Stocks Wipe Out Weekly Gains; Possible Reversal Top in the Making
equity markets broke sharply late in the trading session following a bearish
Durable goods report this morning and a gloomy outlook for the economy
according to the Fedâ€™s Beige Book.
Prior to the durable goods report economists were looking
for an increase of 1.0%, the actual report showed a drop of 1.0%.This news combined with an overbought
situation triggered a break early in the session which took out yesterdayâ€™s low
but held last weekâ€™s close. Following a delayed reaction to the Beige Book
numbers, longs threw in the towel and stock indices broke. The sell-off in the
September E-mini S&P 500 and September E-mini NASDAQ erased all of this
weekâ€™s gains before settling slightly above Wednesdayâ€™s low.
Technically it looks as if breaking last weekâ€™s low will
trigger an acceleration to the downside. Not only will it wipe out this weekâ€™s
gains, but it will also trigger the possible start of a weekly closing price
The bearish durable goods report could be called a momentum
buster as investors have gotten a little too comfortable with the pace of the
current rally. This market is resilient however which means it is going to take
more than a weak durable goods report to break it from current levels.
December Gold posted a daily closing price reversal
triggered by both technical and fundamental factors. Technically, the market is
finding support at a major 50% price level at $1159.40.
Fundamentally, a shift out of equities and the Euro could
trigger a rally in gold as investors reallocate funds according to shifting
risk sentiment and asset demands.
The weak U.S.
economic data coupled with the sell-off in equities helped trigger reversal
bottoms in both the September Treasury Bonds and Treasury Notes despite another
government auction which increased available supply. Todayâ€™s technical pattern
suggests the start of a 2 to 3 day rally.
The New Zealand Dollar fell for the second consecutive day
following Mondayâ€™s bearish closing price reversal top formation. Wednesdayâ€™s
decline was blamed on a drop in business confidence, but some traders attribute
the weakness to position squaring ahead of tonightâ€™s interest rate decision by
the central bank.
Over the short-run speculators have been driving by the Kiwi
in anticipation of a hike in the key borrowing rate. Traders are looking for a
quarter-point hike to 3 percent. The weakness in the Australian inflation rate
is not expected to have an affect on the Reserve Bank of New Zealandâ€™s decision. Recent
economic data suggests that worries about inflation getting out of control are
strong enough to warrant a rate hike at this time.
reported a lower than expected rise in its Consumer Price Index. This is a
strong indication that the Reserve Bank of Australia is going to refrain from
hiking its benchmark interest rate at its next meeting on August 3rd. Traders
sold the Aussie on the news. Weaker U.S. equity markets helped maintain
the weaker tone in this market.
The U.S. Dollar strengthened following the release of a poor
durable goods report. Economists were looking for a 1.0% increase; the actual
change was reported as -1.0%. Investors did an about face following the release
of this data, buying the Dollar and selling higher risk currencies. Recently
bearish news regarding the economy had been driving down the Dollar. Todayâ€™s
reaction indicates that investors may becoming concerned that a weak U.S.
economy will slow the global expansion. The drop in equity markets also
contributed to the strength in the Dollar. After the bearish report and the
initial reaction, the Dollar settled into a range against most major
This afternoonâ€™s release of the Fedâ€™s Beige Book had a
limited affect on the Dollar. The consensus is the report paints a weak picture
for the economy. The market reacted as if the report was a non-event. The
reason for the flat reaction may have been that this news had already been
factored into the markets since economic reports have been weak and Fed
Chairman Bernanke stated last week that weak employment and slow GDP growth
will continue to plague the economy.
The tone in the market appeared to be pro-Dollar today which
could set up for a rally late in the week once the currency pairs breakout of
their trading ranges.
Technically the Euro is still struggling with the
psychological 1.30 price level. It seems that a close over this level may be
the only way to trigger an acceleration to the upside.
The British Pound closed higher but backed off after testing
a major 50% price level at 1.5635. The driving force behind Wednesdayâ€™s
strength was comments from Bank of England Governor Mervyn King.
King said he thought the 2nd quarter surprise gain in the
GDP was â€śencouragingâ€ť but expects new taxes to keep inflation under control.
This would mean the BoE would not have to aggressively raise rates to keep a
lid on inflation. King also said the central bank policymakers face a
â€śdifficultâ€ť challenge as it seeks to balance the risks for the economy. This comment
was very close to Bernankeâ€™s assessment that the U.S. economy faces uncertainty.
King left open the possibility of more stimuli by stating
that their remains â€śroomâ€ť to move in either direction and pledged to take the
â€śappropriateâ€ť steps going forward in order to encourage a sustainable recovery.
In taking into consideration the state of the economy and
Kingâ€™s comments, one can conclude that the BoE is likely to stay the course and
leave interest rates at historically low levels. This means that the recent
rally in the GDP USD was most likely triggered by a weak U.S. economy rather than speculation that U.K.
interest rates would soon rise. Furthermore, King has to be cautious at this
time because a combination of a rate hike, new taxes and cost cutting may be
too much for the economy to handle at this time. These would be the key reasons
to trigger a decline in British Pound from its current level.
As we approach the end of the week, traders should be more
aware of the action in the U.S.
equity markets. Todayâ€™s action wiped out the gains for the week which could be
an indication that sentiment is shifting away from higher risk assets. This
could pressure the Euro and the commodity-linked currencies while supporting
the Japanese Yen. The strength in the Dollar could begin tonight if Asian
indices decide to follow the U.S.
equity markets lower.
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