japanese Yen recover as investors
sought safety in lower yielding assets. A late session turnaround in U.S. equity
markets helped drive down demand for lower yielding currencies, triggering a
surge in the USD JPY. The rally helped take out earlier resistance at a 50%
level at 93.18, sending this pair to the .618 level at 93.55.
The USD CAD confirmed Wednesdayâ€™s closing price reversal bottom at .9929.
There was very little follow-through to the upside however, as a late session
surge in demand for higher risk assets helped to limit gains.
On Wednesday, the USD CAD hit a new 22-month low but there was very little
follow-through to the downside. This is usually an indication of an oversold
market. Technically, the closing price reversal bottom indicates an impending
short-covering rally which could send this pair up to 1.0072 to 1.0106. It
looks as if increased demand for higher yielding assets will dictate the
short-term direction of this pair. The longer-term outlook is for the Canadian
Dollar to appreciate against the U.S. Dollar due to a better economy and higher
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