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Equity Markets Plunge as Investors Pull Plug on Higher Risk Assets

James Hyerczyk from ForexHound.com at 11/19/09


U.S. equity markets fell sharply from the opening today led by overnight weakness in Asian and European stock markets. Early this week, the U.S. markets shot up to a new high for the year, but have since struggled to regain upside momentum. U.S. investors are also questioning the valuation of stocks at current levels, given the state of the economy. Earlier in the week, Fed Chairman Bernanke talked about a fragile economy. This may have scared investors into thinking the weaker economy did not justify stock prices at such lofty levels.

December T-Bonds and T-Notes are trading sharply higher as investors are parking excess funds into the safety of the Treasury markets. Yields are falling because of new investor demand. Rates are also under pressure because the Fed believes interest rates will remain low for a prolonged period of time.

The U.S. Dollar rose sharply against most major currencies this morning after equity markets sold off from the opening. Today’s strength in the Dollar started overnight when Asian and European traders failed to take equity markets higher. This sent out a signal that demand for higher risk assets may be waning.

The fragile U.S. economy is forcing traders to reevaluate long positions in the equity markets. Some feel that prices may be too far ahead of the economy. Others feel that a weak U.S. economy will curtail the recovery in the global marketplace.

The failure of the December Euro to challenge 1.50 with more vigor gave weak longs an excuse to bailout of the market. Earlier this week Trichet tried to talk up the Dollar, but yesterday, Luxembourg’s Juncker while agreeing with Trichet also added that the Euro has not yet reached a level that is detrimental to the Euro Zone economy. At the midsession, the Euro is mounting a strong comeback and has retraced 50% of this morning’s loss.

The December British Pound is trading lower but has erased some of its earlier losses. Fear that the U.K. economy may have trouble recovering because of credit issues is helping to put pressure on the British Pound.

The Dollar is losing ground to the Japanese Yen at the mid-session. Investor repatriation of funds is helping to boost the Yen. Some traders are buying the Yen in speculation that a softening in the Chinese Yuan may be beneficial for the Japanese economy.

The sharp sell-off in U.S. equity markets, December Gold and January Crude oil is putting pressure on the December Canadian Dollar. Look for weakness to continue as long as demand for higher yielding assets continues to fall.

December Gold sold off sharply this morning after the U.S. Dollar strengthened. The sell-off took gold all the way back to 1130.00 before profit-taking and fresh buying turned the market back to positive for the day. Continue to expect volatility as it is clear the gold bulls are reluctant to change the trend to down. If the market fails to make a new high on the current rally then consider this a sign that the trend is getting ready to turn lower.

Speculators are throwing in the towel on the long-side of the crude oil market. They are finally caving in to the pressure created by the bearish supply/demand picture. Maybe they are starting to realize that a weak economy means lower demand for energy. Falling equity markets and the stronger Dollar are contributing to today’s weakness.

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