Equity Markets Flatten Out Ahead of U.S. Retail Sales Report

James Hyerczyk from ForexHound.com at 01/14/10

Equity markets are flat as traders await this morning’s U.S. Retail Sales Report.  Based on previously released new motor vehicles sales and December Chain-Store Sales, traders should expect a healthy report.  Look for retail sales to grow by 0.4% and retail sales less autos to increase by 0.2%. Today’s jobless claims report should show an increase of 3K with a range of 400K to 450K.  

A bullish report is likely to trigger an upside breakout over this week’s highs.  The March E-mini S&P 500 is currently in a position to take out its recent minor top at 1148.00.  A weaker report may trigger a set-back to 1129.00, but investors are likely to step in to buy this break.

March Treasury Bonds sold off sharply yesterday as traders dumped safe assets in favor of higher risk assets.  A bullish Retail Sales Report is likely to pressure T-Bonds today as traders will once again begin to factor in the possibility of a Fed rate hike.  A weak report should be supportive if investors sell off higher risk assets.  116’05 should act as a pivot price today.

The weaker Dollar is helping to support February Gold.  Traders also appear to have shaken off the negative news from China from earlier in the week.  On Tuesday, China made a decision to raise reserve requirements. Traders believe this will lead to a drop in demand for commodities, causing gold to lose its appeal as a hedge against inflation.  Technically, a new short-term range has been created at $1163.00 to $1118.50. This range creates a retracement zone at $1140.70 to $1146.00 which is the next upside target.

March Crude Oil is trading a little better overnight following a late session short-covering rally on Wednesday.  Yesterday, the market found support at a major 50% price at 78.99.  Breaking this level will trigger a further decline to 77.70.  Oversold conditions could trigger a retracement rally to 81.63. A surprise gain in U.S. distillates and crude stocks were the catalysts behind yesterday’s weakness. 

The March Euro is trading flat as Forex traders await this month’s European Central Bank policy decision. Investors are looking for the ECB to leave interest rates at the historically low 1% level.  At the same time, the market will be looking for comments on the debt problems in Greece, Portugal and Spain.  Expect the language of the report to be dovish in tone. 

After the release of the ECB policy statement, central bank President Trichet is expected to comment on the European Union debt issues, the European banking system and the sluggishness of credit in the Euro Zone region.  Trichet’s comments are likely to be market moving especially if he comes down hard on the countries experiencing debt problems.

Technically, the Euro is trading in a range. The main trend is down, but this market still has the potential to rally to 1.4680, to complete a major 50% retracement.  On the downside, 1.4386 remains a short-term target.

Demand for riskier assets is helping to give the pressure the March Japanese Yen.  With risk sentiment back on, the Yen has room to fall. Traders are shifting once again to a risk demand environment because the stock market continues to remain strong and the prospects for a rate hike by the Fed diminished.

Overnight reports, which led to the drop in the Japanese Yen, highlight the country’s reliance on exports. Last night’s reports showed that producer prices fell for the 12th straight month and machine orders unexpectedly dropped. These reports indicate that the government is likely to take more action to combat deflation in an attempt to revive economic growth.  Look for the Japanese government to implement more monetary easing and fiscal policies to fight deflation.  This means that it would be in the country’s best interest to promote a softer Yen at this time.

The fear of an intervention by the Swiss National Bank and less demand for lower risk assets are the conflicting stories keeping the March Swiss Franc inside of a tight trading range. For the third straight day, the currency is ping-ponging inside a 50% price at .9806 and a .618 price at .9873. Technical factors are building which suggest that traders are likely to “go the way of the move”.  This means a break-out to the upside is likely to trigger a rally to .9910 and an acceleration to the downside could drive this market to .9645. 

The March Canadian Dollar is trading flat overnight.  Greater demand for gold, copper and natural gas, three commodities which provide almost half of Canada’s export revenue are helping to support the Canadian Dollar. Look for this currency to remain strong as long as there is demand for raw materials. 

The inability of the Canadian Dollar to rally further is a direct result of the comments from Canadian Prime Minister Harper who earlier in the week said he was concerned about the rise in the Canadian Dollar and its negative effects on the economy.  Traders seem reluctant to challenge the PM at this time out of fear of possible intervention by the Bank of Canada. 

The March British Pound is trading flat to lower ahead of the New York opening.  The British Pound turned the main trend to up on the daily chart earlier in the week when it crossed a main top at 1.6240.  This move was primarily driven by a Bank of England member’s call for higher interest rates later in the year.  Furthermore, traders are beginning to believe that the need for further stimulus has dissipated.  The first upside objective is a 50% level at 1.6355, followed by 1.6478.  A weaker market today could trigger a short-term retracement to 1.6104.