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Fear Drives Investors Out of Gold and Stocks

James Hyerczyk from ForexHound.com at 02/05/10


Fear over concerns about sovereign debt default and a worse than expected U.S. initial claims report helped to push commodity and stock markets lower on Thursday. Risk aversion drove investors toward safer, lower-yielding assets to the benefit of the U.S. Dollar.


Investors were lightening up positions before the U.S. opening when the news hit that Weekly Initial Claims had surprisingly increased. This quickly encouraged long liquidation sending prices spiraling down throughout the session, sending the major indices sharply lower.


The key level in the March E-mini S&P 500 at 1084.50 was violated with a vengeance, triggering a free fall to a new low for the week. Besides the fear that debt problems in Greece will spread to other Euro nations thereby disrupting the global economic recovery, traders reacted as if tomorrow’s U.S. jobs report will not show an increase as expected.


March Treasury Bonds surged to the upside as economic worries pressured equities and commodities, sending investors into the safety of the Treasury markets. The sharp rise in Treasury Bonds sent this market screaming to the major 50% level at 118’24 as yields plunged. A close over this level will be bullish with 119’24 the next upside target.


The stronger Dollar drove April Gold through a pair of retracement levels and the last two main bottoms at $1076.50 and $1074.40. Downside momentum indicates a further decline is likely with a major 50% level at $1052.30 the next downside target.


Wednesday’s bearish crude oil inventory report along with a drop in demand for higher risk assets pressured March Crude Oil. The charts indicated that 75.29 to 74.63 would be the next downside targets, but these prices offered no support. Look for an acceleration to the downside should the pair of main bottoms at 72.53 and 72.43 fail to hold as support.


The March Euro closed sharply lower, pressured by concerns that despite the proposal of a new budget plan, Greece lacks the means to deal with its deficit issues on its own. Fears were also being raised that the fiscal problems in Greece are not isolated and may spread throughout the Euro Region should it default on its debt. Risk aversion set in and traders bailed out of the Euro as they sought protection against the possibility of a collapse in Greece.


This morning the European Central Bank announced that interest rates would remain at 1% and stimulus intact as the economic conditions in the Euro Zone have not improved enough to warrant any changes. Although ECB President Trichet said he “is confident” that Greece would get its budget under control, traders acted as if it was going to take a bailout by the European Central Bank, European Union or International Monetary Fund to take care of the problem.


Trichet tried to calm fears of a meltdown in Greece by saying the Euro Zone still faces major issues, but he is confident it is headed toward recovery. His statement failed to prevent a further deterioration in the Euro as the focus began to shift from Greece to Portugal and Spain.


By the mid-session, the Euro was trading under an important 50% level at 1.3800. Downside momentum was strong which could drive this market to the .618 level at 1.3483 over the near-term.


The theme of the day in almost all major currency markets was risk aversion as investors sold higher risk commodities and stocks and bought lower yielding assets throughout the New York session on concerns the sovereign debt issues in Greece will spread to other economies in the Euro Region. The Dollar finished sharply higher versus all major currencies except the Yen.


Investor concerns about the sovereign debt woes in Greece ignited the break in equities and commodities overnight, but a decision by the Bank of England and poor U.S. jobs data helped to accelerate the rally in the Dollar. Traders took protection while seeking shelter in the Dollar and the Japanese Yen.


The Bank of England as expected announced that interest rates would remain at a historically low level. In addition, it voted to take a pause in its quantitative easing program, but left open the possibility it would increase its asset buyback program should conditions warrant such a move. Traders didn’t like the news and sold the March British Pound aggressively. Investors are now becoming concerned that the deficit problems in the U.K. may escalate like they are in Greece.


The March Japanese Yen finished sharply higher as investors sought safety in lower yielding assets over concerns about the possibility of sovereign debt default in Greece. Traders took the Yen higher after the ECB offered no viable solution to the problems in Greece, nor did it provide any confidence that the matter would not spread to other Euro Region nations. The Japanese Yen tends to strengthen during economic turmoil and uncertainty.


Look for this pair to continue to be the risk sentiment indicator. As long as the fear of default exists, the Yen should continue to appreciate. At this time, the Bank of Japan has no plans to halt the rise in its currency. This could help fuel a steep rise in the March Japanese Yen over the near-term.


The stronger Dollar pressured demand for commodities, namely gold and crude oil. This action helped to fuel weakness in the Canadian Dollar. Strong upside momentum drove the March Canadian Dollar through the last main bottom at .9326. The weekly chart indicates that .9212 is the next downside target.


The weakening Euro once again raised fears the Swiss National Bank would intervene to prevent the Swiss Franc from appreciating too much versus the Euro. This helped the pressure the March Swiss Franc throughout the day. Barring any changes with the Greece sovereign debt situation, the next downside target is .9152.

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