Stocks Up Modestly; Stress Tests and Earnings Key Market Drivers Today
stock futures are up this morning and poised to challenge the recent tops,
driven by demand for higher yields and better than expected earnings reports.
Stocks received a boost for the second consecutive night after Europe reported favorable economic news.
The German based Ifo Institute reported the business-climate
index rose to 106.2 in July from a reading of 101.8 in June. This number
confirmed the strong recovery taking place in Germany and set the tone for a
stronger Euro and a pick-up in demand for higher yielding assets.
The strong economic data from Europe this week is helping to
renew confidence in a global economic recovery while the U.S. still
struggles with the possibility of a double-dip recession. Traders have been
punishing the Dollar late this week as the combination of dovish testimony from
Fed Chairman Bernanke and robust economic news from Europe means interest rates
will remain low in the U.S.
while the Euro Zone grows closer to an interest rate hike. Investors,
frustrated by the low returns offered by U.S. Treasury instruments are seeking
better returns in equities, commodities and commodity-linked currencies.
Without any major economic reports today, investors will
turn their focus early in the session to U.S. earnings reports then shift
their interest to the European stress tests sometime around noon Eastern Time.
Investors are still questioning what the European stress
tests will reveal. Some traders feel the tests may have been too soft to yield
any significant results. Others expect the tests to show weakness in some banks
especially in Spain and Greece.
Overall, the tests will show that European banks need to raise capital.
Increased demand for risk is putting pressure on September
Treasury Bonds after they reached a new high for the year earlier in the week.
Although investors believe U.S.
interest rates will remain low over the long-term, short-term, the market
appears to be overbought. Confidence in a global economic recovery is also
pressuring T-Bonds as traders shed lower risk assets in favor of
U.S. equity markets surged to the upside, taking back most
of Wednesdayâ€™s loss as signs of a global economic recovery helped drive up
demand for higher risk assets.
Better than expected housing data and earnings reports also
contributed to todayâ€™s rally, but the majority of the buying was done overnight
by aggressive Asian and European buyers.
Earlier in the week, Fed Chairman Bernanke helped drive the
market lower with his dovish tone toward the economy. These losses were erased
by a strong European industrial report. Todayâ€™s rally sends a signal that
investors are more optimistic in a global recovery than concerned about the
possible double-dip recession in the U.S. Furthermore with U.S. interest
rates at extremely low levels and the strong possibility of more economic
stimulus or quantitative easing by the Fed, traders feel that the stock market
will offer a better return than fixed income instruments.
The U.S. Dollar fell sharply across the board on Thursday as
trader demand for risky assets soared following a bullish economic report out
of Europe last night. The release of a
better-than expected Euro Zone industrial report combined with Bernankeâ€™s
dovish testimony sent 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
The strong rise in the Euro spread to other currency markets
as traders positioned themselves for a weaker U.S. economy. Traders demanded
higher yielding assets as they anticipated the Fed leaving interest rates lower
for a much longer period of time than previously estimated. U.S. Treasury Bond
traders are currently pricing in the possibility of a Fed rate hike for
September 2011. The bullish news about the Euro Zone and the dovish outlook for
economy is especially bullish for commodity-linked currencies.
The need for stimulus spending by the United States and the possibility
of a global economic recovery means demand for raw materials is likely to
increase. This should help Canada,
Australia and New Zealand
since their economies are driven by demand for commodities such as iron ore,
copper and crude oil. While the Australian and New Zealand Dollars are surging
to the upside, the Canadian Dollar is strengthening by remains in a range. The
upward movement in the Canadian Dollar is most likely being limited by its ties
to the U.S.
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Tue 17 July 2018 AA 08:30 GB- Employment A 13:15 US- Industrial Production AA 14:00 US-Powell Testimony Wed 18 July 2018 AA 08:30 GB- CPI A 12:30 US- Housing Starts/Permits AA 14:00 US-Powell Testimony Thu 19 July 2018 AA 1:30 AU- Employment AA 08:30 GB- Retail Sales A 14:30 US- EIA Crude A 12:30 US- Weekly Jobless Fri 20 Jun 2018 A 12:30 CA- CPI/Retail Sales
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