The stronger U.S. Dollar is helping to put pressure on U.S. equity markets overnight. Concerns about Greek financial problems are pressuring the Euro, leading to a decline in demand for higher risk assets. Traders appear to be lightening up their long equity positions ahead of today’s opening despite the possibility of stronger than expected corporate earnings reports.
Yesterday, Fed Chairman Bernanke ignited a rally in the equity markets with his dovish assessment of the economic recovery and outlook for interest rates. Like he did several times before, Bernanke basically gave equity traders the green light to continue to buy stocks. This is old news, however, as traders will now have to turn their focus on the reigniting of fiscal problems in Greece. Rather than try to sort out the details, investors may choose to take the easy route and lighten up their long positions.
June Treasury Bonds are trading better this morning, buoyed by weaker equity markets. The overnight rally in the T-bonds appears to be a safety play as nervous traders seek to park funds in lower yielding assets. The charts indicate that 115’29 is going to act as a pivot. Holding this price could help trigger a short-term rally. Falling back below this price could trigger a break to 115’14.
June Gold is trading a little weaker overnight mostly because of the stronger Dollar. Losses may be limited if the Greek sovereign debt situation begins to escalate. Traders may begin to support the gold market if it looks like the existence of the Euro will be threatened. Gold traders may seek protection in hard assets rather than paper currencies.
The falling Euro is putting pressure on June Crude Oil. Yesterday, crude oil rose because of the weaker Dollar and a report that inventories had unexpectedly fallen. Technically, this market may be forming a secondary lower top which could mean the start of a short-term sell-off.
Last night China reported that its Gross Domestic Product grew 11.9 percent from a year ago. This was slightly better than the median guesses of 11.7 percent. The news, that China’s economy accelerated more than expected in the first quarter, raised concerns that it may be overheating, prompting more talk of a possible interest rate like. Traders are also increasing speculation that China may revalue its currency as soon as next week. If this takes place, look for the Japanese Yen to strengthen and the U.S. Dollar to weaken.
To recap Wednesday’s trading activity, the Dollar lost ground across the board after Fed Chairman Ben Bernanke’s dovish testimony. Testifying before the Joint Economic Committee, Bernanke reiterated the Fed’s stance that interest rates would remain low for an “extended period”. He also said “the income data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarter”. Finally, he added that “significant restraints on the pace of the recovery remain including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.” In summary, Bernanke weakened the Dollar by stating that the recovery will continue to be modest while indicating the Fed has no intention of changing its language regarding interest rates in its FOMC statements.
The June Euro is selling off sharply overnight. Market participants are feeling jittery again because of concerns over Greece. Investors are worried that the IMF/EU $61 billion financial aid plan will not be enough to help the Greek economy and restore confidence in the Euro. At this time, the Euro is facing serious credibility issues.
High premiums demanded by investors on Greek bonds rose 400 basis points above the German Bund for the first time since the rescue plan was announced on April 11th. This is the clearest sign that investors are becoming worried again. In addition, after three tries, the Euro has been unable to take out the high reached Sunday night at 1.3691. Hedge funds continue to be short and appear to be adding to their positions on each rally.
At this time, the course of the Euro remains weak. Over the next week, several European Union nations will be meeting to approve their contributions to the EU bailout plan. This voting process could be another source of turmoil for the Euro. Not only will these nations have to put up the money to back Greece, but they may have to begin discussions about the possibility of similar problems spreading to Portugal.
Now that traders have had almost a week to digest the EU rescue package, a consensus is building which believes that this plan was nothing more than a short-term fix and that long-term problems still exist. Some sources say the key to a long-term solution to the sovereign debt problems in the EU sits firmly on Germany. Pressure is mounting on Germany to loosen up a bit and make it easier for struggling nations to get the aid they need to survive while simultaneously developing a plan to address financial aid issues which may arise in the future.
The June British Pound traded higher early in the trading session after a report showed the opposition Conservative Party’s lead over the Labor Party widened, easing concerns that the May 6th election will produce a hung parliament. Traders had been pressuring the British Pound lately because of concerns that a hung parliament would result in a government too weak to tackle the U.K.’s huge budget deficit.
Traders are also beginning to doubt the viability of the current rally. Speculation is building that bullish traders will begin to liquidate their long positions ahead of the election. Technically, the charts indicate this market may accelerate to the downside if uptrending Gann angle support at 1.5397 is violated today. The most likely downside target is 1.5160 on April 20th.
News that China’s GDP was up slightly more than expected during the first quarter is helping to underpin the June Japanese Yen. Additional support is being provided by traders leaving the higher risk U.S. equity markets. Technically, the charts indicate that upside momentum could take this market to 1.0853 over the near-term. Traders should also note that the general consensus suggests that the Japanese Yen is likely to gain when China decides to revalue its currency.
A drop in demand for higher yielding assets is helping to pressure the June Canadian Dollar overnight. The short-term picture indicates the possibility of a profit-taking break. Traders may also be lightening up positions ahead of next week’s Bank of Canada meeting on April 20th.
For over a year, Bank of Canada Governor Mark Carney has pledged to keep interest rates at a record low of 0.25% through June. Canadian financial markets are indicating, however, that rates may rise as early as June 1. This helped rally the June Canadian Dollar above parity recently. The bigger picture suggests the Canadian Dollar is likely to continue to rise because of the stronger-than-expected economic recovery and expectations for interest rate increases.
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