Although U.S. equity markets have recovered their overnight losses, the fundamentals which influenced the market on Friday are likely to have a lingering affect on the stock markets today. Traders will be looking for bargains today and will be largely influenced by the action in the Euro especially since this currency has reached an extremely oversold condition.
A late session surge in Europe is triggering a short-covering rally in the Euro and British Pound ahead of the U.S. opening. The Euro was down sharply overnight as traders reacted to Friday’s bearish U.S. jobs data and the news that Hungary is the latest candidate for sovereign debt issues.
Over the week-end the Group of 20 major economic powers concluded their meeting by issuing a more cautious outlook for global growth. Their primary concerns were the European debt crisis and the possibility that European fiscal consolidation will result in muted global growth. While the European and commodity-linked currencies suffered, the Japanese Yen benefitted from a strong surge in flight-to-safety buying.
Shortly before the U.S. opening, the Dollar is starting to see some pressure. U.S. equity markets have turned positive, driving down the Greenback versus the Euro, British Pound and the riskier Australian, New Zealand and Canadian Dollars. Increased appetite for risk is also pressuring the Japanese Yen. This action ahead of the New York opening appears to be short-covering and only proves that the movement in the Dollar will be sensitive to risk sentiment today.
U.S. stock indices plunged sharply lower before the opening on Friday propelled by a quick drop in the Euro and a weaker-than-expected U.S. employment report. The drop in the Euro triggered a flight to safety rally into the U.S. Dollar while the employment report raised concerns about a slowdown in the U.S. economy and the possibility that corporate profits may take a hit if the global economy slows down.
The main trend turned back down in the June E-mini S&P 500 when the market crossed the last main bottom at 1067.25 before settling slightly better than a minor Fibonacci retracement level at 1067.25. Further weakness in the Euro is likely to push this market lower towards the last major swing bottom at 1036.75.
The loss was substantial in the June E-mini NASDAQ but the market still managed to hold a test of the minor retracement zone at 1829.50 to 1811.75. The Dow closed sharply lower and further downside action was indicated by the close under the retracement zone at 10032 to 9967.
The whippy action U.S. equity markets overnight is sending a mixed signal to September Treasury Bond traders this morning. On Friday, the T-Bonds and T-Notes rallied sharply higher as traders left higher risk assets for the safety of the Treasury markets. Technically this market is testing the retracement zone created by the last minor swing down at 126’05 to 121’06. This zone is at 123’22 to 124’08. The close over the high end of this retracement zone will indicate that investors are expected further downside action in the equity markets.
Selling pressure dominated the September Crude Oil market overnight and on Friday. This market is still in a downtrend and currently testing a minor retracement zone at 73.64 to 72.69. Increased aversion to risk is encouraging traders to abandon higher risk assets, putting pressure on the crude oil complex. This scenario is likely to continue this week if the Euro falls substantially again and equity markets remain weak. The weaker than expected jobs data report could be a sign that the global economic recovery is stalling. This will hurt demand for crude oil.
August Gold is trading mixed in limited trading this morning after finishing higher on Friday. Gold was under pressure early in the session on Friday as the Dollar strengthened following the release of the weaker-than-expected jobs report.
After hitting its low about 90 minutes after the report, speculators began to buy gold in anticipation of serious problems developing in the Euro Zone. Investors renewed their buying interest on concerns that the acceleration of fiscal problems in the Europe may lead to the withdrawal of one or more members of the European Union or a collapse in the single-currency.
The overnight action indicates indecision. Investors can’t seem to decide whether to rally because of the weaker Dollar or break because Euro Zone tensions seem to be easing a bit.
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