T-Bonds and Gold Signal Impending Stock Market Break
Treasury futures rallied in flight-to-safety buying as
yields in the 30-Year Bonds and 10-Year Notes plunged. Expectations are the Fed
is likely to keep interest rates down for a prolonged period of time. Despite
the early recovery in the equity markets, the Treasurys held their ground,
suggesting that there is real concern about the condition of the economy.The fact that Fed officials are backing the
call for a weaker economy is the key driving force behind the move in the
Treasury instruments. Traders have decided that the Fed is likely to keep
pressure on interest rates until the economy can turn around.
Something has to give in either the equity or fixed income
markets. The T-Bonds and T-Notes seem to be the best indicator of the state of
the economy. This means that the pressure should be on the equities.
The fact that December Gold rallied on Friday is a strong
sign that money is leaving the paper assets (stocks) and being reinvested in
the hard assets (gold). Although gold could not post a weekly closing price
reversal bottom, the pattern looks positive for the start of a retracement
rally. All it needs right now to trigger a rally is a weaker Euro and stock
U.S. stock indices traded lower following the release of a
weaker than expected U.S. Second-Quarter GDP report, but quickly turned
positive after value-seekers stepped up to buy at cheaper prices.After the initial surge, the markets stalled,
setting up the possibility of a lower trade into the close. Trading conditions
continue to remain volatile as traders jockey for position into the
Technically the September E-mini S&P 500 closed lower
for the week, setting up the possibility of a weekly closing price reversal. A
confirmation of this pattern suggests the start of a 2 to 3 week correction
back to 1060.75 to 1047.00. This morningâ€™s rally stopped short at last weekâ€™s
close at 1100.50, indicating that the Bears are defending this price level.
This week the September Euro penetrated the 1.31 price level
for the first time since May. The primary driving forces behind this move were
the better outlook for the Euro Zone economy and the weak outlook for the U.S.
economy. The data out of Europe may have
brought the European Central Bank closer to a rate hike than the Fed.
The September British Pound closed near the high for the
week after piercing a major 50% price level. The strong close put the market
over 50% of the 1.7042 (July 2009 Top) to the 1.4229 (May 2010 Bottom) range at
economic data and a better outlook for the U.K.
economy are the reasons for the strength in the Sterling. While the U.S. is still on a spending spree, the U.K.
has been busy implementing austerity measures while reading for tax hikes.
Bullish traders seem optimistic that these two factors are good for the economy
but some traders remain skeptical that spending cuts and tax increases will
curtail the economic recover.
Comments from the Bank of England this week seem to suggest
that it remains cautious about the economy and is willing to continue to
provide stimuli if and when necessary. Recently it was reported that the U.K.
GDP rose more than expected. This provided some lift to the market but poor
housing numbers seem to indicate that the central bank is still far from hiking
The Australian Dollar finished near its high for the week
after a two-day setback. Demand for higher risk assets was the driving force
behind the rally. Earlier in the week, the Aussie weakened because CPI data
suggested the economy had cooled off. This meant that the Reserve Bank of Australia would
most likely refrain from hiking interest rates at its next meeting on August 3rd.
Fridayâ€™s rally suggests that speculators are driving up the market because of
the weak U.S. economy and the likelihood that U.S. interest rates will remain
at historically low levels for a prolonged period of time.
The New Zealand Dollar closed higher on Friday after a
closing price reversal top earlier in the week triggered a 3 day, 50%
correction. This move is typical during a rally. The main problem, however,
which suggests lower markets to follow, is the weekly closing price reversal
Fundamentally, the Reserve Bank of New Zealand hiked its benchmark interest
rate by a quarter-point to 3.00%. The RBNZ, however, said it would most likely
refrain from another rate hike because of expectations of slower growth. This
news triggered the sell-off in the Kiwi. Technically, the reversal top could be
a bearish sign if confirmed. The chart suggests a possible correction to .6980
over the next 2 to 3 weeks.
The U.S. Dollar traded mostly higher against most major
currencies overnight but gave up some of its earlier gains early in the New York session,
turning negative against the British Pound, Australian Dollar, Canadian Dollar
and New Zealand Dollar while only giving up ground to the Euro and Swiss Franc.
The Dollar traded weaker versus the Japanese Yen all trading session.
This morning the U.S. GDP Report showed the economy grew at
2.4% in the second quarter. This growth was at a pace somewhat slower than
pre-report estimates of 2.5% to 2.7%. A first quarter revision higher may have
been the reason for the limited reaction to the downside in the equity markets
and the reason why the rally stalled in the Dollar.
The biggest concern at this time amongst investors is the
uncertainty of future growth. Continuing to lose growth at the current pace
suggests the U.S. GDP may fall below 2% during the third quarter. This uncertainty
is one of the main reasons why employers may be curtailing hiring, thereby
exasperating the employment situation in this country.
In other reports, the Michigan
confidence index was revised to 67.8 in July and manufacturing activity in Chicago rose more than
expected. The Dollar was able to hold its ground following the release of both
The overnight strength in the Dollar against the majors
except the Japanese Yen was triggered by weak Japanese economic news. Overnight
it was reported that Japanese core consumer prices fell 1% from a year ago. May
industrial production and employment were also negatives.
The Dollar strengthened further after Fed voting member
Bullard said the U.S.
â€śis closer to a Japanese-style outcome today than at any time in recent
historyâ€ť. He also said the best remedy for this developing problem will be
another round of Treasury purchases by the Fed.
Stocks were expected to trade lower today, but a quick rally
following the opening, triggered by value-seeking bottom pickers helped drive
the equity indices higher. This forced short-covering rallies in both the New
Zealand Dollar and Australian Dollar.
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Mon 18 Dec
10:00 EZ- final HICP Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes Mon 25 Dec
00:00 Christmas Holidays
Potential Trading Opportunities
POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.
POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity
POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
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