Easing of Investor Risk Sentiment Supporting Equity Markets

James Hyerczyk from ForexHound.com at 02/08/10

An easing of investor risk sentiment is helping to support equity price overnight. Early in the trading session, stock markets followed through to the upside following Friday’s strong finish and talk of a possible resolution of the fiscal problems plaguing the Euro Region. 

Appetite for risk was on the rise as the Dollar weakened and the Euro rose. Optimism that a viable solution could be reached to assure investors that Greece would adhere to its budget, helped drive investor confidence up.  It looks as if today could start out choppy until investors decide whether to embrace risk or repel it.

March Treasury Bonds are trading lower.  The overnight weakness is being triggered by a combination of falling demand for lower risk assets and the new supply of debt which is ready to come to the market courtesy of the U.S. Treasury.  Overnight support is being established at a 50% level at 118’24.  A failure to hold this level is likely to trigger an acceleration to the downside.

The weakening Dollar helped April Gold rally overnight. Traders also believe that the gold market overreacted to the downside last week. A combination of oversold conditions and a successful test of a retracement level at $1049.60 could help to give Gold a boost today. Furthermore, growing deficits in most major economies is renewing talk of a major inflationary situation. Some gold investors believe that central banks will be forced to print money to cover their deficits. This will weaken paper money, making hard assets more valuable.

The weaker Dollar and increased demand for higher risk is helping to drive up March Crude Oil overnight.  The supply and demand situation remains bleak so this market will be more sensitive to currency movement. Look for a surge to the upside if the Dollar trades through last night’s low.

The U.S. Dollar had a volatile trade overnight with a slight bias to the downside. Profit-taking was highlighted last night as traders turned a little positive that a solution was going to be reached regarding the escalating deficit issue in Greece.  Overbought technical factors even helped to weaken the Dollar.  Rumors swirled overnight that a solution had been reached to shore up Greece’s finances. These most likely began following a positive comment by French Finance Minister Christine Lagarde’s comment at the Group of Seven meeting. She stated that Greece’s budget deficit would be “managed”.

Following a short-term rally in the Euro and a subsequent break in the Dollar, the Greenback began to strengthen late in the session, as traders began to weigh the evidence for and against a Greece resolution. The Dollar began strengthening after investors realized that there were still some concerns about the fiscal health of some Euro Zone nations and that the G-7 did not offer up strong enough reasons to believe that the situation would improve. 

Although European ministers tried to assure their U.S. and Asian counter-parts that they would ensure that Greece would stick to its proposed budget, investors reacted as if their statements failed to instill the confidence needed to prevent a derailing of the global economic recovery. 

The March Euro saw a choppy two-sided trade overnight. Early session rumors of a solution to the deficit issues in the Euro Zone helped support the Euro, but those gains were erased by worried traders. Continue to look for a volatile trade with a bias to the downside until the European Central Bank, European Union or International Monetary Fund offers a viable solution to the Euro Region’s fiscal problems.

Pressure is on the March British Pound overnight. Besides the weak economy, investors are now having to deal with the possibility that the U.K. will suffer the same fate as Portugal, Spain and Greece and have its debt rating reduced because of its huge budget deficit. Furthermore, news that the June election could result in neither party receiving a majority is also hurting the British Pound. 

The March Japanese Yen is trading a little weaker, but this situation could shift quickly if risk aversion returns to the markets. Budget problems in Europe, the U.K. and the United States may encourage traders to seek the safety of the lower yielding Asian currencies. An overnight recovery in U.S. equity markets helped the Dollar trade higher versus the Yen, but this gain disappeared after the stock markets turned negative.

The direction of the March Swiss Franc will be determined by the movement in the Euro. A weaker Euro will increase the chances of a Swiss Bank intervention, thereby strengthening the Dollar versus the Swiss Franc. A short-covering rally in the Euro will support a rise in the March Swiss Franc.

Strong gold and crude oil are helping to underpin the March Canadian Dollar.  Look for the Canadian Dollar to strengthen as long as it is getting support from the commodity complex.  The weaker stock market will help to limit these gains.