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Equity Index Traders Anticipating Return to Risky Assets

James Hyerczyk from ForexHound.com at 10/29/09


Stock index futures are edging slightly higher ahead of this morning’s U.S. Third Quarter GDP Report.  The report is expected to show that increased consumer and government spending helped expand the economy for the first time in over a year.  Pre-report estimates are for this report to show an increase of 3.2%.  A Bloomberg survey shows the possible range of guesses at 2.0% to 4.8%.  The market will move on how much above or below 3.2% the actual number is reported. 


The overnight strength in equity and gold markets is indicating that traders are leaning toward a better number.  This notion is being seconded by the weaker Dollar and Treasuries.  Traders are trying to build appetite for risk back into the game following this week’s sell-off in equities. 


Even if the number comes out better than expected, gains could be limited.  There are a number of traders who feel that the jump in GDP was triggered by government stimulus and if this stimulus is removed the next quarter’s GDP will be labored.  The real question is can the growth in GDP be sustained?  Some investors also feel that stocks may have priced in the expected economic rebound.


Treasury Bonds and Notes are trading lower as traders take profits ahead of this morning’s GDP Report.  Demand for higher risk assets in anticipation of a bullish number is also weighing on the fixed income instruments.  A better than expected GDP Report is likely to pressure T-Bonds and T-Notes because it will mean the possibility the Fed will begin to take liquidity out of the market. 


This week’s auction has been well-received by domestic and foreign investors.  Today, the Treasury auctions billions of 7-Year Notes.  Investors will be reacting to the GDP report when they begin the bidding process.  This could mean asking for higher yields if the report comes out better than expected.


The U.S. Dollar is under pressure as traders anticipate a better than expected U.S. growth number.  Technically, this week’s rally in the Dollar may be overbought.  This is helping to trigger this morning’s early weakness. 


December Gold is rebounding after testing a major 50% price at $1028.80.  This could mean a retracement back to $1049.00 over the short-run.  The weaker Dollar is helping gold to rally as well as oversold technical factors.


Yesterday’s Energy Information Administration Report showed an unexpected rise in gasoline supplies.  This news helped break December Crude Oil sharply lower.  Overbought conditions, a stronger Dollar and weaker equity prices also contributed to the selling pressure.  The charts indicate there is plenty of room to the downside. 


Crude oil may rebound today if the Dollar stays weak and the U.S. GDP shows a greater economic expansion than expected.

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