The stronger Dollar led stock market investors to pare positions as traders become more averse to risk. U.S. equity markets closed sharply lower following a sell-off which began in Asia and Europe overnight and spread to the U.S. throughout the day. Traders are trying to protect profits at the end of the year as chart patterns suggest there is more downside than upside potential at current levels. Traders are reacting to global debt concerns a lot faster than they did in 2008.  This is leading to the excessive volatility.  

March Treasury Bonds finished in a strong position after regaining a key retracement price at 118’31.  The chart indicates that the next upside target is 123’00 to 118’15.
March Treasury Notes are in a similar position with 119’00 to 119’11 the next upside targets.

The Treasury completed the first leg of its $74 billion auction today without a hitch.  There were concerns before the trading session that investors would be reluctant to participate in this auction because the recent jump in yields was erased yesterday following a strong rally.  Investors were probably more receptive to today’s auction because of the debt problems in Dubai and Greece.
The U.S. Dollar continued to strengthen, but not because of the possibility of higher interest rates like last Friday’s rally, but because of debt concerns and credit ratings.  

Investors poured money into the Greenback in a flight-to-quality rally after Moody’s cut the credit ratings on six Dubai state-linked companies. Moody’s based its decision on the assumption that it cannot assume the government will back the debt of these companies.  

In addition to Dubai’s credit downgrade, Moody’s also issued a stern warning that it may cut the U.S. and U.K. credit rating to below Aaa.  They also added, however, that both of these nations are “resilient” but nonetheless risk an eventual downgrade if positive steps aren’t taken to shore up debt finances.  

Finally, Fitch credit rating services lowered Greece’s credit rating because of its huge debt.

This morning the Bank of Canada announced that interest rates would remain at 0.25 percent until June 2010 and that it was still concerned about the strength of the currency and its possible negative affect on exports.  This news helped send an already weak December Canadian Dollar sharply lower.  

The December Euro weakened after breaking the last main bottom at 1.4801 earlier in the week.  The next downside target is 1.4625.  The currency was hit hard after the Dubai and Greek credit downgrades. Greece’s credit reduction is of particular concern because it could have an affect on Euro Zone economic activity. An unexpected drop in German industrial production weighed on this currency before the New York session even started. Concerns are being raised regarding the pace of fourth quarter growth in Germany and the Euro Zone.

Currency traders bought the lower yielding December Japanese Yen on concerns about holding higher risk assets. This rally occurred despite the approval by the Japanese government of a new $81 billion stimulus package.  Traders did not react to this news because it was announced last week and was already priced in.  

The December British Pound accelerated to the downside today on concerns that credit problems in Dubai would spread to U.K. banks.  The threat of a rating cut by Moody’s further weakened this currency throughout the day.  Further complicating the possibility of an economic recovery is the threat by the U.K. government to raise taxes and trim spending.

On December 10th the Swiss National Bank is expected to leave its benchmark interest rate unchanged and offer clarity as to its future monetary policy plans.  Most traders expect the SNB to discuss its concerns about deflation and the possibility of another round of intervention if the Swiss Franc appreciates too much against the Euro.

After having lost $100 since last Thursday, February Gold finished lower for the day because of the strengthening Dollar.  Key Gann angle support was broken at $1140. This could lead to a further collapse in this market to at least $1107.00 over the short-run. Investors are being “coached” by gold bug analysts to “buy the dips”, but this strategy could prove to be risky if the Dollar strengthens further.  The recent vertical rise in this market suggests that an asset bubble may have been formed.  Without new central bank buying pressure, the small trader will not have enough money to support another leg higher. March Silver is in a down trend and currently searching for support in the 17.83 to 17.44 range.

March Crude Oil closed under pressure because of lower equity prices, a stronger Dollar and low demand.  A shift in trader mentality out of higher yielding assets could drop this market into 75.53 to 73.63 over the near-term.  Speculators drove this market higher and speculators leaving this market will drive it lower.


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