Investor sentiment is up this morning, driving U.S. stock index futures higher in the wake of strong earnings results from European banking giants UBS and Deutsche Bank. Investors are also buying in anticipation of strong earnings results from Aetna, Inc., Anadarko Petroleum Corp., DuPont and Lockheed although banking stocks are expected to carry the market today.
Today traders will have a chance to react to two U.S. economic reports: the Case-Shiller 20 City Index and Consumer Confidence. The Case-Shiller housing report for May is expected to rise to 4.0% from 3.8%. This will be the biggest rise in the index since September 2006. Consumer Confidence is expected to come in at 51 which is down from 52.9. A greater than expected drop will fuel concerns about a double-dip recession.
Treasury Bonds and Notes are trading lower in anticipation of better housing numbers. A strong number will pressure the Treasurys as investors cut demand for the safety of government debt. Investors are facing a huge supply situation at this time. Today the U.S. Treasury will auction $38 billion in 2 Year Notes. Look for low demand at this auction as the expected record low yield is expected to keep investors on the sidelines. Furthermore, there is just too much demand for higher yielding equities at this time to warrant strong demand for the lower-yielding T-Notes.
Demand for risky assets is helping to drive up September Crude Oil this morning. Upside momentum is building which could drive this market through the major swing top from June at 80.82. A key 50% retracement level at 80.88 will be an important barrier this market will need to overcome to trigger an acceleration to the upside. Today the American Petroleum Institute oil inventory report is expected to show a decline of 2.3 million barrels. This news could fuel an intraday upside breakout.
Surprisingly, August Gold is trading higher. Gold has been steadily falling since the Euro bottomed as traders have been shedding their hedges against a currency collapse. The rise in the stock indices has also been pressuring gold as both markets have been competing for investment dollars. August Gold is in a downtrend and may have to test a major 50% price at $1158.30 before reaching a value area on the charts.
The Dollar is trading weaker across the board except the Japanese Yen. Investors are feeling more confident about the global economic recovery and shedding safer currencies. Commodity-linked currencies are trading higher let by the Australian Dollar as traders buy ahead of tomorrow’s CPI report. A stronger than expected inflation figure is expected to solidify a rate hike by the Reserve Bank of Australia. Strong demand for equities is reigniting interest in the carry trader which is pressuring the Japanese Yen.
Monday Recap
The Dow finished sharply higher after moving positive for the year. Slow and steady was the move on Monday as stocks opened higher then slowly built on their gains throughout the day buoyed by the news that U.S. New Home Sales beat estimates and FedEx boosted its forecast
Early in the trading session, stocks got a boost as investors were able to set aside risk because of the acceptance of the European bank stress test results. Some traders were worried that given the weekend to digest last week’s stress test data, investors would reconsider their bullish tone set in motion on Friday. This was not the case, as investors held stocks steady to better overnight despite widespread criticism of the techniques used to assess the solvency of the European banking system.
Technically, the September E-mini Dow Jones futures contract turned the main trend up on the daily chart with a move through 10367. The chart indicates the market is in a position to test the .618 retracement level at 10516 and the June top at 10536 over the near-term. The September E-mini S&P 500 turned its trend up on the trade through 1099.25. This market is struggling at a 50% level at 1107.00. Holding above this level could launch an acceleration to the June top at 1129.50. Finally, the September E-mini NASDAQ is in an uptrend on the daily chart. Holding the 50% level at 1875.75 could help drive this market to the 61.8% retracement price at 1917.75.
Cycle watchers may have been disappointed by Monday’s strong finish since several technical timers had been looking for a reversal top. Monday’s action did not negate the outlook however as several key cycles are also set to converge later in the week. Continue to watch for higher-highs, but become cautious if an intraday reversal top develops.
While equity traders looked at yesterday’s New Home Sales Report as friendly, Treasury Bonds and Notes rallied on the news. A one-month bounce off of last month’s low was not enough to convince investors that interest rates would rise because of the news. In fact, the Treasurys are still suggesting the possibility of a double-dip recession because of the recent weak economic reports as well as Fed Chairman Bernanke’s bearish testimony.
Longer-term investors are pricing in the possibility of the first rate hike in years by the Fed in September 2011. This clearly shows the market still does not have strong confidence in the economy. This logic flies in the face of the stock market rally which is being driven by better than expected earnings and revenues. The question is what is the best indication of the state of the economy, the broad-based economic reports or the earnings outlooks.
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