Equity markets are expected to open flat this morning following a strong rally yesterday. Although gains were somewhat limited in the U.S. yesterday, strong gains were seen in Asia and Europe. Most of the rally in stocks was attributed to greater demand for higher risk assets and currencies. This could be because U.S. investors are taking advantage of opportunities overseas and diversifying their portfolios.
Traders seemed nervous yesterday about buying strength in the U.S. equity markets. This could be because of the tendency of the market to have large declines in September. Traders are definitely looking for a catalyst to take it to new levels. Investors are waiting for a new sector to emerge as the leader. Financial stocks received an upgrade yesterday but equities barely moved on the news. This is because stocks in this sector may be overpriced given the current condition of the economy. Investors are looking for bargains and may not be willing to chase this market higher at this time.
Another concern for investors is the lack of consumer spending. Broad market investors have for the most part of this rally ignored the less than stellar performance by the retail sector. Consumers have been holding on to their money out of fear of a job or home loss. Yesterday’s report showing a drop in U.S. consumer credit raised some concerns because it indicated that consumers are repaying debt rather than spending on goods and services. New tighter credit requirements and an uncertain outlook on the economy may be causing consumer to save rather than spend.
The Fed’s Beige book is the only major report on the agenda today. This report which will be issued at 1:00 pm CDT is expected to show that output has stabilized but credit is still tight. In addition to the Beige book, two members of the Fed are expected to give speeches. Their statements may produce short-term volatility in the market at times.
Treasury markets are called lower this morning. The lack of demand for U.S. debt is forcing yields higher. Investors have expressed concerns about the growing U.S. deficit and the U.S. ability to pay back this debt. In addition, greater demand for Japanese debt may force U.S. yields higher in order to make bonds and notes more attractive to foreign investors. Today the Treasury will auction $20 billion of 10 year notes. The markets will react when the results of this auction are released at about noon central time.
The U.S. Dollar is seeing some stability this morning following two days of heavy selling pressure. Appetite for risk seems to have diminished somewhat in Europe and Asia. The Dollar may be posting small gains this morning but still remains vulnerable to downside risk. Renewed questions about the U.S. Dollar’s status as the primary reserve currency are being raised again. Despite signs that the global recovery will be rocky, investors are still creating demand for higher risk assets.
Last night European Central Bank President Trichet once again warned that the financial crisis is not over and how important it is for government policymakers to consider how they will withdraw economic stimulus measures. This seems to be a major sticking point developing between analysts and economists.
Overnight the September Euro is trading slightly better. This could be a technical reaction to yesterday’s strong breakout to the upside. The September British Pound is also up slightly as traders square up positions ahead of tomorrow’s Bank of England meeting. Investors expect the BoE to leave rates unchanged. The main concern is whether the BoE makes adjustments to its asset buyback program. Last month the BoE shocked the markets by announcing an increase in its quantitative easing program. The September Japanese Yen is called slightly lower. Money could be standing aside as traders await today’s U.S. T-note auction. The Yen has been gaining on the Dollar recently because of the attractive yields offered by Japanese debt.
Weakness in the higher yielding Australian and New Zealand Dollars may be an indication that demand for risky assets may be down today. Overnight Australia announced that retail sales had unexpectedly dropped. This led to selling pressure because of concerns about when the Reserve Bank of Australia would raise interest rates. The New Zealand Dollar is trading weaker ahead of tomorrow’s Reserve Bank of New Zealand meeting. Traders expect the RBNZ to keep interest rates low for the time being.
December Crude Oil is expected to open flat to lower following yesterday’s short-covering rally. OPEC is meeting at this time in Vienna. Traders expect the cartel to encourage members to maintain their current production levels. No further production cuts are expected at this time.
December Gold is called lower following several days of strength. Some traders have been buying gold because of their lack of confidence in a basket of currencies. Others have been buying in anticipation of a break in the equity markets. In this case, money is shifting between the asset classes.
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