U.S. stock futures indices are showing a slight rebound following a private employment report which showed a rise of 42,000 jobs in July. The U.S. Dollar strengthened slightly on the news, reversing the short-term trend. Treasury markets touched a new high for the session and December Gold briefly touched 1200.00.
Prior to this morning’s ADP Employment Data report, the Dollar was showing a slight upward bias and stocks were weaker due to a slightly weaker European July services report. The services PMI rose to 55.8 but fell short of pre-report guesses of 56.0. This morning the U.S. reports its July ISM non-manufacturing index at 9 a.m. central time.
This week the Dollar has been taking a beating against most major currencies on speculation the Fed will be forced to keep interest rates low and may have to renew its quantitative easing program. A series of poor U.S. economic news coupled with better than expected news from Europe has been the catalyst behind the weakness. Investors seeking higher yields have been driving equity markets higher in the wake of the weaker Greenback.
Overbought technical conditions and uncertainty heading into this Friday’s U.S. Non-Farm Payroll Report as well as disappointing earnings from Procter & Gamble helped drive the equity markets lower on Tuesday. Treasury Bonds and Gold firmed on Tuesday indicating that one of these asset classes will have to begin to give ground.
Today’s strong rally in gold may be an indication that money is beginning to flow into the precious metals markets. Uncertainty may be making gold an attractive hedge against a possible break in the paper asset stock market.
The key to today’s direction will be the Dollar and gold in my opinion. Traders should watch to see if investors begin to shed risky assets and turn to gold for a little protection. If this allocation begins to take place, then look for pressure to begin to build on the equity markets.
Tuesday Recap
U.S. equity markets lost some momentum on Tuesday as disappointing earnings and economic data pressured demand for equities. Stocks could never get on track today following Monday’s impressive rally. Early weakness was triggered by disappointing earnings from Procter & Gamble. Later in the session, another series of weak economic news sealed the weakness for the day.
Technical and fundamental factors kept a lid on U.S. equity markets from the opening. The general feeling among technical investors is that the markets have reached an overbought level. The lack of follow-through to the upside after Tuesday’s surge was attributed to the absence of key economic reports in Asia and Europe. In addition, the stronger Yen affected demand for higher yielding assets.
Talk that the Fed will be considering another round of quantitative easing helped to pressure Treasury debt instruments today as speculators bought T-Notes and T-Bonds ahead of next week’s Fed FOMC meeting. This has to be speculative buying as yields are already at record lows, leading some traders to believe the Fed’s hands are tied.
December Gold traded slightly better. Technical factors may have contributed to last week’s low and subsequent rally, but the strength the last two days could be part of an asset allocation process. Some speculators believe that money is going to begin to flow out of equities and into gold.
The U.S. Dollar was under pressure against most majors on Tuesday on speculation the Fed will consider renewing its quantitative easing program following next week’s FOMC meeting on August 10. Another round of weak economic data also contributed to the weakness in the Greenback which drove the Dollar to its lowest level since April against some of the currency pairs.
The Dollar opened lower and remained under pressure throughout the New York session, pressured by weak U.S. consumer spending news, a drop in home sales and a bigger than expected decline in factory orders.
The Greenback’s early morning weakness began following the release of a bearish article by the Wall Street Journal. According to the WSJ, the Fed will consider using cash from maturing mortgage-bond holdings to buy new mortgage or Treasury Bonds instead of allowing its portfolio to shrink. Insiders believe the Fed’s decision will be heavily weighted by this Friday’s U.S. Non-Farm Payrolls Report.
Some investors are questioning whether the Fed will follow-through on this symbolic event. The market has already pushed Treasury yields and mortgage yields to historic lows. Those traders who follow the interest rate differential believe the Dollar will continue to remain under pressure until interest rates begin to go up. Others believe that eventually the weakening U.S. economy will spread globally, triggering a flight to safety rally into the Dollar.
The Euro and British Pound remained strong throughout the day ahead of the Bank of England and European Central Bank policy meetings on August 5. Both central banks are expected to keep interest rates unchanged.
The BoE will report on the effects of the new austerity measures and tax hikes on current monetary policy. The big issue will be whether these reforms curtail growth. The ECB is likely to issue a statement on the state of the Euro Zone following the recent aid package to countries facing sovereign debt issues. Recently strong economic reports have surprised investors, many of whom believed the economy would slow down due to financial austerity measures.
Technically, the strong close in the Euro has the market in a position to test a long-term downtrending Gann angle from the 1.5144 top at 1.3394. Sellers may step in at this level. The British Pound tested a .618 retracement level at 1.5967. Buying seemed to dry up as the market neared this level indicating this market may have reached an overbought point.
Speculation that the weak U.S. economy will adversely affect the Canadian economy helped the September Canadian Dollar lose ground on Tuesday. The CAD traded in a tight range, indicating it may be going through a transition period. Although no topping signal has been given, the inability to rally this currency in the wake of bearish U.S. economic news may be a sign of either a shift in risk sentiment or position squaring ahead of this Friday’s U.S. and Canadian employment data.
The Japanese Yen gained despite the news that Japanese Minister Yoshihiko Noda said on Tuesday that excessive, disorderly moves in the foreign exchange market were undesirable and that too strong a Yen hurts exports and households. Market participants have heard this line before which may be the reason for the reaction. This form of verbal intervention didn’t work in the past to slow down the strength in the Yen and is not expected to do so now. It seems that only an actual intervention will force the Yen lower.
Finally, Monday night the Reserve Bank of Australia voted to leave interest rates unchanged at 4.5%. The main reason for this action was inline growth and inflation. The Aussie surged initially on the news but pulled back from its highs throughout the session. The consensus is the RBA is very content with keeping borrowing costs at current levels until the economic outlook become clearer.
Technically, the closing price reversal may be a sign of a top. The market will have to confirm the pattern with a break through .9070. This could start a 2 to 3 day break. 
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