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Wednesday July 21, 2010 - 13:49:09 GMT
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Equity Markets Steady to Better ahead of Bernanke Testimony

U.S. stock index futures are trading steady to better ahead of this afternoon’s testimony by Fed Chairman Ben Bernanke. Shortly before testimony is to begin, investors will have the chance to react to earnings reports from Morgan Stanley, Wells Fargo and Starbucks. This morning’s pre-opening gains are being attributed to yesterday’s report of better-than-expected earnings from tech giant Apple, Inc.


After earnings are released before the opening this morning, investors will shift their focus to Bernanke’s monetary report to the U.S. Senate Banking Committee. Bernanke is expected to be grilled about the recent bout of weak economic data that could result in the Fed beginning another round of quantitative easing. Investors will be tuned into the testimony in hopes of hearing clues about the possibility of a double-dip recession. Last week in its FOMC minutes, the Fed lowered its forecast for GDP and employment. Bernanke may attempt to further explain the reasoning behind the Fed’s downward shift in its outlook for the economy.


Bernanke is scheduled to speak at 1 p.m. Central time which gives investors plenty of time to react to this morning’s earnings report.


Treasury futures are also expected to react strongly to Bernanke’s testimony as what he says will dictate the future direction of interest rates. A dovish tone in his testimony is likely to underpin the futures markets which are trading lower because of this morning’s strength in the equity markets.


The Euro is under pressure this morning following reports of a leak in the release of the European bank stress test data which was originally scheduled to be revealed on Friday. The leaks revealed that Spanish and Greek banks are expected to pass the tests which raised concerns among investors about the stringency of the tests.


At first the Euro rallied on the news, but selling pressure quickly hit the Euro as investors questioned how rigorous the tests are. The most pressure hit the Euro following the news that the nationalized German lender Hypo Real Estate revealed a possible capital shortfall. Even though it was just one financial institution, investors turned negative on the Euro.


Tuesday’s Recap


Strong gains in metal and energy stocks helped turn U.S. equity markets higher, erasing early session losses. Stock futures clawed back to positive after opening sharply lower this morning. Equity markets were already trading down because last night IBM and TI reported lower than expected revenue figures when Goldman Sachs said that its second-quarter profit tumbled 82%. More pressure came shortly before the opening following a weaker than expected U.S. Housing Starts report.


By mid-session, the September E-mini S&P 500 was trading higher after testing a 50% level at 1051.00 and holding 1050.75. This move was enough to attract bargain hunters who triggered the start of a short-covering rally. The strong gain on Tuesday retraced most of the recent four day break. After the markets closed, the markets rallied further, bolstered by a bullish earnings report from Apple.


U.S. equity markets plunged in pre-market trading following a weaker than expected U.S. Housing Starts report. It was reported that in June housing starts fell to a 549,000 pace, a 5% drop and an 8-month low. The Dollar and Treasury instruments rose on the news as traders became risk adverse, shifting their interest to lower yielding assets.


The inability of the September Treasury Bonds to reach a new contract high following the bad housing report may also be a sign that stocks have reached an oversold level and Treasuries, an overbought area. Treasury Bonds and Treasury Notes struggled to hold on to their early session gains. The sharp rise in the equity futures pressured the Treasury instruments into the close, setting up a possible break tomorrow.


August Gold traded weaker because of falling stocks and a rising Dollar early in the session. The slow down in housing starts was another indication of a weakening economy. This is likely to pressure consumer confidence and spending, leading to more weakness in consumer prices and inflation. A turnaround in the equity markets helped turn gold higher, leading to the possibility of a minor closing price reversal bottom.


The Australian Dollar rebounded on Tuesday following a three-day setback boosted by stronger U.S. equity markets and increased demand for currency-linked commodities. Speculation mounted that the central bank would raise interest rates before the end of the year following news that the Asian Development Bank increased its growth forecast for China. This encouraged investors to buy the Aussie in anticipation of improved economic conditions because of increased demand for Australian raw materials.


Technically, the September Australian Dollar maintained its uptrend despite the short-term correction to .8632. The strong move on Tuesday puts the Aussie in a position to take out the swing top at .8870 and the .618 retracement level at .8883. A penetration of these two levels is likely to trigger an acceleration to the upside.


The strong rise in the Australian Dollar along with talk of another interest rate hike by the Reserve Bank of Australia triggered a strong rally in the New Zealand Dollar. With the Aussie’s likely to hike rates before the end of the year and the Bank of Canada setting its benchmark rate 25 basis points higher this morning, Kiwi investors gained confidence that the Reserve Bank of New Zealand would be next in line to adjust interest rates higher.


Technically, the September New Zealand Dollar rebounded after testing the 50% level of the .6794 to .7303 range. The main trend is up, but the market may run into minor resistance at .7166 to .7198.


After trading in a tight range most of the morning, pressure from rising equity prices and commodities finally ignited a rally in the September Canadian Dollar. Early this morning, the Bank of Canada hiked its benchmark interest rate by 25 basis points. This increase was in line with expectations, but the dovish tone of the policymaker’s statement helped hold the Dollar/CAD inside a tight range most of the morning. Once U.S. equity markets rebounded from a weaker opening, traders aggressively bought the Canadian Dollar.


Technically, the September Canadian Dollar is still locked inside of two ranges. The broad range is 1.0064 to .9208 with a mid-point of .9636. The narrower range is .9208 to .9857 with a mid-point of .9533. Currently this pair is trading between the mid-points of each range.


A rumor of a possible intervention by the Bank of Japan helped pressure the September Japanese Yen on Tuesday. A turnaround in the stock market pressured demand for lower yielding currencies, thereby adding to the bullishness of the Dollar/Yen. Although an intervention from the BoJ is possible, traders are taking a precautionary approach to the long side due to the fact that the strength in the Yen has been caused by a weakening U.S. economy and not excessive speculation. The BoJ is worried that the strengthening Yen will lead to decreased demand for Japanese exports. Investors are likely to remain long until the swing bottom at 1.1225 is violated. A breakout below this point will turn the main trend to down, setting up a possible decline to 1.1074.


The British Pound rebounded against the Euro after Hungary’s smaller-than-expected debt auction renewed sovereign debt concerns in the Euro Zone.


Early in the session the British Pound was under pressure due to concerns about the economic recovery triggered by a weaker-than-expected budget deficit and lower mortgage approvals.


Technically, the September British Pound survived a two-day break while keeping the main up trend in tact. Tuesday’s strong upside momentum indicates the market may have enough power to test the last swing top at 1.5471. A new main bottom at 1.5152 may also form, adding to the Pound’s growing series of higher bottoms.


The biggest concern facing the Pound at this time is whether the U.K. economy can strengthen enough to trigger a rate hike by the Bank of England. Traders are extremely worried that the economy will weaken further because of the newly approved austerity measures.  This would make the U.K.’s debt rating vulnerable to a downgrade by the ratings agencies.


The September Euro traded lower, pressured by sovereign debt concerns in Europe following poor demand for Hungary’s debt. Profit-taking ahead of Friday’s release of the European bank stress tests results added to the weakness. Traders are nervous about what the report will reveal. Some feel the test wasn’t stringent enough; others feel that it will show several banks need to raise more capital.


After testing a Fibonacci retracement level at 1.2998 and trading all the way to 1.3028, the Euro posted a daily closing price reversal top on Tuesday. This is the second such reversal in two days signaling increasing selling pressure. A follow-through to the downside is needed to confirm the reversal. Watch for weakness to develop if the 50% level at 1.2783 fails to provide support.


Over the near-term, stronger demand for higher risk assets is likely to continue to underpin the commodity-linked currencies. Profit-taking is expected to continue to pressure the Euro as traders await Friday’s European bank stress test results.


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