Flight to Safety Rally Likely to Pressure U.S. Equities
The flight to safety rally overnight into the U.S. Dollar is
likely to pressure U.S.
equity markets on Tuesday as investors are expected to reduce their exposure to
Selling pressure began overnight in Europe amid speculation
central bank will intervene to limit gains in the Yuan after dropping its
two-year peg to the U.S. Dollar.
In addition to the speculation about China, a new debt problem concern in Europe is also renewing fear that sovereign debt issues
have exposed the banking system to risky investments which may lead to a slow
down in economic growth. Traders are also raising doubts about the recovery
taking hold because of the newly proposed austerity measures in the Euro Zone
and the U.K.
Technically the September E-mini S&P 500 posted a
closing price reversal top on the daily chart on Monday. This bearish pattern
will be confirmed when Mondayâ€™s low at 1103.25 is violated. Once confirmed the
market is set-up for a 2 to 3 day correction to 1083.25 to 1072.50.
A drop in demand for higher risk assets is helping to boost
the September Treasury Bonds. On Monday, T-Bonds recovered from a gap lower
opening to close on its high. This move kept the uptrend intact, triggering the
overnight rally. Regaining a .618 price level at 124â€™08 could trigger stops and
an acceleration to the upside.
August Gold traders look confused. They donâ€™t seem to know
whether to be concerned about renewed debt problems in Europe,
the strengthening Dollar or weaker equity markets. Gold is trading slightly
better this morning after a huge reversal top on Monday. The short-term break
stopped at a 50% price at $1232.30. A failure to hold this price should trigger
a further break to $1224.20. Downside momentum could trigger a change in trend
to the down on a move through $1216.20.
The September Euro retreated overnight following a 10-day
rally amid concern debt trouble at European banks will temper global growth.
Selling pressure hit the Euro after European Central Bank
President Jean-Claude Trichet said nations in breach of European Union fiscal
rules may face tougher punishments and ECB member Christian Noyer said some
banks in the Euro region are facing funding problems.
The Euro topped on Monday after Fitch credit-rating firm
downgraded BNP Paribas. The downgrading of the major bank shifted the focus
back on the European debt crisis and the banking sector. Fitch citied
structural issues related to the bankâ€™s business mix as the main reason behind
the downgrade. Fitch also cited asset-quality deterioration in 2009 for the
Technically, the Euro posted a daily closing price reversal
top on Monday. This pattern was confirmed overnight with a follow-through move
to the downside. Based on the short-term range of 1.1876 to 1.2467, traders
should look for a 2 to 3 day break or a retracement to 1.1884 to 1.2477.
Investors are bailing out of the September British Pound
shortly before the new government unveils its first budget.Chancellor of the Exchequer George Osborne
will present the budget to parliament today as he seeks to prevent the loss of
triple-A rating. The market is looking for the budget to include severe cuts in
spending and possible tax hikes.
This move toward fiscal tightening may lead to a prolonged
period of loose monetary policy which may weigh on the Pound. In other words,
the anticipated moves by the new government may mean the Bank of England may
have to maintain liquidity or risk losing the economy.
Technically, Mondayâ€™s closing price reversal top inside of a
retracement zone at 1.4876 to 1.5028 was confirmed overnight. This bearish
chart pattern suggests a minimum 2 to 3 day break with a minimum downside
target of 1.4643 to 1.4574. More aggressive selling could trigger a retracement
to 1.4583 to 1.4499. The chart pattern also suggests that 1.4583 to 1.4574 is a
support cluster which could attract buyers.
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