Today is a bank holiday in the U.S. Trading may be thin at times because of the holiday but this condition could lead to volatile trading. There are no major reports from the U.S. today. Tomorrow will be an important day with Retail Sales, Business Inventories and FOMC Minutes.
The main issue in the markets is the Dollar and risk appetite. Last week the Dollar was pounded early as traders were questioning its use as the world’s reserve currency. It made a slight comeback late in the week, boosted by comments from the Fed regarding a tight monetary policy. Overnight, last week’s late positive momentum was erased by a pick-up in demand for risk. Asian and European traders seem positive the Dollar will continue to weaken and are expected to step up demand for higher risk assets throughout the week.
Stronger stock markets in Asia and Euro are expected to drive U.S. stock markets higher today. Traders seem fearless about earnings. Buying is coming in strong despite having a majority of companies left to report third quarter results. Overnight the December E-mini S&P 500 reached a new high for the year. This move erased the reversal top at 1075.75 which was formed in late September. Because of the weaker Dollar, U.S. equities still appear cheap to foreign investors.
Treasury markets are trading a little better this morning. This is a technical rebound following a big sell-off late last week. December Treasury Bonds and Notes felt downside pressure late last week because of comments from Fed Chairman Bernanke regarding a tighter monetary policy. The tide seems to be shifting to the downside which means traders should be looking at the short-side following strong rallies.
The U.S. Dollar is expected to open lower against most majors. The December Euro is trading higher despite weaker German wholesale prices. This shows that traders are more interested in owning higher risk assets and are paying less attention to economic news. Look for weakness to continue in the December British Pound. The fundamentals suggest that U.K. interest rates should continue to remain low and stimulus plans intact. The December Japanese Yen is trading weaker. Comments from the Bank of Japan suggesting it is dangerous to short the Dollar at current levels is providing support. The December Canadian Dollar is called higher. Last week Canadian employment was reported better than expected. The strength created by this bullish report is continuing this morning, boosted by higher equities and energy prices.
December Gold is called higher this morning. The weaker Dollar continues to drive traders into the precious metals for protection. Gold prices are way ahead of silver prices which is causing some analysts to call the current move a bubble. As long as the Dollar remains weak, look for the trend to continue. High prices mean higher volatility so be aware of the potential for wild swings.
Increased demand for risk is helping to support energy prices. The short-term fundamentals still suggest weaker prices because of excess supply and low demand. A bullish outlook for increased demand is helping to slow down the rate of decline. A strong rally in equities and a sharp break in the Dollar could trigger another surge to the upside.
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