Whoever said “the trend is your friend” must have had the current equity markets in mind. Recently, analysts have called the stock market “overbought,” “too far ahead of itself” and “due for a correction,” but the market continues to drive higher.
Look for U.S. equity markets to open higher this morning based on firm Asian and European markets. The Dow, NASDAQ and S&P 500 are all expected to make new highs for the year and approach highs not seen since October 2008.
The catalyst for the movement in the assets classes this morning is news of manufacturing expansion in China, the Euro Zone and surprisingly, the U.K. With this good news and so much cash on the sidelines, it looks as if equity markets are in a position to gap and go from the opening.
Today’s key report is the U.S. Institute of Supply Management’s Manufacturing Index. A report on construction spending will also be released today at 9 am CDT. Traders are expecting U.S. manufacturing to show an increase like the other major economic centers reported last night. The current market posture may change if this report comes in well under expectations. Although it may not be trend-changing news, it is likely to trigger a substantial break in equities and could reverse the weakness in the Dollar if it misses by a hefty amount.
All of the major asset classes are being affected this morning by the strong surge in the equity markets. Renewed confidence in the economic recovery is leading to demand for risk assets. The bullish news regarding the expansion of Chinese manufacturing is a sign that Asia may be leading the rest of the world out of the recession. This is helping to fuel economic optimism and increase appetite for risk. Asia, led by China, has the money to feed this appetite.
With money moving into higher yielding assets, commodities are expected to trade higher along with equities, while lower-yielding assets, such as the U.S. Dollar and Treasuries, are expected to trade weaker.
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