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Thursday May 20, 2010 - 23:44:18 GMT
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Treasury Bonds Soar as Stock Market Jitters Drive Investors to Safety

Flight-to-safety buying drove June Treasury Bonds sharply higher. Thursday morning’s trading action took out the recent high at 124’16. 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 doesn’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. Don’t be surprised if fresh buyers show up to trigger a technical bounce.


U.S. 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 NASDAQ’s target is 1730.25 and the June E-mini Dow has a downside objective of 9840.


The June Euro confirmed Wednesday’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 “intel” has come out of the not so secret meeting being held by the EU nations, traders reacted today as if “no news is good news” 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 doesn’t make sense because buying one’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 economy.


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 week’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 doesn’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 higher. U.S. equity markets finished sharply lower amid concerns the Euro Zone debt crisis would disrupt the global economic recovery and undermine demand for higher-yielding assets.


The June British Pound had very little follow-through to the upside after Wednesday’s closing price reversal bottom. Although the reversal bottom was negated by Thursday’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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GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
A 06:00 DE- Retail Sales
A 09:00 EZ- flash HICP/GDP
AA 12:30 US- Core PCE Deflator
A 14:00 US- CB Consumer Confidence
Wed 1 Aug 2018
A Final Mfg PMIs
AA 12:15 US- ADP Private Payrolls
A 15:00 US- EIA Crude
AA 18:00 US- Federal Reserve Decision
Thu 2 Aug 2018
AA 11:00 GB- Bank of England Decision
A 13:30 US- Weekly Jobless
Fri 3 Aug 2018
A Final Services PMIs
AA 12:30 US- Employment
A 12:30 US/CA- Trade

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