U.S. equity markets are expected to open better this morning despite a break from their overnight highs. Stocks were trading better in the night session following a sharp sell-off on Monday. Traders were reacting to the firm Euro and to positive comments from Fed Chairman Bernanke.
The break on Monday in the June E-mini S&P and the overnight follow-through to the downside stopped short of taking out the recent main bottom at 1036.75. The main trend is down, but the market seems ripe for a short-covering rally due to oversold conditions. Based on the short-term range developing between 1107.75 to 1045.50, a retracement to 1076.50 is possible over the short-run.
Besides the oversold technical factors, investors may take shots at the long side of the market today if the Euro can stabilize. The commodity-linked currencies indicate a slight increase in demand for risk.
Despite the firm equity markets ahead of the opening, September Treasury Bonds are trading better this morning. The inability to take out yesterday’s high at 125’00 and stronger intra-day stock prices could encourage long traders to take profits after an almost 4 handle rally over the past three days.
September Crude Oil is holding steady inside of a retracement zone at 73.64 to 72.69. The divergence from the Euro may be a sign of a developing bottom.
The news that the U.K. is facing potential problems because of its growing deficit is helping August Gold surge to the upside. The overnight rally stopped short of a new all-time high at $1251.40 but upside momentum could trigger a breakout over this price today. Look for a weaker Dollar to help drive this market higher, but investors may decide to take a little off the top if the Euro strengthens.
The U.S. Dollar is trading mixed against the major currencies ahead of the U.S. opening. The Greenback is posting gains versus the British Pound and Japanese Yen while showing a slight loss versus the Euro and an even bigger decline against the risk-related currencies.
Higher global equity prices combined with oversold conditions are contributing to greater appetite for risk. This is helping to drive up the Australian, New Zealand and Canadian Dollars while pressuring the lower-yielding Japanese Yen.
Chairman Bernanke’s comments helped underpin the Euro for a short period of time overnight. On Monday, Bernanke said that Europe is committed to the Euro’s survival and has the funds available to help out any nation that seeks financial aid. Bernanke also said the recent Euro stabilization package was “a lot of money” but enough to protect Greece, Portugal and Spain from default for a number of years.
Bernanke did acknowledge, however, that hedge funds and large institutions may not yet be convinced that Europe’s debt problems can be solved and that even more money may be necessary to shore up the continent’s debt problems. Based on renewed selling pressure in front of the New York session, it appears that the Fed Chairman’s comments were only strong enough to trigger a knee-jerk reaction in the June Euro.
The June British Pound is the big loser overnight, pressured by comments from Fitch Ratings. To summarize, Fitch said that the U.K. is facing a fiscal challenge and needs to accelerate plans to reduce its budge deficit.
According to Fitch analysts, “The scale of the U.K.’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget.”
The analysts further added that the U.K. needs a “strong and credible medium-term adjustment plan to underpin the U.K.’s AAA credit rating, particularly as investor concerns about sovereign risk in advanced economies have risen.”
Fitch’s comments regarding the debt situation in the U.K. were nothing new. For several months the European Union has been trying to get its debt-laden members to take austere financial measures in order to combat their growing sovereign debt issues.
What Fitch wants the U.K. to do is speed up the process of enacting its austerity measures. In other words, move them from long-term plans to the medium-term. If the U.K. doesn’t act quickly, it risks losing its AAA credit rating. This is something the British government doesn’t want to see happen because it will mean higher financing costs. Fitch also wants to quell investor fears that the debt problems in continental Europe will jump to the U.K. shores.
Traders reacted to the comments from Fitch by selling the British Pound. The daily chart is indicating a weakening condition because of the market’s inability to establish support at the short-term retracement zone at 1.4499 to 1.4435.
Steady global equity markets overnight are helping to pressure the June Japanese Yen but not enough to drive it away from the key 50% retracement level at 1.0954. The market movement around this price will dictate the direction of the trade today. Falling below this level will indicate increased risk sentiment. Holding above this price will mean traders are or getting ready to shed risky assets.
Increased demand for higher risk assets are also helping to underpin the June Australian Dollar, June New Zealand Dollar and the June Canadian Dollar. Oversold conditions and short-covering in front of the recent bottoms in the Australian and New Zealand Dollars are helping to push these markets higher. Like the Japanese Yen, the intra-day direction of these two currency pairs will be dictated by the direction of the U.S. equity markets today. Stronger stock markets are likely to underpin the Canadian Dollar above the retracement zone at .9407 to .9361.
Traders will be watching the pace of any fresh declines in the Euro today. Some strong bears consider this market oversold and may try to trap weaker traders into thinking a break to new lows will trigger an acceleration to the downside. We’ve seen this move before, but traders still have to be reminded of it.
There also seems to be a slight demand for risk this morning, investors are still a little nervous and may overreact to the downside in the Aussie, Kiwi and Loonie should U.S. equity markets begin to sell-off. 
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