Wall Street Turns Bullish after Stress Test Calms Traders
equity markets soared to the upside late in the trading session after treading
water at the mid-session. The markets traded sideways after the release of the
European bank stress tests, giving traders time to assess the results. The news
that the majority of European banks passed the stress tests came as a relief to
traders who shifted their interest back to earnings report and the global
The lack of any fresh economic news was another factor
affecting the trade today. Earnings reports were good this morning, but with
the focus on European stress tests later in the session, gains were limited.
Once traders saw that the tests revealed no major flaws in the banking system,
demand for risky assets rose along with stock prices. For the week, all three
major indices posted strong gains during sometime volatile trading sessions.
Earlier in the week, the markets were crushed by commentary
from Fed Chairman Bernanke who talked about the weak economy and the need for
new stimuli. The markets turned around early Thursday morning when the Euro
Zone reported robust gains in the industrial sector. The strong close has the
markets in a position to break out to the upside, but gains could be limited
late in the week as many cycle watchers are predicting the start of a major
Treasury markets traded lower after failing to mount a
comeback when stocks weakened near the mid-session. T-Bond and T-Note investors
took profits after strong rallies earlier in the week. Although interest rates
are expected to remain under pressure over the near-term, the shifting of
assets out of fixed income instruments and into equities should pressure the
Treasuries. Overall, however, traders should look for a correction rather than
a change in the trend. This is not likely to occur until there is solid
evidence the economy is turning back up.
August Gold closed unchanged for the week. Traders are
confused about the fundamentals at this time. The rise in stocks should
pressure gold as both assets classes compete for the same assets. However, gold
may rally if the Dollar gets trashed. Traders have to make a decision as to
which event to follow. A decision may be made once gold tests a major 50% level
The U.S Dollar Index had a roller-coaster ride this week
although it managed to finish only slightly lower. Based on the November 2009
to June 2010 trading range of 75.03 to 89.22, this market is now testing a
major 50% level at 82.12.
Over the past two weeks, the pace of the decline has slowed
as the market approached the 50% retracement level, but following this weekâ€™s
inside trading range, may be set up for an acceleration to the downside. A
break through 82.12 is likely to trigger a sharp break into the next
retracement level at 80.45.
Traders should turn their attention to this index this week
because of the possibility of stronger than average volatility and the
potential for a support base to form between the 50% and 61.8% retracement levels
at 82.12 to 80.45.
The Weekly Euro had a volatile, two-directional trade this
week, ping-ponging between a 50% support level at 1.2783 and a 61.8% resistance
level at 1.2998. Technically, the weekly chart formed a closing price reversal
top, but will have to trade through 1.2732 to confirm it. A confirmation of
this pattern is likely to trigger a 2 to 3 week correction back to 1.2452 to
A failure to confirm the reversal top and a close over
1.2998 will be a bullish signal. Look for an acceleration to the upside if this
occurs since the chart indicates no major resistance on the weekly chart until
On Friday, the Euro was up in early session trading in a
continuation of Thursdayâ€™s strong rally before jitters about todayâ€™s stress
tests triggered a profit-taking correction. From an early session high at
1.2965, the Euro broke to 1.2793 shortly after the New York opening.
The September Euro spiked to 1.2910 immediately after stress
test results began being released, but sold off quickly as traders were
disappointed with the results. Although only a small number of European banks
passed their stress tests, investors remained skeptical about the methodology
used by the regulators. Many viewed the guidelines used as too easy on
As expected, Germanyâ€™s
HRE, Greekâ€™s Atebank and Spainâ€™s
Banca Civica failed their tests, but most banks passed even in hot spots such
as Greece and Spain.
The biggest concern for investors was that stress tests
excluded the possibility of sovereign debt default. Sovereign debt held in
portfolios was distinguished from sovereign debt held to maturity. Debt held
for trading is expected to be marked to market; debt held to maturity is not.
The problem with this separation into two different types of
debt means that it is possible that losses by banks will be underestimated.
This could hurt the financial health of European Banks and undermine the
credibility of the banking system.
The concerns being raised by investors put pressure on the
Euro at the mid-session, but a late session rally in U.S. equity markets triggered a
short-covering rally in the Euro, pushing it higher for the day. While the news
about the bank stress tests is unsettling, risk takers decided that nothing out
of the ordinary was revealed so traders turned their attention to higher risk
assets like U.S.
stocks in what can best be described as a relief rally.
The British Pound rallied sharply higher on Friday versus
the U.S. Dollar and the Euro. Fridayâ€™s rally was ignited by the news that the
U.K. economy grew almost twice as much as economists forecast in the second
quarter in the fastest expansion for four years. The strongest gains were seen
in the services, manufacturing and construction sectors.
The bullish economic news out of the U.K. was damaging to the U.S. Dollar because it
was solid proof that the economy was recovering at a time when the Fed was
forecasting a weaker GDP for the U.S. Fridayâ€™s report may be the
evidence the Bank of England needs to begin hiking its historically low
benchmark interest rate. In the meantime, the Fed is pondering applying more
stimuli as well as renewing its quantitative easing program. Treasury market
traders are already pricing in a rate hike for September 2011, this is up from
an earlier forecast of Spring 2011.
The improving economy and the possibility of a
sooner-than-expected rate hike make the GBP USD a more attractive investment at
this time. Technically, the Pound/Dollar had an inside week which indicates
impending volatility. The strong close puts this market in a position to take
out the April swing top at 1.5523. A breakout above this level may run into
selling pressure inside of a major retracement zone at 1.5635 to 1.5967.
Although the initial reaction to the stress tests was
bearish for the Euro, traders quickly realized that the news was already in the
market. In my opinion, European Central Bank President Trichetâ€™s comment
earlier in the month that banks would need to raise capital and a rumor last
week that eleven banks would fail the test was spot on. Todayâ€™s report revealed
that seven institutions didnâ€™t have enough capital and may need to raise more
than $4.5 billion.
Analysts around the globe are saying that the stress tests
werenâ€™t stringent enough and that the release of the results failed to
alleviate market concerns about the banking systemâ€™s vulnerability to
sovereign-default risk. Nonetheless, investors spoke today by trashing the
Dollar and rallying stocks, this could be an indication that they have put the
tests behind them and are turning their focus on the global economic recovery.
This means that economic reports are likely to carry more weight in the weeks
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