Thursday July 22, 2010 - 20:21:25 GMT
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Stock Rally on Expectation of Lower Interest Rates
equity markets are trading sharply higher at the mid-session, driven by the
prospect of lower interest rates and greater demand for higher risk. While
Bernanke‚Äôs comments on Wednesday may have led to a sell off, the combination of
his dovish outlook and a stronger outlook for the Euro Zone economy sent shorts
scurrying. The inability to break the
stock markets overnight was also a sign of fresh buying.
This morning traders did not hesitate to
buy stocks despite the higher opening. Those who waited for a dip missed the
boat as strong demand for equities came in from the get-go. Traders feel the
call for lower interest rates and the possibility of another round of
quantitative easing are the main reasons to own stock.
The strong rise in demand for commodities
and equities is pressuring September Treasury Bonds and September Treasury
Notes. T-Bonds traders are now pricing in a rate hike for September 2011. This
represents a shift in attitude from the Spring 2010. Although investors are likely to continue to
buy the Treasurys during times of turmoil, appetite for risk like today will
mean light selling pressure.
The U.S. Dollar is trading lower across the
board as trader demand for risky assets soared following the news out of Europe. The release of the bullish industrial report
combined with Bernanke‚Äôs dovish tone sends a signal to investors that the
European Central Bank is moving closer to a possible rate hike while the Fed is
still struggling with the possibility of a double-dip recession. Furthermore,
the bullish Euro Zone numbers is a sign that the ECB is likely to refrain from
applying additional stimulus measures while the weakening U.S. economic data means the Fed is
likely to consider a second round of quantitative easing.
The strong rise in the Euro is spreading to
other currency markets as traders position themselves for a weaker U.S.
economy. Traders are demanding higher yielding assets as they anticipate the
Fed leaving interest rates lower for a much longer period of time than
previously estimated. U.S. Treasury Bond traders are pricing in the possibility
of a Fed rate hike for September 2011. The bullish news about the Euro Zone and
the dovish outlook for the U.S.
economy is especially bullish for commodity-linked currencies.
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