Overbought Conditions Could Trigger Weaker Stock Market Opening.
If overnight trading action is any indication then look for U.S. equity
markets to open lower. The lack of buying interest overnight is most likely a
reflection of short-term overbought trading conditions and the lack of fresh
economic news. The Dollar is still under pressure against the Euro and British
Pound, but equity traders are a little disconnected from this move this
Treasury futures are trading better overnight. The Wall Street
Journal is reporting that the Fed is likely to consider renewing its
quantitative easing program. This will include buying Treasury Bonds. Traders
are buying T-Bonds and T-Notes in anticipation of the announcement at the Fed
meeting on August 10th.
December Gold is trading higher overnight. The main trend is
down, but the strong rally off a key 50% price level last week indicates that
strong buyers may be behind this move. The rally in Treasury Bonds and Gold are
strong indications that a stock market top is near. In my opinion there is no
way these three asset classes can compete for the same investment dollar
without one collapsing.
Improving economic outlooks for both the Euro Zone and U.K.
are helping to boost the Euro and British Pound versus the Dollar overnight.
Both currencies continue to soar to the upside, driven by strong trend buying
and the lack of overhead resistance.
Poor U.S. economic data and expectations that U.S. growth
could lose momentum as government stimulus is withdrawn has led investors to
speculate that U.S. interest rates will stay low for a prolonged period of
Even the Wall Street Journal supports the notion that the
Federal Reserve will consider using cash the Fed receives when its
mortgage-backed holdings mature to buy new mortgage or Treasury Bonds, instead
of allowing its portfolio to shrink gradually, as it is expected to do in the
At its next policy meeting on August 8, analysts expect the
Fed members to mull over ways to stimulate the economy including quantitative
easing. This action by the policymakers will be a signal that there is a
deepening concern among members about the economic outlook.
Before the Fed meets, the Bank of England and the European
Central Bank will have a chance to express their outlooks for their respective
economies on August 5. The BoE is expected to keep its borrowing costs at
historically low levels while explaining how monetary policy and growth will be
affected by the recently imposed austerity measures and tax increases. The ECB
will also leave interest rates unchanged at 1%, but should offer a solid
explanation for the recent surge in economic growth despite talk of a slow down
due to sovereign debt issues only two months ago.
No matter how you look at the central bank meetings, it is
clear that the market believes that both the BoE and ECB are closer to raising
interest rates than the U.S. Fed.
Overnight the U.S. Dollar hit multi-month lows against most
major currencies, some of which had not been seen since mid-April.Negative sentiment is building which could
send the Dollar even lower today as pessimism about the economy continues to
Some of the pessimism about the economy was fueled by Fed
Chairman Bernanke on Monday when he told a group that the economy has yet to
recover fully and monetary policy must remain accommodative. Bernanke also said
it is going to take â€śsignificant timeâ€ť to restore the labor market.
In other news, the Dollar is losing ground to the Japanese
Yen despite news that Japanese Minister Yoshihiko Noda said on Tuesday that
excessive, disorderly moves in the foreign exchange market were undesirable and
that too strong a Yen hurts exports and households. Market participants have
heard this line before which may be the reason for the reaction. This form of
verbal intervention didnâ€™t work in the past to slow down the strength in the
Yen and is not expected to do so now. It seems that only an actual intervention
will force the Yen lower.
Finally, last night the Reserve Bank of Australia voted to leave interest
rates unchanged at 4.5%.The main reason
for this action was inline growth and inflation. The Aussie surged initially on
the news but pulled back from its highs throughout the session. The consensus
is the RBA is very content with keeping borrowing costs at current levels until
the economic outlook become clearer.
Stock indices extended their gains on Monday boosted by a
strong outlook for the global economy. In the meantime, the outlook for the U.S. recovery
weakened as July PMI fell and Fed Chairman Bernanke expressed his concerns for
labor and housing.
News of an improving global economy sent global equity
markets sharply higher in a rally that never looked back. Stronger global PMI
reports drove up demand for risky assets as traders begin to price in a
Traders seeking higher return on their investments sold the
lower yielding Dollar and Treasury instruments to take advantage of the strong
rally in equity markets today. The rally began overnight in Asia and quickly
spread to Europe. U.S. traders, who have had ample
opportunities to buy equities on dips during the past week, chased the market
higher from the opening.
The rally on Monday was led by large multinational companies
who will benefit from a strong global recovery. Financial stocks also
contributed to the strength in the indices now that it has been generally
accepted that the European bank stress tests revealed nothing of significance
for the sector.
September E-mini S&P 500 traders are trying to drive
this market through the last main top on the weekly chart at 1129.50. A push
through this price will turn the main trend to up on the weekly chart and
indicate further upside.
The market may continue to rally early in the week but
upside momentum could slow ahead of Fridayâ€™s Non-Farm Payrolls Report.
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