U.S. economic growth slowed during the second quarter more than economist estimated, pressuring equity markets before the opening. Expectations were for a rise of 2.5% to 2.7%. Stocks fell on the news as investors shed risky assets.
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.
The Dollar is trading higher against most major currencies with the exception of the Japanese Yen. Traders are leaving the higher risk and commodity-linked currencies this morning and seeking shelter in the lower yielding Dollar and Yen. Some traders believe the slowdown in the U.S. economy will curtail the global economic recovery.
Thursday Recap
U.S. equity markets tumbled shortly after the opening after Dallas Fed President Fisher reiterated that the economy was weak. In an early morning speech Fisher said that growth from the first quarter on is “likely to fall below 3 percent for a prolonged period.” This comment didn’t sit well with investors who used it as an excuse to shed risky stock positions ahead of Friday’s well-anticipated Gross Domestic Product report.
Fisher’s comments covered a few major sectors, making the decline broad-based. His comments pressured the technology when he said software and equipment purchases “are closer to catching up with demand”. He cited weak manufacturing growth. Fisher called the housing market “dyspeptic”. He mentioned consumer anxiety. The sum of all of these previously mentioned factors “point to a slightly weaker national outlook”.
The trend is up in the Treasury markets but investors took a cautious approach to the long side even though stocks weakened. Watch the September T-Bonds and T-Notes after the GDP report is released. A worse than expected report is likely to trigger a flight-to-safety rally in the Treasuries. A better than expected number is likely to lead to a sell off. At this time Treasury traders have priced in an annual rate growth of 2.5% to 2.7%. Depending on how much the actual number misses this range will determine the volatility in these markets.
The Dollar was under pressure most of the day on Thursday. The Greenback opened lower against the major currencies but gained back a little after Dallas Federal Reserve President Richard Fisher said economic growth is likely to remain below 3% for a “prolonged period”. He also added that there would be a slow and “bumpy” improvement in jobs but without a second downturn.
Fisher’s information was not really fresh news. His comments seemed to reiterate the Fed’s assessment in its minutes from earlier in the month and Fed Chairman Bernanke’s testimony before the Senate a couple of weeks later. Traders may have overreacted in the equity markets today, but the move in the Dollar was expected. Furthermore, the fact that the Dollar strengthened a bit after the comments is an indication that a worse than expected GDP report on Friday could renew a flight-to-safety rally in the Dollar.
The Euro surged to 1.3105 for the first time since May shortly after U.S. equity markets opened, but was unable to hold this level as stocks corrected sharply during the trading session. The subsequent break triggered volatile moves throughout the session with the market retracing inside the 1.3105 to 1.3059 range several times.
The EUR USD began to break out to the upside last night buoyed by strong European earnings reports and the dim outlook for the U.S. economy. Some traders are factoring in the possibility that the European Central Bank may be in a position to raise its benchmark interest rate before the Fed acts upon the U.S. borrowing rate.
Technically the Euro is in a strong uptrend. The breakout above the last swing top at 1.3028 reaffirmed the trend as well as the crossing of the .618 retracement level at 1.2998. In order to sustain this rally, the currency has to close above 1.2998.
The British Pound traded higher but barely held on to earlier gains following a test of a major 50% level at 1.5635. Slowing the Sterling’s upside momentum today is a U.K. housing price report which showed that home values fell in July for the first time in five months. Tighter lending conditions and concerns that government spending cuts will slow economic growth were to blame for the drop.
Last week it was reported that the U.K. economy grew more than expected during the Second Quarter but that was before the implementation of new government austerity measures. Concerns that new taxes and spending cuts will hurt the economy could be the factors which contribute to the start of a short-term decline. Technically, investors should begin to watch for a technical closing price reversal top to signal the end of the current rally. At a time today, the Sterling was close to forming a reversal top, but bargain hunters were buying aggressively on the dips.
The New Zealand Dollar traded weaker versus the U.S. Dollar after the Reserve Bank of New Zealand hiked its key lending rate by 25 basis points to 3.00%. Although this hike was expected, the main reason behind the weakness is the comment from RBNZ Governor Alan Bollard. The central bank Governor stated after the report that the “pace and extent” of future increases would be more moderate than earlier projected. Investors read this a sign that the central bank will refrain from an additional rate hike at its next meeting on September 15.
Technically the Kiwi reached its closing price reversal top objective at .7211. A normal reaction to this pattern is a 2 to 3 day decline of 50% of the last swing up. Further weakness will be indicated if .7211 fails to hold as support. Weakness in U.S. equities may trigger a further decline on Friday.
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