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Thursday April 29, 2010 - 02:07:38 GMT
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Stocks Reverse Course after Fed Keeps Rates Low

U.S. equity markets rallied to a new high for the session after the Fed left interest rates unchanged at historically low levels and remained dovish in its statement regarding the future of interest rate hikes.

Earlier in the session the stock indices bent a little bit but did not break after the Euro broke sharply following an S&P Corp. downgrade of Spain’s debt. Although investors seem to be a little more cautious about holding long positions at current levels, they don’t seem as worried about the worsening situation in the Europe as they did on Tuesday. This could be because they feel a solution is close due to the on-going dialogue between Greece and the EU/IMF.

Technically, the June E-mini S&P 500 main trend turned down on the daily chart when the market broke through the last main bottom at 1179.75. The lack of follow-through after breaking this price indicates that there were more buyers looking to enter than sellers looking to pressure the short-side. The key will be what traders do when 1196.75 to 1201.50 is tested. If the market is topping then sellers will step in and form a secondary lower top. If the market is going higher then it should easily blow through this retracement zone.

June Treasury Bonds finished lower after tensions eased in Greece. Traders took profits early in the session when it became apparent that the EU/IMF was close to inking a 3-year deal with Greece to help with its debt crisis. Although the Fed said rates would remain low for “an extended period”, traders took this to mean it is getting closer to hiking rates. In other words, the Fed can’t lower rates from where they are. Demand for higher yielding assets kept the pressure on T-Bonds into the close.

June Gold traded higher despite the stronger Dollar. Investors were buying gold on speculation of the demise of the Euro. Buyers were clearly taking hedge protection against paper money in case the European debt problems begin to spread to the U.K. and Japan. A weaker Dollar is likely to underpin gold, however, if a bailout deal is approved between Greece and the EU, traders may begin lifting long hedge positions, putting downside pressure on precious metals.

June Crude Oil traded weaker this morning after the Euro broke on the Spain downgrade. Bearish traders believe the Greek debt problems will slow down growth in the Euro Zone and consequently hurt demand for energy products. The inability to crash the Euro today and optimism that a solution will be found regarding Greece, helped turn crude oil to the upside.

Technically, the daily closing price reversal in June Crude Oil could fuel the start of a 2 to 3 day rally. The minimum upside objective is 83.46 which has already been reached, followed by 83.97.

The June Euro tumbled to a new low for the year after Spain’s debt was downgraded to AA. Traders initially sold off the Euro in a knee-jerk reaction, but selling pressure quickly dried up. Although the Euro reached a new low for the year, the selling pressure was not as intense as Tuesday’s reaction. This was because investors had already discounted the possibility of the downgrade.

After bottoming about mid-morning, trading stabilized in the Euro until the early afternoon when the Federal Reserve released its policy statement. The FOMC kept interest rates at historically low levels and left its somewhat dovish statement intact. In other words, rates are to remain low for “an extended period”. Although the Fed sees improvements in the economy it still feels that unemployment is a problem as well as tight consumer credit. Furthermore it thinks the housing market can be improved. Once again the Fed stated that inflation is expected to be “subdued”. The Euro’s rally accelerated to the upside after the Fed’s statement was digested.

Wednesday’s trading action seemed to be indicating that traders had faith that a resolution between Greece and the EU/IMF would be reached soon. This was probably the reason for the less aggressive trading on the short-side. In fact, the way the market traded, it looks as if bottom-pickers were stepping in. At the close, the Euro formed a closing price reversal bottom which could lead to a 2 to 3 day rally and a retracement to 1.3403.

Bearish traders should remain cautious at current levels so they don’t get caught in a massive short-covering rally. There are still plenty of shorts still in the game, but it isn’t going to take much to encourage the weaker shorts to cover fresh losing positions.

It looks as if traders are backing away from aggressively shorting the Euro as long as the EU/IMF is still working out the details of the bailout. If anything should happen during the negotiations and talks were called off, then look for the Euro to plunge. As long as the bailout dialogue is open, it appears as if traders have priced in the worse case scenario for the time being.

Talk of a “fragile” economy and renewed concerns about the U.K. election led to a hard sell-off in the June British Pound on Wednesday. Investors are also concerned that the problems in the Euro Zone may soon spread to the U.K. This is the main reason why traders are worried about the May 6th election.

With the election too close to call at this point in time, traders are worried that the outcome may result in a hung parliament. If this occurs than it is possible that political uncertainties may result in a failure to achieve a balanced budget. This would cause more debt to be issued, leading to the possibility that the U.K. credit rating will be lowered. With an explosive situation brewing in Europe, it would not take much for debt issue problems to escalate in the U.K.

The strong recovery in U.S. equity markets helped pressure the June Japanese Yen. In addition, traders are worried that Japanese debt may be next in line to be downgraded. Like certain Euro Zone nations and the U.K., Japan has a huge debt problem on its hands which could lead to a downgrade. Not only are traders selling the Yen as a carry trade, but today it looked as if traders were pressuring the Yen in anticipation of a debt rating downgrade.

Renewed interest in higher yielding assets and lower interest rates in the U.S. helped drive the June Canadian Dollar higher. With the Bank of Canada already on record stating that interest rates are going to move higher in June and the Fed saying that U.S. rates will remain low for “an extended period”, the interest rate advantage has shifted to Canada. This is the primary reason for the strength in the Canadian Dollar on Wednesday. Longer-term traders should continue to support the Canadian Dollar because of the strengthening Canadian economy and the likelihood of a series of interest rate hikes over the next several months.



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