equity markets received a boost this morning after Warren Buffett defended Goldman
Sachs on CNBC. Traders bought Goldman Sachs shares, helping to drive up demand
for financial sector stocks.
The rally increased later in the morning after the release
of better than expected ISM Manufacturing and a Construction Spending
reports.The manufacturing report
indicated that the economy was expanding. The increase in construction spending
was a surprise. Most analysts had been estimating a decline. This may be sign
of improvements in the housing sector.
The strong rally in the June E-mini S&P 500 did not
change the trend to up, but it did erase most of Friday‚Äôs loss. The close put
the market at slightly better than 50% of the range from 1216.75 to 1176.75.
June Gold and June Crude Oil continued to rally on increased
demand for higher risk assets. Gold was also getting a boost from traders
speculating on the demise of the Euro.
Speculators drove up crude oil because of the spill in the
Gulf. Although experts say the spill should have no effect on the markets,
speculators believe it will lead to increased demand for Middle Eastern oil.The jump in ISM Manufacturing also indicated
an expanding economy. This is likely to lead to an increase in demand for
The June Euro remained under pressure on Monday despite an
announcement by Greece,
the European Union and the International Monetary Fund that a 3-year bailout
package has been reached which will provide as much as $146 billion for the
The bailout agreement which was highly expected failed to
restore confidence to the Euro, most likely because speculators still believe
the sovereign debt problems in the Euro Zone are likely to spread to Spain, Portugal
Each recent rally in the Euro has been met by more selling
pressure which has triggered a break to a new low for the year. This pattern is
expected to continue as the direction of the Euro is clearly in the hands of
the shorts. Recently released Commodity Futures Trading Commission Commitment
of Traders data shows that hedge funds and other large speculators are
dictating the direction of this market. The report shows that these large
traders increased net wagers on a Euro drop by 25% to 89,013 contracts in the
week ended April 27th.
Clearly if large traders believed that the bailout package
was going to save the Euro, the number of net shorts would have decreased. The
increase in the number of net shorts indicates that bearish traders are gaining
confidence in the possible demise of the Euro. Last week the S&P Corp.
downgraded the debt rating of Spain
This action helped throw fuel on the fire as it no doubt confirmed to the
bearish traders that they were trading the Euro from the right side.
Although the Greece
bailout package may be providing the nation with some breathing room, the
market is saying that traders remain cautious. It is easy for the policymakers
to require beaten countries like Greece to agree to more austere
financial measures, but it is another thing to make them follow the new rules.
The Euro is also under pressure from traders who simply
believe the Euro Zone is going to be mired in this financial crisis for some
time. In addition to expectations of contagion in the region, some bearish
traders are increasing bets that the European Central Bank will not be able to
raise interest rates during a time period when most major industrial nations
are considering rate hikes. Other traders believe that the situation in the
Euro region will grow to the point where credit markets become locked up much
like they were during the height of the Lehman debacle. Putting everything
together, it looks as if the situation is likely to worsen which means downside
pressure will remain on the Euro.
The weakness in the Euro and concerns about European
sovereign debt issues also spread to the June British Pound on Monday. Not only
do British Pound investors have to be worried that its sovereign debt will get
downgraded by a credit ratings service, but they also have to deal with the
possibility of hung parliament after the May 6th election.
According to recent polls, the U.K. election is too close to call.
This means the election may result in no party having a majority in parliament.
Without a majority calling the shots, it seems unlikely that the parliament
will be able to tackle its sovereign debt problems and its budget deficit.Without guidance and direction, the
government may be unable to come up with a viable plan to fight its fiscal
issues, if this occurs, then look for the U.K. debt rating to be slashed at
some point this year. This action will compound the weakness in the British
Pound and drive the currency lower.
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