U.S. Stocks Called Lower as Traders React to Asian, European Weakness
equity markets are trading lower this morning ahead of the opening in New York. Although the
markets closed higher on Tuesday, they started to peel back gains about
mid-session on concerns about consumer discretionary stock losses and a slow
down in global growth.
Recent weakness in U.S.
economic reports have been driving up demand for risk, but last nightâ€™s break
appears to have started as traders reassessed the U.S. economyâ€™s impact on continued
global growth. Investors are also taking risk off the table after more
information about the European bank stress tests was revealed.
European regulators are expected to reveal today how they
intend to test the health of the Euro Regionâ€™s banks. The purpose of the tests
is to simulate the impact of a severe economic shock to the banking system. The
regulators will be attempting to restore confidence in the markets, but
investors appear to be skeptical about the credibility of the test results.
Many feel that the tests will not be stringent enough. This is raising concerns
this morning which is leading to long position paring and the subsequent
selling of riskier assets.
Currency markets are also feeling pressure this morning
especially the Euro and the commodity-linked markets. Emotions are running high
in the markets which could fuel a self-off once the New York currency session opens. Without any
economic reports for guidance, traders may react to the fear developing over
the upcoming bank stress tests. Overnight, the Euro weakened on a smaller than
expected gain in the Euro Zone GDP and a weaker than expected German factory
September Crude Oil is bouncing off of technical support
overnight, but this slight gain could be overcome by renewed selling pressure
because of predictions in a drop in demand triggered by the weakening global
On Tuesday, the September E-mini S&P 500 posted a
closing price reversal bottom after investors turned up demand for higher risk
assets. This pattern will have to be confirmed by a trade through 1038.50. Oversold
conditions and a weak U.S.
economy helped to boost equity markets throughout the day after a strong showing
in Asia and Europe overnight boosted demand
for risk. This bullishness was clearly in the U.S. markets on the opening. Later
in the morning the U.S.
announced a slowdown in U.S.
services. This news weakened the Dollar and drove up equity markets.
A weaker economy means the Fed is likely to keep interest
rates low, driving up demand for higher risk investments. Investors are
treating the weak U.S.
economic reports as a sign that liquidity and low interest rates will remain
intact for a prolonged period of time. With Ten-Year Treasuries yielding close
to 3.00% investors are going to be looking elsewhere to boost their return on
investments. This place is likely the equity markets.
Technically, the reversal bottom formation suggests a move
to perhaps 1066.00 over the next 2 to 3 days, but trades have to remember the
pattern has yet to be confirmed by a follow-through rally.
Despite the weaker ISM services report on Tuesday, September
Treasury Notes failed to rally to a new move high. This is a sign that the
market may be overbought and getting ready to correct. Depending on how the
equity markets behave, T-Notes may begin to feel pressure if traders decide to
pull money from the safer Treasuries to reinvest in the higher-yielding
equities. The chart indicates room to the downside with 121â€™00 a possible
downside target. If stocks fail to follow-through to the upside, then expect
yields to continue to drop on renewed buying interest.
Stocks and bonds are at a critical juncture and something
will have to give. Either investors are going to keep forcing yields lower by
buying the T-Notes or they are going to begin dumping T-Notes in favor of a
better return in stocks. Watch for a pick-up in volatility.
August Gold broke sharply lower on Tuesday. With the U.S. economy
weakening traders are beginning to factor in extremely low inflation or perhaps
deflation and are selling off gold positions. Furthermore, the unwinding of the
Gold/Euro spread is also putting downside pressure on gold. Technically the
chart pattern suggests there is plenty of room to the downside with a possible
test of a 50% price at $1158.30 likely sometime this week. Gold may reverse its
short-term direction if stocks see downside pressure today.
On Tuesday, the U.S. Dollar hit a six-week low against the
Euro driven by greater demand for risky assets and a hawkish comment from the
Reserve Bank of Australia.
A mid-morning report showing that the U.S. Services Sector slowed last month
also contributed to the Euroâ€™s rally on the prospects of a weaker outlook for
The recent strength in the Euro versus the Dollar is an
indication that investors are adjusting positions and absorbing the shift in
the recent economic data. Tuesdayâ€™s turnaround in many of the Forex markets
demonstrates investor willingness to buy riskier assets.
Recent weak U.S.
economic releases have encouraged traders to move into a market psychology
where poor data triggers Greenback weakness. Earlier in the year, investor
sentiment was the opposite. At that time, weak data triggered flight-to-quality
buying of the Dollar.
Although a reading over 50 still indicates an expanding
economy, todayâ€™s ISM report showing a drop from 55.4 in May to 53.8 could be a
sign that the pace of the expansion is slowing. This news helped drive an
already weak Dollar sharply lower almost immediately after its release. Later
during the trading session, short-term overbought conditions helped the
Greenback regain some of its earlier losses.
Last weekâ€™s upside momentum in the September Euro continued Tuesday
morning. Technically, the main trend is up. The charts indicate that the market
has a clear shot at reaching a major retracement price at 1.2783.
Another sign that investors were shifting sentiment toward
more risky assets was the sharp rise in commodity-linked currencies. Early in
the Tuesdayâ€™s trading session, the September Australian Dollar reversed an
overnight sell-off after the Australian central bank issued a hawkish policy
statement. The intra-day rally put the Aussie in a position to form a closing
price reversal bottom after forming a support base inside of a retracement zone
at .8469 to .8378.
Fundamentally, the market was supported by hawkish comments
from the Reserve Bank of Australia.
In its policy statement, the Australian Central Bank kept its benchmark
interest rate unchanged at 4.5%. It did, however, indicate that further rate
increases are to come even if inflation continues to increase and Chinaâ€™s
economy slows. Tuesdayâ€™s strong rally reflects the fact that speculators had
been looking for more dovish comments from the RBA.
The strong rise in U.S. equities and a firm crude oil
market also triggered a sharp rise in the September Canadian Dollar. Tuesdayâ€™s
chart action indicates that further strength is likely now that it appears that
investors have decided to explore the long-side of riskier assets.
Tuesdayâ€™s statement by the RBA also is a strong indication
that the Bank of Canada will hike interest rates at its next meeting on July 20th.
Speculators had been positioning themselves for a neutral stance by the BoC. Although
the RBA left its benchmark rate unchanged, its hawkish comments leaves open the
strong possibility that another rate hike is imminent. Yesterdayâ€™s sharp
turnaround in the Loonie was most likely short Canadian Dollar traders making a
hard, fast adjustment to the possibility of higher interest rates.
economic data and a shift in risk sentiment also underpinned the September
Japanese Yen. Although this currency pair appears to be rangebound while
forming a support base, traders can begin to anticipate a break if U.S. equity
markets begin to mount a short-covering rally. This break will most likely be
fueled by investors reapplying the carry trade strategy to the Japanese Yen.
When this occurs, investors borrow funds in the lower yielding Yen to invest in
riskier assets such as U.S.
equities. Further evidence about a slow down in the global economy may trigger
a resumption of the current rally.
Although there is likely to be profit-taking breaks along
the way, there has been a notable shift in investor mentality toward more risk.
Traders should be aware that weak U.S. economic reports are likely to
drive traders out of the Dollar and into more risky assets. The logic behind
this shift is that central banks will continue to keep the markets liquid. This
means interest rates for the weaker nations will continue to remain low.
Aggressive investors will be looking to find a place to put their money to work
in an effort to earn better yields in exchange for higher risk.
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Mon 19 Feb 2018
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