Global stock markets are under pressure overnight which is
leading to expectations for a lower opening in the U.S. this morning. Traders are also
expected to react to this morningâ€™s durable goods and Weekly Initial Claims
data. Flight to safety buying is helping to underpin the Treasuries. The Dollar
is posting gains against the Euro and Dollar-linked currencies. Gold and crude
oil are under pressure as investors shed risky assets.
On Wednesday U.S.
equity markets closed lower but held onto the low posted earlier in the day
after the Federal Reserve said the economy was â€śproceedingâ€ť rather than
strengthening like it had said in its last report in April.This change in language helped pressure the
stock market but failed to trigger an all out selling frenzy.
Stocks were under pressure since early in the session after
a worse than expected home sales report triggered a sell-off. The weakness was
fueled by the thought that the weak housing market would derail the U.S. economic
recovery. The report showed that perspective buyers left the market after tax
incentives were dropped. The number reached its lowest level in 50 years.
The September E-mini S&P broke through a key 50% level last
night at 1083.25 and is likely to test the .618 retracement level at 1072.50 if
downside momentum continues.
The September E-mini NASDAQ tested its 50% retracement level
at 1854.75 overnight. A move through this price could trigger a further break
to 1834.50. No doubt the market is being underpinned by the optimism over the
release of Appleâ€™s new phone.
Losses were limited in the September E-mini Dow on Wednesday
but downside momentum overnight indicates the market is likely to complete its
50% retracement to 10073.
The short-term main trend is still up in the equity markets.
So far all weâ€™ve seen is a two-day break into a retracement zone which
indicates the move can only be characterized as a normal correction. Looking at
the bigger picture however, yields a different assessment. From the April top
down to the June low, the markets look bearish, after completing normal 50%
retracements of the huge Spring break.
September Treasury Bonds are trading higher overnight in
anticipation of a weaker global economy. T-Bonds rallied on Wednesday following
the Fedâ€™s assessment of the weak economy. The inability to break the T-Bonds
after the stock rally is further proof that investors are still suspect about
future corporate profits and the U.S. economyâ€™s ability to maintain
its growth pace. Expectations are for the market to attempt to break through
the last main top at 126â€™05 especially if todayâ€™s Weekly Initial Claims Report
is weaker than expected.
The September Euro is trading weaker overnight after a slump
bond sales helped escalate worries about European sovereign debt issues.
The Euro finished higher on Wednesday after reversing
earlier weakness following a weak assessment of the U.S. economy by the Federal Open
Market Committee. Based on the overnight action, it appears that this was
short-covering rather than new buying.
Federal Reserve officials downgraded their outlook for the
economy, saying that the recovery was â€śproceedingâ€ť, not strengthening as they
had said in their previous FOMC policy statement in April. The change in the
statement indicates that there was less then favorable data reported since the
committee last met.
In addition to the change in the view of the economy, the
Fed left the target federal funds rate at the current range of zero to 0.25%
and reiterated that interest rates will remain low for an extended period.
Policymakers put some blame on the slowdown in the economy on the European debt
The late session break in the Dollar on Wednesday against
the Euro reversed earlier bullishness. At the mid-session, the Greenback was
trading mixed against most currencies. Trading was light, but the Dollar did
get a boost following a plunge in the U.S. housing market. Gains probably
would have been greater if volume was at average levels.
Early during the session the Euro broke after a report
showing a drop in new U.S.
home sales weighed heavily on higher risk assets. Traders looked for safety in
the Dollar as the report indicated a still weak U.S. economy and the possibility of
a double-dip recession in the housing market.
At the mid-session, the Euro was nearing a key retracement
zone at 1.2174 to 1.2102 but never quite reached this level. The turnaround in
the Euro suggests that a secondary higher bottom may be forming which indicates
buyers may be trying to wrestle the trend away from the sellers.
Although a break into the retracement zone is still
possible, upside momentum indicates that the market may make a run at the last
swing top at 1.2467. This breakout move will set up a further rally into a
major downtrending Gann angle formation at 1.2609.
Overnight action suggests that the Euro may succumb to both
fundamental and technical pressure which should help it resume its move into
the retracement zone at 1.2171 to 1.2102. Risk sentiment seems to be shifting
which means investors will continue to shed risky assets while seeking shelter
in the safer U.S. Dollar.
A drop in demand for higher risk assets is pressuring the
commodity-linked currencies this morning. Downside pressure is clearly on the
Australian, New Zealand
and Canadian Dollars. A weakening global economy should keep the pressure on
demand for goods and services from these major suppliers of raw materials.
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