Improved Outlook for Earnings Boosts U.S. Equities
An improved outlook for earnings helped boost U.S. equity
futures following sluggish overnight session. U.S. stock index futures turned
higher shortly before the opening after trading lower overnight because of fear
about a slow down in the global economy. Investors in Asia and Europe also began to take risk off the table on concerns
that the current European stress tests will not be stringent enough to recover
potential problems with the banking system.
There were no major U.S. economic reports on Wednesday
so the focus shifted back toward the economy and earnings. Investors have been
selling the Dollar lately and buying higher risk assets. This was especially
apparent on Tuesday when weak U.S. ISM Services data turned around a weaker
stock market. This morning upbeat earnings news regarding State Street Corp.
helped turn investors optimistic about the upcoming earnings season. The money
manager projected that second-quarter profits would be well above analystsâ€™
The strong rally based on the upbeat forecast was an
indication that earnings will be the major catalyst in the market over the next
Technically the September E-mini S&P 500 confirmed
Tuesdayâ€™s closing price reversal bottom with a follow-through rally on
Wednesday. The strong rally has the market in a position to test its first
upside objective at 1066.00. A move through this level could trigger an even
further rally to the 61.8% level at 1081.00.
Strong demand for higher yielding assets helped drive the
September Treasury Bonds lower. The first clue that this market was topping was
revealed on Tuesday after the T-Bonds failed to rally following the release of
a weaker than expected U.S. ISM Services Report. This market now appears to be
set up for a correction back to 125â€™15. A strong rally in the equity markets is
likely to trigger the start of an acceleration to the downside.
August Gold made a closing price reversal bottom on
Wednesday, triggered by oversold conditions and a weaker Dollar. The chart
pattern indicates a move to $1224.30 is likely over the near-term. If there is
no follow-through to the upside on Thursday, then look for a resumption of the
downtrend with $1158.30 the next likely downside target.
The September Australian Dollar continued its rally which
started on Tuesday following hawkish comments from the Reserve Bank of Australia.
The RBAâ€™s policy statement turned around a sluggish market by stating that
interest rates are likely to rise despite concerns about inflation and a
possible slow down in the Chinese economy. Greater demand for higher risk
assets also fueled todayâ€™s rally.
Technically the Aussie is in a strong position to rally
further. Todayâ€™s close was on a .618 retracement price at .8651, but upside
momentum indicates that this potential resistance zone level is not likely to
hold. This sets up the market for a further rally to the recent main top at
The formation of the secondary higher top in the September
New Zealand Dollar is also a strong indication of higher markets to follow. The
Reserve Bank of New Zealand
is likely to follow-the direction of the RBA and hike interest rates a second
time in as many months when it meets on July 28th. Traders are at
least indicating this scenario by covering short-positions in anticipation of
another rate hike. Like the Australian Dollar traders, Kiwi traders seem to
have a better outlook for China
than the rest of the world.
The September Japanese Yen failed in its attempt to make a
new move high early this morning. The strong rally in the U.S. equity markets encouraged
traders to buy Dollars and sell Yen in a resumption of the carry trade
strategy. While a weak outlook for the global economy drove investors into the
lower-yielding Yen, a strong earnings-based equity market rally is likely to
drive them out of the Yen and back into higher yielding assets.
After overnight weakness due to concerns over the slowing
global economy and the upcoming European bank stress tests, the Euro and
British Pound mounted strong recovery rally and finished the day modestly
On Thursday both the European Central Bank and the Bank of
England meet to decide monetary policy. Both central banks are expected to
leave interest rates unchanged but the markets could move depending on what is
said in the subsequent policy statements and press conferences. Traders will be
particularly interested in what ECB President Trichet will have to say about
the state of the Euro Zone economy as well as his opinion on the scope of the
bank stress tests.
Todayâ€™s early strength in the U.S. Dollar and subsequent
weakness later in the session is an indication that traders arenâ€™t sure about
which fundamental event is driving the markets. Lately it has been the weaker U.S.
economic reports that have been sending investors out of the Dollar and into
more risky assets. Overnight it was concerns over the weak global economy and
the European bank stress tests. Volatility is expected to remain high in the
Forex markets as investors wrestle with the soundness of the European bank
balance sheets and the potential loss of momentum in the global economy.
The strong rise in the September Euro is keeping the uptrend
intact. The daily chart indicates there is plenty of room to the upside with a retracement
cluster at 1.2783 the next likely target.
Technically, the September British Pound is in an uptrend,
controlled by the series of higher tops and higher bottoms. Look for an
acceleration to the upside when the swing top at 1.5228 is violated. The weekly
chart indicates that this market could be headed toward 1.5635 over the
Donâ€™t expect too much action overnight as traders have
pretty much positioned themselves ahead of Thursday morningâ€™s ECB and BoE
policy announcements. With both central banks expected to keep interest rates
at historically low levels, the movement in these currencies is likely to be
delayed until traders hear from the Trichet of the ECB and King of the BoE.
Trichetâ€™s comments will be listened to more closely as he has more to comment
on. Emphasis will be placed on his assessment of the European bank stress
tests. Traders want to hear that Trichet feels the tests will be stringent
enough so that they can get a correct risk assessment of the condition of the
European bank balance sheets.
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