A downgrade of Portugal’s credit rating broke the Euro sharply lower overnight, putting pressure on higher yielding stock equities, gold and crude oil. Shortly before the opening, these three major asset classes are trading lower but have not reacted nearly as much as one would have assumed following the news that the fiscal crisis is spreading throughout Europe. This news may have already been priced into the market, but with the June Dollar Index making a new high as demand picks up for lower yielding assets, one has to be less aggressive at current levels in the stock market because of the possibility of a risk aversion led sell-off.
June Treasury Bonds are trading sharply lower after several days of consolidation. While the media likes to talk about the stock market as a leading economic indicator, I have always maintained that Bond traders are the smartest investors in the world, and the overnight developments in the bonds suggest that there is risk out there despite what the equity markets are saying.
Pressure is mounting on the Treasuries because investors are driving up yields in the face of the increasing risk of holding on to debt. Everyone is issuing debt at this time from corporations to governments. Because of the increased competition, investors are in a position to ask for and receive the higher yields they desire.
The stronger Dollar is driving down June Gold. Last night’s break stopped short of taking out a recent bottom at $1088.50 which most likely would have triggered an acceleration to the downside. Although the initial reaction to the news out of Portugal is encouraging the shorts, if the situation becomes dire for the Euro once again like it did several weeks ago, then look for gold to find support from investors betting on the demise of the Euro. General demand for hard assets will help underpin this market should the Euro collapse.
Investors are selling riskier assets overnight, putting downside pressure on the June Crude Oil contract. The main trend is down on the daily chart and this market may be forming a secondary lower top. Should the Euro collapse further, pressure could spillover to the energy complex. The charts are saying this market is vulnerable to a correction to 77.28.
The March Euro broke through its recent low at 1.3431, plunging sharply lower after Fitch downgraded Portugal’s credit rating. Coupled with on-going concerns regarding efforts by Greece to obtain financial aid from either the European Union or International Monetary Fund, this latest development could worsen if additional cuts are applied to Spain, Italy and Ireland.
Overnight Fitch announced it had downgraded Portugal one level to AA- and warned further cuts would be forthcoming unless the country takes care of its ailing finances. Additional pressure could be on the Euro if the other credit rating agencies, the S&P Corp. and Moody’s, reaffirm Fitch’s assessment. Furthermore, traders are reacting as if this situation will spread to other sovereign nations as the European Union continues to drag its feet amidst the already dire Greek outlook.
After closing Tuesday off its low following the news that France and Germany were leaning toward accepting a Greece financial aid package from the IMF, the Euro weakened shortly before the Fitch news on the notion that financial aid from an outside entity would appear to be a weak signal from the European Union. This was almost a complete about face from yesterday’s late session rally which helped push up demand for higher yielding assets and currencies.
According to the recent CFTC’s Commitment of Traders data, short traders continue to control the direction of the Euro. Although efforts have begun to curb excessive short speculation in the European single currency, it looks as if bearish speculators are in control and have called the direction of this currency precisely.
The Dollar is rising across the board against all major currencies as investors seek protection from the drop in higher yielding assets. Fear could spread throughout the markets today if support for the Euro continues to erode. Investors are showing their support for the Dollar by selling off equities, gold and crude oil overnight. In addition, the Dollar Index has soared to a new high for the year.
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