Treasury Bonds Soar as Stock Market Jitters Drive Investors to Safety
Flight-to-safety buying drove June Treasury Bonds sharply
higher. Thursday morningâ€™s trading action took out the recent high at 124â€™16.
Upside momentum seemed to be indicating that another surge was likely. The move
in the T-Bonds looks more reactionary than speculative with investors taking
their cues from the falling equity markets.
June Crude Oil traded sharply lower on its expiration day.
The price action seemed to be indicating that no one wants to own crude oil.
Liquidation of risky assets was one reason for the weakness. Traders have been
treating crude oil as a hedge against the Dollar. Now that the U.S. Dollar is
clearly on a path to move higher, there doesnâ€™t seem to be any reason to hold
on to long crude oil positions.
Fundamentally, a slow down in the global economy is likely
to lead to a drop in demand for energy products. This will no doubt help drive
up oil inventories. The break through the February bottom at 72.43 by the
September contract indicates that more downside pressure can be expected.
June Gold traded lower, but downside momentum appears to be
slowing. This means that gold is nearing a value area which may be attractive
to buyers. The charts indicate that a 50% level at $1167.90 is likely to be
tested. Donâ€™t be surprised if fresh buyers show up to trigger a technical
equity markets traded sharply lower as large investors dumped positions due to
the lack of clarity from financial market regulators in Europe and the U.S.
Technically, all three major stock markets seem to be
getting drawn to the spike bottoms put in during the first week in May. The low
target price in the June E-mini S&P 500 is 1056.00. The June E-mini
NASDAQâ€™s target is 1730.25 and the June E-mini Dow has a downside objective of
The June Euro confirmed Wednesdayâ€™s closing price reversal
bottom and surged to the upside on Thursday. Based on the chart pattern,
traders should look for this move to continue with 1.2742 to 1.2884 the next
upside target zone.
All day long the market was flooded with negative chatter
about the Euro which turned out to be the sign that too many people were short
the currency. Often times a market will go down until the weakest short puts on
a position and this may be the case with the Euro since the whole world has
known about the debt problems in the Euro Zone since January.
Traders are citing the cause for the reversal in the Euro as
two key events. The first was already mentioned, the huge amount of shorts in
the market. The second was a slightly positive reaction to moves by European
Union government officials. Although no solid â€śintelâ€ť has come out of the not
so secret meeting being held by the EU nations, traders reacted today as if â€śno
news is good newsâ€ť and covered their short positions.
Rumors circulated throughout the day about a secret meeting
of the European Central Bank. Since an aid package has already been proposed,
some traders are surmising that an interest rate cut to zero or an intervention
may be being considered. An intervention doesnâ€™t make sense because buying
oneâ€™s own currency is usually met with equal or greater selling pressure. An
interest rate cut to zero will help provide liquidity to the Euro Zone but at
the same time signal that the ECB believes there will be no growth in the
Whatever happens will definitely contribute to the
volatility in the Euro. This is because investors are screaming for clarity and
action. They are tired of getting half-heartened attempts to shore up the
economy along with virtually no decisive action. Although EU officials are
downplaying expectations of any effort to underpin the Euro, traders seem to be
taking no chances after the recent huge sell-off and are taking money off the table
to protect their profits.
In other action today, traders dumped higher risk assets,
driving commodity-linked Forex markets lower while pushing up demand for the
lower yielding Japanese Yen.
The lack of clarity regarding proposed regulatory legislation
and the surprise curbing of short sales by Germany made investors nervous.
Throughout the entire Greek debt crisis, investors have been looking for
clarity and conviction from the European Union. Each time the EU has made a
proposal, they have failed to explain to investors the logic behind the move.
This weekâ€™s move by Germany
to forbid the shorting of bank stocks is a good example of what is triggering
the fear in the market today.
Institutions are confused by the action in Germany because the regulators have
basically changed the rules of the game. Institutions are worried that the
proposed changes in U.S.
regulations are going to make it more difficult to protect risky positions in
equity markets. What this means is large investors are unsure how they are
going to hedge their exposure in the markets and instead have chosen to pare
back positions to reduce the possibility of large losses. Without knowing what
the regulators are going to allow them to do, it doesnâ€™t make sense to take on
added risk so liquidation seems to be the only viable option.
In addition to confusion over regulatory issues, investors
are blowing out of risky commodity-linked currencies because they feel the Euro
Zone debt problems are going to derail the global economic recovery. This means
the real possibility of a global double-dip recession.
Hedge funds and large investors continue to divest out of
the commodity-linked Australian and New Zealand Dollars. Traders feel that the
spread of Euro Zone debt woes will curtail the global recovery and lead to a
drop in demand for raw materials.
Technically, downside momentum in the Aussie Dollar could
trigger a sharp decline to 50% of the October 2008 bottom to the November 2009
top. This range is .6008 to .9405 with a minimum target price of .7706.
Based on the monthly main range in the New Zealand Dollar of
.4892 to .7635, traders should look for this currency to correct to .6263 if
downside momentum continues at its current pace.
Falling crude oil triggered a huge break in the June
Canadian Dollar. Thursday morning surge put this market in a position to take
out the recent bottom on the daily chart at .9293. This is a minor point on the
long-term chart. A drive through the February 2010 bottom at .9271 is likely to
trigger more selling pressure which will threaten the structure of the bull
market in the Canadian Dollar.
As investors dumped higher risk stocks and commodities, the
proceeds from the sales flowed back into the Japanese Yen, sending it sharply
equity markets finished sharply lower amid concerns the Euro Zone debt crisis
would disrupt the global economic recovery and undermine demand for
The June British Pound had very little follow-through to the
upside after Wednesdayâ€™s closing price reversal bottom. Although the reversal
bottom was negated by Thursdayâ€™s intraday sell-off, the lack of follow-through
to the downside and the strong comeback rally indicates that sellers are scare
and shorts are still willing to cover at current levels.
Fundamentally, the British Pound is not only feeling the
pressure from the collapsing Euro, but traders are also beginning to factor in
the austerity measures the new government is going to propose. Some traders
feel that the weak economy may force the Bank of England to continue to buy
government assets in an effort to pump liquidity into the economy. This
saturation of Sterling
should keep downside pressure on the currency.
A strong retracement rally in the Euro is likely to scare
more than a few of the shorts out of the British Pound which means this market
is ripe for a corrective rally of its own. The current chart pattern suggests
that any decent strength in the Euro over the next few days could trigger a
fast rally to perhaps 1.4810 in the Sterling.
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