If overnight trading action is any indication then look for U.S. equity markets to open lower. The lack of buying interest overnight is most likely a reflection of short-term overbought trading conditions and the lack of fresh economic news. The Dollar is still under pressure against the Euro and British Pound, but equity traders are a little disconnected from this move this morning.
Treasury futures are trading better overnight. The Wall Street Journal is reporting that the Fed is likely to consider renewing its quantitative easing program. This will include buying Treasury Bonds. Traders are buying T-Bonds and T-Notes in anticipation of the announcement at the Fed meeting on August 10th.
December Gold is trading higher overnight. The main trend is down, but the strong rally off a key 50% price level last week indicates that strong buyers may be behind this move. The rally in Treasury Bonds and Gold are strong indications that a stock market top is near. In my opinion there is no way these three asset classes can compete for the same investment dollar without one collapsing.
Improving economic outlooks for both the Euro Zone and U.K. are helping to boost the Euro and British Pound versus the Dollar overnight. Both currencies continue to soar to the upside, driven by strong trend buying and the lack of overhead resistance.
Poor U.S. economic data and expectations that U.S. growth could lose momentum as government stimulus is withdrawn has led investors to speculate that U.S. interest rates will stay low for a prolonged period of time.
Even the Wall Street Journal supports the notion that the Federal Reserve will consider using cash the Fed receives when its mortgage-backed holdings mature to buy new mortgage or Treasury Bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead.
At its next policy meeting on August 8, analysts expect the Fed members to mull over ways to stimulate the economy including quantitative easing. This action by the policymakers will be a signal that there is a deepening concern among members about the economic outlook.
Before the Fed meets, the Bank of England and the European Central Bank will have a chance to express their outlooks for their respective economies on August 5. The BoE is expected to keep its borrowing costs at historically low levels while explaining how monetary policy and growth will be affected by the recently imposed austerity measures and tax increases. The ECB will also leave interest rates unchanged at 1%, but should offer a solid explanation for the recent surge in economic growth despite talk of a slow down due to sovereign debt issues only two months ago.
No matter how you look at the central bank meetings, it is clear that the market believes that both the BoE and ECB are closer to raising interest rates than the U.S. Fed.
Overnight the U.S. Dollar hit multi-month lows against most major currencies, some of which had not been seen since mid-April. Negative sentiment is building which could send the Dollar even lower today as pessimism about the economy continues to build.
Some of the pessimism about the economy was fueled by Fed Chairman Bernanke on Monday when he told a group that the economy has yet to recover fully and monetary policy must remain accommodative. Bernanke also said it is going to take “significant time” to restore the labor market.
In other news, the Dollar is losing ground to the Japanese Yen despite news that Japanese Minister Yoshihiko Noda said on Tuesday that excessive, disorderly moves in the foreign exchange market were undesirable and that too strong a Yen hurts exports and households. Market participants have heard this line before which may be the reason for the reaction. This form of verbal intervention didn’t work in the past to slow down the strength in the Yen and is not expected to do so now. It seems that only an actual intervention will force the Yen lower.
Finally, last night the Reserve Bank of Australia voted to leave interest rates unchanged at 4.5%. The main reason for this action was inline growth and inflation. The Aussie surged initially on the news but pulled back from its highs throughout the session. The consensus is the RBA is very content with keeping borrowing costs at current levels until the economic outlook become clearer.
Monday Recap
Stock indices extended their gains on Monday boosted by a strong outlook for the global economy. In the meantime, the outlook for the U.S. recovery weakened as July PMI fell and Fed Chairman Bernanke expressed his concerns for labor and housing.
News of an improving global economy sent global equity markets sharply higher in a rally that never looked back. Stronger global PMI reports drove up demand for risky assets as traders begin to price in a weakening U.S. economy.
Traders seeking higher return on their investments sold the lower yielding Dollar and Treasury instruments to take advantage of the strong rally in equity markets today. The rally began overnight in Asia and quickly spread to Europe. U.S. traders, who have had ample opportunities to buy equities on dips during the past week, chased the market higher from the opening.
The rally on Monday was led by large multinational companies who will benefit from a strong global recovery. Financial stocks also contributed to the strength in the indices now that it has been generally accepted that the European bank stress tests revealed nothing of significance for the sector.
September E-mini S&P 500 traders are trying to drive this market through the last main top on the weekly chart at 1129.50. A push through this price will turn the main trend to up on the weekly chart and indicate further upside.
The market may continue to rally early in the week but upside momentum could slow ahead of Friday’s Non-Farm Payrolls Report. 
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