U.S. equity markets are called lower this morning after a limited overnight trade. Yesterday, the Cash Dow closed over 11,000 but there was little investor reaction following this largely psychological event. Traders seem a little tentative chasing strength in this market and may opt once again to support the long side on dips only.
Investors have two factors on their minds at this time: risk sentiment and earnings. The risk sentiment factor centers on Greece and its ability to shore up its finances. Traders are watching this situation closely to determine whether the Dollar will strengthen or weaken. A stronger Dollar could pressure stocks as this would be a sign that investors are looking for protection. A weaker Dollar will be an indication that traders are looking to take on the risk of holding higher yielding assets. The best currency to watch for direction will be the Euro.
Equity investors are also concerned about first quarter earnings reports and the future outlook for earnings. Although earnings reports may come out better than expected for Q1, traders will be watching to see if higher commodity prices will be a factor to be concerned about affecting the future earnings of companies moving forward. The rise in commodity prices and the potential for higher interest rates and inflation will be key factors affecting earnings during the second, third and fourth quarters of 2010.
June Treasury Bonds and Treasury Notes are trading better. The strong surge in Treasuries is being attributed to traders hedging bets against a drop in equity prices due to the possibility of worse than expected earnings reports. Based on the short-term range of 118’12 to 114’06, the current rally has retraced back into a potential resistance zone at 116’15 to 116’29. Since the main trend is down, selling pressure may begin to resurface again.
June Gold is trading lower after falling back inside a retracement zone at $1137.80 to $1159.50. The Dollar has hardly moved the past two days which leads me to believe that today’s selling pressure is related to the easing of Greek tensions. Bullish traders have been building positions in anticipation of a collapse in the Euro due to the floundering Greek fiscal situation. Today’s sell-off may be traders liquidating their positions as tensions have eased following the new European Union proposal.
The drop in demand for higher risk assets is putting pressure on June Crude Oil. The trend is still up, but the chart formation is suggesting that longs are bailing out. Look for a minimum pullback to 83.43 over the near-term before new buyers step in.
The U.S. Dollar traded mixed overnight but shortly before the New York opening there are signs it may open lower. Most of the overnight pressure is coming from the strengthening British Pound.
The June Euro is trading slightly better ahead of the New York session following an overnight session which saw this pair test 1.3555. This break stopped short of a 50% retracement level at 1.3542 and filling the gap from Sunday night with a test of 1.3498.
Trading has been tentative in the Euro since the EU approved a measure to bailout Greece with short-term loan package. The initial reaction on the opening Sunday was a gap-higher opening, but the market has sold off since that unusually strong opening. Aggressive traders took advantage of the higher opening by shorting the spike up and rode the market down as traders remained cautious ahead of last night Greek T-Bill auction.
Investors were watching this auction carefully to see how much Greece would have to pay to fund its government over the near-term. The concern was that the cost to finance its current budget would force it to tap the $61 billion loan package from the European Union. The results of the auction were better than expected. There was a very strong bid-to-cover but Greece had to pay for this demand. Six-month T-Bills settled at 4.55%. Fifty-Two week T-Bills finished at 4.85%. To put it in perspective, during last week’s turmoil, Greece would have had to pay 6 to 7%. Overall, one would have to say, it was a good auction.
The result of the auction does not mean the crisis is over. Based on the overnight trade, market participants are still very nervous. The high cost of the debt also indicates that Greece will have to borrow additional funds to stabilize its financing. There is evidence that hedge funds were aggressive sellers overnight. Overall, the trade has been very tight with a slight bias to the downside. Many traders are still maintaining a “sell the rally” mentality with the objective of filling the gap left by Sunday night’s strong opening. How much the Euro weakens will be determined by the amount it has to borrow from its European partners.
The June British Pound is trading higher after a report showed that the U.K. trade deficit beat expectations. The overnight report showed that the deficit narrowed substantially in February following a disappointing report in January. The number also reflects the positive impact the weak U.K. currency has had on demand for British imports. Optimistic traders feel that the low British Pound has finally paid off by increasing the competitiveness of U.K. exports.
Although the British Pound is trading higher, gains could be limited because of concerns over the upcoming May election. Traders are waiting for the competing parties to offer succinct plan as to how the winning party will begin to shore up the budget deficit.
The mixed Euro is helping to hold the June Swiss Franc in a tight range between a pair of retracement levels at .9434 and .9471. This pair is waiting for the Euro to make its move. A stronger Euro will put pressure on the Dollar. A weaker Euro will help the Dollar appreciate.
The June Japanese Yen saw a slight drop early in trading session after reports surfaced of a clash between the Japanese government and the Bank of Japan. The main sticking point between the two factions is monetary policy and the fight over how to avoid deflation. The lower equity markets helped turn this pair around and expectations are for the Japanese Yen to open a little better this morning.
The June Canadian Dollar is trading lower because of a drop in gold and crude oil prices. This news is putting short-term pressure on the Canadian Dollar. There is evidence in the Canadian financial markets that traders are increasing bets that the Bank of Canada will raise interest rates on June 1. Traders are now pricing in a 50% probability of a rate hike sooner than the previous estimate of July 1. Traders are citing the hot economy as the main reason for the change in the estimate.
Today, investors are looking for the Canadian trade data to show an increase for the third consecutive month although the market will be most sensitive to the movement in gold, crude oil and equity prices.
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