Risky assets under pressure; Weaker Euro, Pound to blame
Stock indices, gold and crude oil are all expected to open
lower due to lower demand for higher yielding assets. The weaker Euro and
British Pound are helping to spread fear and uncertainty around the markets
The June E-mini S&P 500 is expected to open lower after
yesterday closing price reversal top was confirmed. The daily chart indicates
that a break to 1198.25 to 1194.00 is likely over the near-term.
June Treasury Bonds are expected to open higher due to
increased demand for safety and lower yielding assets. Gains could be limited
as traders may be a little reluctant to increase their long positions amid this
weekâ€™s auction and subsequent increases in supply.
The stronger Dollar is pressuring June Gold and June Crude
Oil. Both markets are also down because of the weaker Euro. Goldâ€™s losses could
be limited if speculators decide to buy the metal as a hedge against a collapse
in the Euro.
Uncertainty over whether a Greece
financial aid package would be worked out in the short-run and fear that
sovereign debt problems are spreading across Europe
to other countries is pressuring the Euro overnight.
The lack of clarity is helping to pressure the Euro.
Investors were expecting to hear by now that the European Union and
International Monetary Fund were on the same page with Greece and that a
bailout plan was getting close to be hammered out. Instead uncertainty
continues to linger and the Greek financial problems seem far from over.
One of the problems is investors want to know how the
borrowing mechanism proposed by EU/IMF a couple of weeks ago works. Itâ€™s one
thing to propose a bailout plan, but apparently another thing to actually know
the details. It now appears that the original proposal was enacted to try to
stem the decline in the Euro rather than fix what ails Greece.
Another issue plaguing a quick solution to the problem is Germany.
Clearly Germany does not
want to fund any plan to bailout Greece with the struggling nationâ€™s
promise to make even more austere budget cuts than previously agreed upon
several weekâ€™s ago.
As long as the debate goes on, the Euro is expected to
weaken. This is twice within the past month where good news triggered a
short-covering rally only to be met by fresh shorting pressure. Overnight the
spread between Greek Bonds and German Bunds neared 700 basis points. This
indicates that fear and uncertainty is driving the markets and that capital
market traders may be in charge of Greeceâ€™s fate rather than the EU
and the IMF.
Overnight additional information from Portugal showed that the cost of
insuring its debt also widened. This is causing more uncertainty and leading to
speculation that the Euro is on a path that could eventually destroy the
structure of the main European currency.
Look for traders to keep the pressure on the June Euro over
the near-term. Volatility will remain high as the Euro will be sensitive to
various news stories breaking throughout the day.
After looking like it was going to emerge as the strongest
currency yesterday, the June British Pound is now trading as the weakest
overnight. Once again the combination of uncertain election news and weaker
than expected economic data is helping to pressure the British Pound just a few
days after the economy appeared to be getting back on track and one day after
traders had swept aside political fears.
Overnight traders are reacting negatively to weaker than
expected U.K. Retail Sales Growth and mortgage approvals. April retail sales
growth was reported at +13 but economists were looking for a +15. The number of
mortgage approvals in March rose to 34,905 but lending only rose by 2.4 billion
pounds. This was the smallest increase since July 2009 and indicated the
housing market was still a drag on the economy.
In addition to the economic news, it was reported that
another election poll shows that the election is too close to call and that it
appears that there is still no clear leader. Without a majority leader in the
polls investors are uncertain whether parliament will be able to agree on the
austere measures needed to shore up the countryâ€™s budget.
The weaker Euro and British Pound are helping to drive down
demand for higher risk assets. This is helping to put selling pressure on
commodity-linked currencies such as the Canadian Dollar, Australian Dollar and
New Zealand Dollar. Weaker global equity markets are helping to drive up
interest in the lower-yielding Japanese Yen.
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