Disappointing Earnings, Economic Data Pressure Stocks
equity markets lost some momentum on Tuesday as disappointing earnings and
economic data pressured demand for equities. Stocks could never get on tract
today following Mondayâ€™s impressive rally. Early weakness was triggered by
disappointing earnings from Procter & Gamble. Later in the session, another
series of weak economic news sealed the weakness for the day.
Technical and fundamental factors kept a lid on U.S. equity
markets from the opening. The general feeling among technical investors is the
markets have reached an overbought level. The lack of follow-through to the
upside after Tuesdayâ€™s surge was attributed to the absence of key economic
reports in Asia and Europe. In addition, the
stronger Yen affected demand for higher yielding assets.
Talk that the Fed will be considering another round of
quantitative easing helped to pressure Treasury debt instruments today as
speculators bought T-Notes and T-Bonds ahead of next weekâ€™s Fed FOMC meeting.
This has to be speculative buying as yields are already at record lows, leading
some traders to believe the Fedâ€™s hands are tied.
December Gold traded slightly better. Technical factors may
have contributed to last weekâ€™s low and subsequent rally, but the strength the
last two days could be part of an asset allocation process. Some speculators
believe that money is going to begin to flow out of equities and into gold.
The U.S. Dollar was under pressure against most majors on
Tuesday on speculation the Fed will consider renewing its quantitative easing
program following next weekâ€™s FOMC meeting on August 10. Another round of weak
economic data also contributed to the weakness in the Greenback which drove the
Dollar to its lowest level since April against some of the currency pairs.
The Dollar opened lower and remained under pressure
throughout the New York session, pressured by weak U.S. consumer spending news,
a drop in home sales and a bigger than expected decline in factory orders.
The Greenbackâ€™s early morning weakness began following the
release of a bearish article by the Wall Street Journal. According to the WSJ,
the Fed will consider using cash from maturing mortgage-bond holdings to buy
new mortgage or Treasury Bonds instead of allowing its portfolio to shrink.
Insiders believe the Fedâ€™s decision will be heavily weighted by this Fridayâ€™s
U.S. Non-Farm Payrolls Report.
Some investors are questioning whether the Fed will
follow-through on this symbolic event. The market has already pushed Treasury
yields and mortgage yields to historic lows. Those traders who follow the
interest rate differential believe the Dollar will continue to remain under
pressure until interest rates begin to go up. Others believe that eventually
the weakening U.S.
economy will spread globally, triggering a flight to safety rally into the
The Euro and British Pound remained strong throughout the
day ahead of the Bank of England and European Central Bank policy meetings on
August 5.Both central banks are
expected to keep interest rates unchanged.
The BoE will report on the effects of the new austerity
measures and tax hikes on current monetary policy. The big issue will be
whether these reforms curtail growth. The ECB is likely to issue a statement on
the state of the Euro Zone following the recent aid package to countries facing
sovereign debt issues. Recently strong economic reports have surprised
investors, many of whom believed the economy would slow down due to financial
Technically, the strong close in the Euro has the market in
a position to test a long-term downtrending Gann angle from the 1.5144 top at
1.3394. Sellers may step in at this level. The British Pound tested a .618
retracement level at 1.5967. Buying seemed to dry up as the market neared this
level indicating this market may have reached an overbought point.
Speculation that the weak U.S. economy will adversely affect
the Canadian economy helped the September Canadian Dollar lose ground on
Tuesday. The CAD traded in a tight range, indicating it may be going through a
transition period. Although no topping signal has been given, the inability to
rally this currency in the wake of bearish U.S.
economic news may be a sign of either a shift in risk sentiment or position
squaring ahead of this Fridayâ€™s U.S.
and Canadian employment data.
The Japanese Yen gained despite the new 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.
Technically, the closing price reversal may be a sign of a
top. The market will have to confirm the pattern with a break through
.9070.This could start a 2 to 3 day
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