Here’s a recap of Wednesday’s action as traders await the release of U.S. Weekly Jobless Claims.
U.S. equity market plunged sharply lower into the close as disappointing U.S. jobs data as reported by the ADP Corp. encouraged investors to liquidate positions well ahead of Friday’s U.S. jobs data. Investors are now becoming concerned that calls for a gloomy outlook for the economy is going to become a self-fulfilling prophesy.
Consumers aren’t spending and now it appears that businesses aren’t hiring. This is probably one of the worst things that can happen to the Keynesian Theory following Obama stimulation. His plan to revive the economy is to add stimulus in an effort to fuel consumer demand. Increased consumer demand is then expected to encourage business to hire more employees. Once the economy is back on solid footing, the administration will then recover most of the stimulus money through increased taxes.
While the rest of the world is slashing spending, our administration is looking at pushing through more stimuli. Something has to give and I believe that investors have finally awoken to the thought that the deficit is too large and is going to be a problem going forward.
Although concerns about European bank funding were cleared up on Wednesday, investors should still be concerned about sovereign debt issues. For the next two days, debt issues and global growth should be on the minds of traders along with the all-important U.S. jobs data report. Some analysts still claim that this report lags the economy. This may be true but investors are going to monitor this report very closely for direction regardless of what analysts say.
Once again I’d like to emphasize that the best investors watch the Treasury markets for direction. On Wednesday, yields continued to drop, signaling that perhaps the worst is expected to come in the higher risk asset markets. The charts indicate demand for fixed income instruments is continuing to grow with plenty of room to the upside for price expansion. This continued movement into safer assets suggests that equity markets are getting ready to plunge.
The September Euro rallied sharply higher on Wednesday after the European Central Bank reported that demand for three-month loans by member banks was weaker than expected. This news came as relief for traders who were looking for European banks to be a little more active at the lending window given the bleak outlook for the Euro Zone economy. The news tempered concerns that the European banking sector was weakening and would need to continue to borrow from the ECB to shore up finances.
Technically, the Euro found support at a key 50% level at 1.2171. The rally from this level gives bullish traders a ray of hope that the market will form a secondary higher bottom to help drive it through the most recent high at 1.2367. Bearish traders point out that the short traders still control the Euro based on the recent Commitment of Traders Report. Some feel that lower prices are coming and that today’s rally was just a technical glitch in the down trend. The chart indicates that a failure to hold 1.2171 should trigger a fast move to 1.2102.
Gains in the Euro may have been limited on rumors that Moody’s rating service was getting ready to downgrade Spain’s sovereign debt. Some believe that this may already be priced into the market because Fitch and the S&P Corp. had already downgraded Spanish bonds weeks earlier.
The U.S. Dollar was mixed against most major currencies on Wednesday. The weak equity markets helped drive up demand for safety while pressuring the commodity-linked currencies. The September Australian Dollar broke through 50% support at .8469. Downside momentum indicates that a test of .8378 is likely over the near-term. The September New Zealand Dollar completed its 50% retracement to .6865, but the inability to trigger a technical bounce at this level indicates that a break to .6896 is likely. The September Canadian Dollar broke sharply lower after an early attempt to rally it failed. Downside momentum indicates a move to the early June main bottom at .9357 should be expected over the short-term.
Weak crude oil and equity markets weighed heavily on the Canadian Dollar. Concerns are being raised about Canada’s ability to grow its economy if crude oil continues to weaken. Traders are now beginning to price in the possibility that the Bank of Canada will leave interest rates unchanged at its next meeting.
The big surprise of the day was the June ADP Employment Report. Early guesses were pegged at the creation of anywhere from 23,000 to 100,000 jobs or a consensus of 60,000. The actual figure of 13,000 jobs created helped the Dollar to strengthen against all Forex markets except the Japanese Yen and Euro.
The lack of interest in the bearish ADP Report is a sign that traders are more focused on this Friday’s U.S. Non-Farm Payrolls Report. Economists are predicting a loss of about 130,000 jobs in June. This figure includes about 250,000 temporary jobs. Based on the weak close in the U.S. equity markets, it appears that the bears are in control. This also means that the Dollar is likely to be underpinned by demand for less risky assets 
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