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Thursday June 10, 2010 - 15:42:01 GMT
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Euro Recovers 1.20 Sending Stock Indices Higher

A stronger Euro overnight is helping to drive up demand for risky assets, sending U.S. equity markets higher before the opening. The ability to regain the psychological 1.20 price level triggered short-covering rallies in the global equity market, leading to the call for higher openings in New York this morning.

 

The E-mini S&P 500 plunged from its high late in the session on Wednesday after testing a short-term retracement level at 1074.50.  Increased demand for higher risk assets helped drive up the equity markets early, but comments from Fed Chairman Bernanke and less than stellar economic data from the Fed’s Beige Book encouraged investors to take profits, driving the index lower into the close.

 

Despite the early strength in the indices throughout the first half of the session, traders remained cautious about the move, watching the Euro for direction. Once the Euro broke through the psychological 1.20 price level, traders turned bearish, accelerating the break to the downside.

 

Technically the June E-mini S&P 500 confirmed Tuesday’s daily closing price reversal bottom but ran into resistance at a short-term 50% price level at 1074.50. The key support level to watch until June 14th is 1045.00. A close under this price could trigger the start of a break to 1004.00 by June 23rd. As long as 1045.00 holds over the near-term, the S&P 500 could take another run at 1074.50, then perhaps 1082.25.

 

September Treasury Bonds are called lower this morning. Increased appetite for risk is helping to drive investors out of Treasuries. Additional pressure is coming from the thought of additional supply this morning as the Treasury is set to hold another debt auction. A break under 123’22 could lead to an acceleration to the downside especially if stocks begin to mount a strong rally.

 

T-Bonds posted a strong recovery into the close on Wednesday due to the weakness in the equity markets. Early during yesterday’s session, the T-Bonds were trading weaker because of the stronger equity markets and the $21 billion U.S. Treasury Note debt sale. There is was also speculation that the Fed may be preparing to raise interest rates. After the Beige Book showed only a moderate recovery taking place, traders drove up T-Bonds on the thought that the economy was too weak for the Fed to follow-through on its promise to begin tightening rates sooner than expected.

 

Technically, the T-Bonds found support at a 50% level at 123’22 before the late session break in U.S. equity markets helped pare losses. This price is most important to the structure of the market at this time.

 

Demand for equities is helping to drive down August Gold as the two markets compete for investment dollars. A break under a 50% level at $1226.30 will be the first sign of weakness, setting up a further decline to the next support level at $1219.64. A strong surge in equity markets today will likely keep downside pressure on gold throughout the day.

 

On Wednesday August Gold traded sharply lower earlier in the trading session after investors took profits after the recent run-up because of greater demand for equity prices. Technically this market stopped inside a retracement zone at $1226.30 to $1219.70. A late session break in stocks helped gold pare its earlier session losses, sending the metal higher into the close. Watch the equity markets this week for direction. Gold seems to be a little more sensitive to stock market movement rather than the Dollar at this time.

 

The stronger Euro and equity markets are helping to support September Crude Oil this morning. The divergence of this market away from the Euro was the first sign of a developing bottom. Look for upside momentum to take this market through the last swing top at 77.84. A break through this price will turn the main trend to up.

 

Fundamentally, higher stock prices helped underpin crude oil most of the day on Wednesday. The late session sell-off in the equity markets had very little effect on crude into the close. This could be a sign that the break in equities may have been over-extended. Additional support came from a weekly report showing that inventories had dropped more than expected. Look for a drive to at least 78.00 unless 73.64 fails to hold as support.

 

The Dollar is trading weaker across the board this morning. Appetite for risky assets is up driving up the commodity-linked currencies. The inability to break the Euro after Wednesday’s hard sell-off is also being seen as a positive development.

 

Some traders attributed Wednesday’s late session break to position evening ahead of the European Central Bank’s policy meeting today. Although the ECB is expected to leave interest rates unchanged, investors are worried about its statement and the post-meeting comments from ECB President Trichet. The statement is expected to contain bearish talk about the near-term growth of the Euro Zone economy. Trichet is expected, however, to sound more upbeat as he tries to unite the Euro Zone nations.

 

From a technical perspective, the ability to regain the 1.20 psychological support level is helping to increase demand for higher yielding assets.

 

Higher equity and crude oil markets are helping the Euro this morning also. In addition, traders were a little more optimistic about the survivability of the Euro after the European Union finalized its rescue plan. Although sovereign debt issues remain the major concern, short traders felt it was necessary to pare positions on this news.

 

Technically the Euro is still in a downtrend, but the charts indicate there is room to the upside should the current weakness prove to be only a retracement and test of the bottom at 1.1876. Recently hedge funds and large speculators have been shying away from selling weakness and have been more comfortable with selling retracements. If the bottom at 1.1876 is defended on this current break, then look for the start of a rally back to the nearest retracement zone. Watch for renewed selling pressure once the Euro completes its retracement to 1.2164 to 1.2233.

 

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