Investors Dump Stocks as Sentiment Shifts towards Less Risky Assets

James Hyerczyk from ForexHound.com at 01/22/10

Investors dumped stocks late in the trading session on Friday as sentiment shifted toward less risky assets. The combination of a stronger Dollar, monetary tightening in China and a proposal by Obama to end financial institution prop trading weighed heavily on traders this week.

Demand for safety helped to lower yields and boost the March Treasury Bonds and Treasury Notes this week. This bodes well for the next auction because it looks as if the Treasury will be able to offer lower yields. .

February Gold finished the week sharply lower as traders dumped commodities because of the weaker Dollar. News that China was beginning to shift toward a tighter monetary policy means less demand for precious and industrial metals. Furthermore, a slow down in demand will mean lower inflation which lessens the need for gold as a hedge.

March Crude Oil collapsed last week on the prospect of a stronger Dollar and weaker demand from China. New regulations regarding position limits also led to massive liquidation.

The U.S. Dollar closed sharply higher for the week, boosted by a weaker Euro, news that China was tightening its monetary policy and an increase in demand for lower yielding assets. Late in the week, the Dollar flattened out after President Obama proposed restrictions on financial institution trading. The early read is that investors feel the proposal is Dollar negative and in the long-run may discourage investors from buying U.S. assets.

The March Euro was under pressure all week as concerns about Greece’s budget deficit spiraled out of control as investors began to factor in the possibility of a default. Matters weren’t helped by the European Central Bank and European Union’s refusal to offer any help, although a rumor late in the week seemed to indicate that some sort of loan was going to be made available. This matter is not expected to go away and may even escalate if similar problems develop in Spain and Portugal.

The March British Pound started the week strong, but weakened late in the week after a series of negative economic reports made investors realize that the U.K. economy still has a long way to go to catch up to other major nations. On Friday, it was reported that retail sales were better, but missed analyst estimates.

The March Japanese Yen had a volatile week before finishing sharply higher. Early in the week, the Dollar rallied versus the Yen on better economic news.  Late in the week, however, the Japanese Yen took off to the upside following a huge break in U.S. equities and a shift in sentiment by investors to lower risk assets. President Obama’s plan to curtail trading by financial institutions is likely to make lower yielding assets more attractive to the benefit of the Yen. A rapid rise in the Yen is likely to draw a stern comment from the Bank of Japan which favors a weaker currency. 

The March Swiss Franc finished the week lower, but short-term oversold conditions could lead to a short-covering rally early next week. The combination of oversold conditions and less demand for the Dollar helped to apply the selling pressure. The Swiss Franc is especially sensitive to the Euro at this time. Watch for a possible intervention by the Swiss National Bank if the Swiss Franc appreciates too much versus the Euro.

The extreme sell-offs in gold, crude oil and equities helped drive the March Canadian Dollar lower for the week.  In addition, the Bank of Canada voted to maintain its stimulus measures which put additional pressure on the Canadian Dollar. The BoC also expressed its concerns with the recent rapid rise in its currency, saying a high value would be detrimental to the economic recovery.