A turnaround in European stock markets helped pull U.S. equity markets off their lows in light overnight trading. Stocks were under pressure early in the session led by a jump in insurance costs for Irish and Hungarian debt. Insurance costs rose after credit rating agency Moody’s Investors Service downgraded Ireland’s government bond ratings to Aa2 from Aa1, citing the government’s “gradual, but significant loss of financial strength.”
A breakdown in talks between the Hungarian government and the International Monetary Fund sent worries throughout Europe. Hungary wants to ease the financial austerity measures placed on the county while the IMF wants Hungary to maintain its current fiscal deficit targets.
U.S. equity markets are called slightly better after the horrific sell-off on Friday. The loss on Friday wiped out the week’s gains. Early in the week, traders focused on earnings, but succumbed to poor economic data later in the week. More earnings reports are due this week which should be supportive for the markets, but some traders feel that this week’s housing data could trigger another round of selling pressure. IBM is set to release its earnings report after the bell.
Today the National Homebuilder’s Association Index is expected to show that the housing market continued to lose steam. On Tuesday, the markets will react to building permits and housings starts. Finally the week ends with existing home sales. All of these reports are important to the structure of the market. Housing is the worst performing sector in the economy. Housing has been under pressure since the government’s tax incentive program ended in April. Sales have declined as well as home values, leading to a drop in consumer confidence. Consumers are worried about losing their jobs and their homes.
Treasury instruments are trading flat while the Dollar is trading mixed. The Euro has shrugged off the bearish news about Hungary and Ireland and is once again threatening the 1.30 level. The U.S. Dollar is up against the Yen indicating an increase in demand for risk. The Greenback is giving back some of Friday’s gains versus the Australian and Canadian Dollars while adding to last sessions gains against the New Zealand Dollar.
The mixed Dollar is adding to the confusion in the Gold market. Technical buying in front of the old bottom at $1185.00 is helping to hold August Gold steady overnight. A strong Euro today could pressure Gold while underpinning September Crude Oil.
To recap Friday’s action, September Treasury Bonds surged to the upside once again as traders flocked to the safety of the lower yielding Treasury market. In addition, the weak U.S. economic data means the Fed is likely to keep interest rates down for a prolonged period of time.
Ten-Year Treasury futures made a new high for the year. This move reflected both fear in holding higher yielding assets and confidence that the Fed will be forced to keep interest rates low.
August Gold closed sharply lower on the heels of the poor economic news. Investors are pricing in a low inflation environment. A break through the recent bottom at $1185.00 is likely to trigger a further decline into a key 50% retracement level at $1158.30.
Stock traders finally succumbed to mounting pressure leading to a sharp sell-off in the equity markets. Reports this month haven’t been good, but investors have for the most part ignored the data and instead turned their focus to earnings. On Friday, however, investors appeared to have scrapped Plan A, choosing instead to react to another round of bearish economic reports.
Following Thursday’s closing price reversal tops, the equity markets sold off sharply and are now in a position to correct back to at least 50% of the recent 8 day rally. The chart patterns suggest the September E-mini S&P could correct to 1051.00 over the short-run. The September E-mini NASDAQ is set up for a break back to 1782.00 and the September E-mini Dow could fall to 9936.
The pace of the break in the equity markets following the recent rally suggests that buyers drove stock markets higher with very little conviction. This is typical action in a bear market.
Forex investors did an about face from earlier in the week, ending the week by dumping higher risk assets. The sharp rise in the Yen and the sell-off in commodity-linked currencies is a strong sign that investors are shifting toward a risk-off trading strategy.
The Euro surged to the upside shortly after the New York opening and before the release of U.S. economic data, briefly piercing the 1.30 level for the first time since early May.
Last week started with the focus on U.S. corporate earnings, but quickly shifted toward the economy. While good earnings have been driving up demand, it appears that investors have decided that the economic data should carry more weight. The question being asked is can corporations sustain earnings growth in the wake of a weakening economy? Friday’s action seemed to indicate that the answer is no.
The key indicator to watch is the Japanese Yen. A rising Yen will be a strong sign that investors are forecasting a weaker global economy. Commodity-linked currencies are likely to suffer the most if investors lean toward a risk-off environment. 
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