U.S. equity markets are trading flat this morning but could see downside pressure if investors decide to seek protection against a decline by demanding safety from higher yielding assets. Yesterday the markets showed how resilient they were when they rebounded from early pressure. Risk of a flare-up of financial problems in Greece could encourage investors to move money out of higher yielding stocks and commodities.
June Treasury Bonds are expected to open flat to slightly better in light trading. Investors seem unwilling to take a position until they see this week’s auction results. Investors fear that the higher return in the equity markets will encourage traders to seek higher yields in T-Bonds, thereby driving down prices. Furthermore, some traders feel that the war of words between the U.S. Treasury and China over currency valuation will lead to less demand from the Chinese.
The stronger Dollar is putting pressure on April Gold. Yesterday the main trend turned to down on the daily chart, signaling weaker markets to follow. Watch for choppy, two-sided trading while the Dollar tries to establish a trend. A break through $1088.50 could trigger an acceleration to the downside.
Pressure on equities and commodities could lead to weakness in June Crude Oil. Yesterday’s sharp rise in equities triggered a short-covering rally in crude oil after this market changed the trend to down after a break through 79.77.
The U.S. Dollar is trading better against the major currencies this morning. The Euro and the British Pound are the two weakest currencies. The early assessment is traders will be looking to protect themselves against risk which should benefit the lower yielding Dollar.
The March Euro is under pressure as speculation continues to grow that Greece Prime Minister Papadreou is likely to leave this week’s European Union summit on March 25th and 26th without a financial aid deal. This means he’ll have to turn to the International Monetary Fund for aid if needed. This is negative to the Euro because it makes Europe appear as weak for allowing one of its members to go out of the EU to seek financial help.
European Central Bank President Trichet didn’t help matters much when he offered comments citing his belief that Greece should not be offered low-interest financing. There is no question that Trichet wants stronger terms. He backed his stance by saying, “There shouldn’t be any subsidy element, no concessionary element.” His thoughts were in line with German Chancellor Merkel who is pushing for similar austere measures and sanctions against nations that threaten agreed upon deficit limits.
What is becoming clear is that battle lines are being drawn between Greece and the European Union and its beginning to look like Greece will have to turn to the IMF for financial aid.
The March British Pound is the biggest loser overnight. Sellers are pressuring the British Pound after a report showed that the U.K. inflation rate dropped to 3.0% in February. Coupled with political uncertainty and the threat of a credit rating cut, this weaker inflation report confirms a report released on Monday which calls for a “bumpy” recovery.
The lower Euro is helping to weaken the March Swiss Franc. Overnight, Swiss National Bank President Phillip Hildebrand said the SNB is poised to act “decisively” to counter any “excessive” gains by the currency. He further added “For Switzerland, we can’t fully rule out deflation threats in the case of renewed external shocks”. “An excessive appreciation for the Franc against the Euro would for example be such a shock.” This comment suggests that the SNB stands ready to continue to intervene on behalf of the Swiss Franc to protect its currency and economy.
Demand for lower risk assets is also helping to pressure commodity-linked currencies. This is weakening the March Australian, New Zealand and Canadian Dollars.
The primary driver in the Forex markets today will be risk aversion. This could mean lower stocks and commodities. The only major U.S. economic report is the 9:00 am CT Existing Home Sales Report. Home sales have plunged since tax relief ended. A surprise in this report could move the U.S. equity markets which will influence the direction of the Dollar.
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