stock markets finished sharply lower on Friday although a short-covering rally
late in the session pared a decent portion of the loss. The indices accelerated
to the downside after the Euro broke through last weekâ€™s low at 1.2518.
The move in the Euro began as a report that Franceâ€™s
president had threatened to pull his nation out of the Euro Zone. French
President Nicolas Sarkozyâ€™s comments reignited the fear of a collapse in the
currency. Traders divested out of higher risk assets pressuring U.S.
Fear that the collapse in the Euro Zone will plunge the
world into another recession weighed on investorâ€™s minds as they pared
positions in anticipation of reduced future earnings.
The drop in the Euro spread worry throughout the global
equity markets which began to weaken overnight. This set up the U.S. equity
markets for the break following Thursdayâ€™s closing price reversal top.
Technically, the June E-mini S&P 500 is set up to
retrace at least 50% of the week-long rally. The move from 1056.00 to 1174.75
creates a retracement target at 1115.50 to 1101.50.
Pressure is on the June E-mini NASDAQ this morning.
Thursdayâ€™s closing price reversal top sets up a potential break to 1856.00 to
The bearish closing price reversal top on the daily E-mini
June Dow charts sets up a potential retracement to 10376 to 10251.
Stocks will take their cue from the Euro on Sunday night.
The weak close in the Euro has this currency in a position to take out the
so-called â€śLehman Brothers Lowâ€ť at 1.2329. At the time this low was made in
2008, the world was going through a credit crisis. Nonetheless, a break through
this level next week could trigger a psychological breakdown in the equities as
it will mean that the global economy is well on its way to repeating the same
mistakes which triggered the start of the sell-off in late 2008 and early 2009.
June Treasury Bonds soared on Friday in a flight to safety
rally. Based on the short-term range of 124â€™16 to 119â€™26, the market rallied
into the retracement zone created at 122â€™05 to 122â€™23. With equity prices
plunging and fear spreading across Europe,
traders want the protection the Treasury markets offer. Fridayâ€™s action was
relatively calm compared to last weekâ€™s movement.
The falling Euro and the strong Dollar did not trigger a
breakout rally in June Gold as expected. This came as a surprise, but it could
be related to margin calls in the equity markets. For weeks, gold has become
the safe haven currency. During the Greece financial crisis, money was
flooding into gold, driving it to an all-time high. At this time, Gold is
barely holding onto its gains which could be a reflection of margin calls
hitting stock traders. Traders often begin liquidating speculative positions to
meet margin calls in investments. This may have been the case in gold this
Technically, June Gold made a daily closing price reversal
top at $1249.70. Although it doesnâ€™t appear that the trend is getting ready to
turn down, this pattern may trigger a correction to $1203.00 to $1191.90.
June Crude Oil collapsed on Friday on the Euro break.
Bearish traders are becoming more confident that the problems in the Euro Zone
are going to slow down demand for crude oil. Downside momentum suggests that
70.75 is the next target over the near-term. Earlier in the week, a report from
the Energy Information Administration started the break with a report showing
that inventories had risen more than expected.
The June Euro touched its lowest level since October 2008 on
Friday as investors continued to pull out of the currency on the fear that
political and economic problems will lead to a collapse of the Euro Zone
economy. The rapid decline is pushing toward the so-called â€śLehman Brothers Low
at 1.2329. This support was established at the height of the global credit
crisis and marks a time when a global financial disaster was avoided.
Although some feel that the worldâ€™s financial system is
better prepared for a credit shock than it was back in 2008, a break through
this level will have psychological ramifications as well as symbolic meaning.
It will be used as a benchmark among global investors who will question whether
the world has learned anything following one of the greatest financial meltdownâ€™s
Besides the risk of sovereign debt default, investors are
now becoming concerned about the lack of activity and the inaction from the
European governments. Once again investors are asking the question â€śwhere is
the union in the European Unionâ€ť.
The inability to stop the slide in the Euro by pumping $1
trillion into the economy with basically debt on top of debt has convinced
investors that the EU has and had no plan to prevent the kind of currency
slaughter taking place at this time.Investors have grown weary of the reactive moves by the governments and
want to see more proactive action.
From the start investors have been asking for clarity from
the EU. No one wants to see a currency collapse, but without a firm plan in
place investors have had no options to consider except to sell the Euro.
Friday morningâ€™s selling pressure was rumored to have been
triggered by a story in a Spanish newspaper saying that French President
Nicholas Sarkozy was threatening to pull out of the Euro. Although his
statement has been denied a few times this morning, traders donâ€™t seem to
believe the denial.
Although the French have denied the negative statement from
President Sarkozy, the Euro continues to remain fragile. After Sarkozyâ€™s
denial, rumors began to circulate that serious discussions may be going to
decide the ultimate fate of the Euro. At this time emotions are running high in
the Euro Zone as it is becoming clearer that the financial cuts necessary to
make Europe financially sound will have huge
Even former Federal Reserve Chairman Paul Volcker has a
gloomy outlook for the situation. On Thursday during a stop in London he said â€śYou have
the great problem of a potential disintegration of the Euro. The essential
element of discipline in economic policy and in fiscal policy that was hoped
for has so far not been rewarded in some countries.â€ť
As support continues to erode for the Euro discussions will
increase as to how it will survive when there continues to be such a huge
disparity between those countries that have and those nations that have not.
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