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Thursday July 15, 2010 - 04:57:39 GMT
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Stocks Struggle to Eke Out another Gain

U.S. stock futures struggled a bit on Wednesday but were able to post their 7th consecutive gain. Stocks were expected to trade sharply higher on the heels of a strong earnings report from Intel but demand for equities faltered overnight due to concerns about European bank stress tests and today following a weak Retail Sales report. Late in the session, news that the Fed lowered its outlook for the economy weighed on the markets into the close. Despite the negative news, there were enough buyers in the market today to weather the storm. This was an indication that the majority of investors are still focusing on earnings rather than the economy. This could change, however, once investors assess the Fed Minutes.

 

If today’s late session weakness is any indication, stocks may have trouble rallying from their current positions if investors begin to believe the Fed’s outlook for lower GDP and employment. If traders maintain their optimism because of earnings, then the reaction to the Fed may be delayed. Either way, expectations are for this rally to become labored which may be an indication that the bears are stepping up their activity.

 

The best topping sign to look for at this time is a closing price reversal. This means that a new high for the week is necessary, followed by a lower close.

 

The upside action in the Treasuries and the strong closes in both the September Treasury Bonds and Treasury Notes is a strong sign that the Fed is going to keep interest rates at historically low levels for a prolonged period of time. Although stocks rallied today along with the Treasuries, one of these markets has to give sooner or later. Since the Fed data supports a weaker economy over a longer period of time than earnings, my assessment is that the stock market rally will fade once traders realize the economy is not getting any better.

 

It looks as if U.S. Dollar bears have a decision to make after the Fed Minutes painted a gloomy picture of the economy. Either the Dollar will decline because of the Fed’s outlook or the Dollar will rally because of renewed risk aversion.

 

For the past few weeks, worse-than-expected U.S. economic reports have driven investors out of the Dollar and into foreign currencies but this trend may becoming to an end as traders assess the Fed’s new outlook for the economy.

 

Late Wednesday the Dollar began a small comeback following the release of the June Federal Open Market Committee Minutes. In the report, Fed officials issued an updated economic forecast calling for a downward revision of the Gross Domestic Product. In April, the Fed pegged the GDP growth rate at 3.2 percent to 3.7 percent. Today’s report showed a downward revision of GDP to 3 percent to 3.5 percent.

 

The Fed also revised its forecast for the unemployment rate. The rate, now at 9.5 percent, is projected to drop to 9.2 percent in the best case scenario. In April, the Fed was calling for a decline to 9.1 percent.

 

Both downward projections paint a gloomy outlook for the economy, reflecting worries about how the European debt crisis could affect U.S. growth and job prospects. Traders have to remember that Europe is in the midst of invoking financial austerity measures which are designed to curtail spending. This could have a direct affect on demand for U.S. goods and services leading to a drop in GDP and lower employment.

 

Although the Fed is projecting a decline in GDP and employment, the Fed also saw less of a threat of inflation. The Fed predicted that inflation would rise 1 to 1.1 percent, down from the April forecast of 1.2 to 1.5 percent. This change in inflation reflects an expected drop in consumer spending.

 

Since the Fed is projecting low inflation, investors feel it now has room to leave interest rates at historically low levels for a prolonged period of time.

 

The key factors contributing to the decline in the economy are household and business uncertainty, weak real estate markets, a weak job market, diminishing fiscal stimulus and tight lending by banks.

 

Unlike April’s projections, this time “most” Fed officials felt that it would take “no more than five or six years” for the economy to reach its goals for maximum employment with low inflation. Previously, only a minority of Fed honchos thought it would take more than that time for the economy to recover.

 

U.S. Treasury markets rallied sharply higher following the release of the Fed minutes, indicating fixed income investors are looking for yields to fall further. This move could be indicative of the start of another flight rally into the Dollar.

 

With the Euro currently toying with a major 50% level at 1.2783, this spot on the chart would be the perfect spot for the start of a correction. Furthermore, with less than ten days until the release of the European bank stress test results and rumors afloat that eleven or more banks may have failed the test, now would be the right time for the Euro to begin to weaken.

 

Today’s Fed report may have taken the spotlight away from earnings season for the time being. A clash between those who want to sell the Dollar because of better than expected earnings and those who want to buy the Dollar because of renewed risk aversion may be on the horizon. This conflict between the two forces could trigger volatile conditions over the near-term with sudden shifts in direction. It’s hard to predict at this time which way the trend will develop, but what is clear is that traders are in for a rocky time in the markets over the short-run until one of the forces takes control.

 

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Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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