The flight to safety rally overnight into the U.S. Dollar is likely to pressure U.S. equity markets on Tuesday as investors are expected to reduce their exposure to risky investments.
Selling pressure began overnight in Europe amid speculation that China’s central bank will intervene to limit gains in the Yuan after dropping its two-year peg to the U.S. Dollar.
In addition to the speculation about China, a new debt problem concern in Europe is also renewing fear that sovereign debt issues have exposed the banking system to risky investments which may lead to a slow down in economic growth. Traders are also raising doubts about the recovery taking hold because of the newly proposed austerity measures in the Euro Zone and the U.K.
Technically the September E-mini S&P 500 posted a closing price reversal top on the daily chart on Monday. This bearish pattern will be confirmed when Monday’s low at 1103.25 is violated. Once confirmed the market is set-up for a 2 to 3 day correction to 1083.25 to 1072.50.
A drop in demand for higher risk assets is helping to boost the September Treasury Bonds. On Monday, T-Bonds recovered from a gap lower opening to close on its high. This move kept the uptrend intact, triggering the overnight rally. Regaining a .618 price level at 124’08 could trigger stops and an acceleration to the upside.
August Gold traders look confused. They don’t seem to know whether to be concerned about renewed debt problems in Europe, the strengthening Dollar or weaker equity markets. Gold is trading slightly better this morning after a huge reversal top on Monday. The short-term break stopped at a 50% price at $1232.30. A failure to hold this price should trigger a further break to $1224.20. Downside momentum could trigger a change in trend to the down on a move through $1216.20.
The September Euro retreated overnight following a 10-day rally amid concern debt trouble at European banks will temper global growth.
Selling pressure hit the Euro after European Central Bank President Jean-Claude Trichet said nations in breach of European Union fiscal rules may face tougher punishments and ECB member Christian Noyer said some banks in the Euro region are facing funding problems.
The Euro topped on Monday after Fitch credit-rating firm downgraded BNP Paribas. The downgrading of the major bank shifted the focus back on the European debt crisis and the banking sector. Fitch citied structural issues related to the bank’s business mix as the main reason behind the downgrade. Fitch also cited asset-quality deterioration in 2009 for the downgrade.
Technically, the Euro posted a daily closing price reversal top on Monday. This pattern was confirmed overnight with a follow-through move to the downside. Based on the short-term range of 1.1876 to 1.2467, traders should look for a 2 to 3 day break or a retracement to 1.1884 to 1.2477.
Investors are bailing out of the September British Pound shortly before the new government unveils its first budget. Chancellor of the Exchequer George Osborne will present the budget to parliament today as he seeks to prevent the loss of the U.K.’s triple-A rating. The market is looking for the budget to include severe cuts in spending and possible tax hikes.
This move toward fiscal tightening may lead to a prolonged period of loose monetary policy which may weigh on the Pound. In other words, the anticipated moves by the new government may mean the Bank of England may have to maintain liquidity or risk losing the economy.
Technically, Monday’s closing price reversal top inside of a retracement zone at 1.4876 to 1.5028 was confirmed overnight. This bearish chart pattern suggests a minimum 2 to 3 day break with a minimum downside target of 1.4643 to 1.4574. More aggressive selling could trigger a retracement to 1.4583 to 1.4499. The chart pattern also suggests that 1.4583 to 1.4574 is a support cluster which could attract buyers. 
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