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Demand for Higher Risk Helping Equity Prices

James Hyerczyk from ForexHound.com at 01/25/10


U.S. equity markets are trading better at the mid-session, buoyed by demand for higher risk, oversold conditions, a fresh influx of cash and news that Obama may propose tax breaks for businesses.

Investors dumped stocks late last week as sentiment shifted toward less risky assets. The combination of a stronger Dollar, monetary tightening in China and a proposal by Obama to end financial institution prop trading weighed heavily on traders last week. While these conditions are expected to continue to linger this week, the bulk of the focus will be on the Fed FOMC meeting which takes place on January 27th. Traders will be looking for clues as to when the Fed will decide to begin to raise interest rates. News that Bernanke is expected to reappointed as Fed chairman is also to support today’s rally.

Treasury futures are trading lower at the mid-session as demand for lower yielding assets is falling. Demand for safety helped to lower yields and boost the March Treasury Bonds and Treasury Notes last week. This bodes well for the next auction because it looks as if the Treasury will be able to offer lower yields. Supply concerns are likely to limit gains, however.

February Gold is mounting a strong comeback following last week’s sharply lower trade. Investors dumped commodities because of the stronger U.S. Dollar. News that China was beginning to shift toward a tighter monetary policy means less demand for precious and industrial metals. Furthermore, a slow down in demand will mean lower inflation which lessens the need for gold as a hedge. Most of today’s strength can be attributed to short-covering and profit-taking.

March Crude Oil is trading sideways-to-higher at the mid-session following last week’s collapse. The prospect of a stronger Dollar and weaker demand from China were the driving forces behind the weakness. New regulations regarding position limits also led to massive liquidation. Cold weather moving to the East may drive up demand for heating oil which could underpin crude oil today.

The U.S. Dollar is trading mixed at the mid-session with no clear theme at this time. Traders may be choosing to stand on the sidelines or lighten-up positions during the two days leading up to the Fed FOMC meeting on January 27.

The March Euro is holding on to its early morning gains at the mid-session. Gains are being limited by traders taking a precautionary view on developments regarding the Greece budget problem.

The March British Pound is strengthening since the New York opening. Oversold conditions and position squaring are helping to boost the British Pound. The U.K. economy is still the driving force behind this market’s recent weakness. This market is likely to strengthen over the near-term or until more bad economic news hits the wires.

The March Japanese Yen is trading lower following a volatile week which saw the Greenback lose ground. News that Bernanke will be reappointed is helping to support demand for higher risk assets. This market could turn around quickly to the upside today if U.S. stock markets weaken and demand for lower yielding assets rises. The Bank of Japan is expected to leave interest rates and stimulus alone at this week’s meeting, but could threaten to intervene if this currency rallies above 1.12.

The March Swiss Franc is trading higher overnight after continuing last week’s late session reversal. The chart pattern suggests that this market is likely to continue to strengthen until it reaches a key resistance zone at .9702 to .9743. Traders should also watch the Euro. A sudden drop in the Euro versus the Swiss Franc could lead to renewed talk of intervention by the Swiss National Bank.

Oversold conditions in gold, crude oil and equities are not supporting the March Canadian Dollar as originally forecast this morning. Overall, this market can best be described as rangebound.

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