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Lower Demand for Higher Risk Assets Pressures Equities

James Hyerczyk from ForexHound.com at 12/08/09


U.S. equity markets are called lower this morning following sell-off in Asia and Europe.  The stronger Dollar is leading some investors to pare positions.  Traders are trying to protect profits at the end of the year as chart patterns suggest there is more downside than upside potential at current levels. 


Treasury futures are up sharply overnight, erasing almost all of the loss following Friday’s unemployment report.  Weaker equity markets and yesterday’s comments from Bernanke calling for interest rates to remain low for a “prolonged” length of time are helping to give March T-Bonds and March T-Notes a boost.  Today’s 3-Year Note auction could prove to be a challenge for the Treasury now that the yield premium built into this market on Friday has been eliminated.  The results of the auction will be released this afternoon. 


The December Canadian Dollar is trading lower ahead of this morning’s Bank of Canada announcement at 8:00am CT.  The BoC is expected to leave interest rates at 0.25 percent. It should also reiterate its stance to leave rates historically low until at least July 2010.  This statement will be the key to the market’s movement today.  If they move up the date then the Canadian Dollar should rally. Following last week’s robust increase in the number of jobs created last month, the BoC is no longer concerned about stagnation in the economy, but it is still worried about the negative effect a high priced currency will have on exports.  The BoC monetary committee is going to have to be careful in how they word the statement because they don’t want to appear to bullish on the economy.  


The December Euro is trading lower this morning following a weaker than expected German Industrial Production Report.  This report is taking out some of the steam in the market following comments from Bernanke which suggested the Fed was not yet ready to begin raising interest rates.  The German report which showed industrial output fell 1.8% in October was a surprise but remember European Central Bank President Trichet has been warning that the economic recovery will be bumpy and rough.


Technically overbought conditions are once again helping the December Japanese Yen take back losses following a huge break to the downside last Friday following the release of the better than expected U.S. unemployment rate. The Dollar is paring gains versus the Yen following comments yesterday by Fed Chairman Bernanke who reiterated the Fed’s stance that interest rates would continue to remain low for a “prolonged period of time”.  A sharp drop in equities could provide support for the U.S. Dollar versus the Yen if traders decide to unwind carry trade positions.


A report showing that U.K. house prices rose for the firth consecutive month was not enough to ignite buying interest in the December British Pound overnight, sending the market lower ahead of the New York opening.  Industrial Production was unchanged in October, reminding investors that the economy was still in a weakened state.  Manufacturing output was also flat.  Traders are now concerned that the economy will not show a strong improvement in GDP during the 4th quarter. Further complicating the possibility of a recovery is the threat by the U.K. government to raise taxes and trim spending.

The December Swiss Franc is trading lower overnight. The breakdown under the last swing bottom at .9782 turned the main trend down, but the market rejected this area late yesterday after selling pressure dried up. Swiss Franc traders are also being influenced by the movement in the gold market.  A recovery in gold could limit losses in the Swiss Franc. On December 10th the Swiss National Bank is expected to leave its benchmark interest rate unchanged and offer clarity as to its future monetary policy plans.  Most traders expect the SNB to discuss its concerns about deflation and the possibility of another round of intervention if the Swiss Franc appreciates too much against the Euro.


February Gold is down because of the strengthening Dollar but well above yesterday’s low.  Investors are being “coached” by gold bug analysts to “buy the dips”, but this strategy could prove to be risky if the Dollar strengthens further.  The recent vertical rise in this market suggests that an asset bubble may have been formed.  Without new central bank buying pressure, the small trader will not have enough money to support another leg higher.  This could lead to a further collapse in this market to at least $1107.00 over the short-run.


March Crude Oil remains under pressure because of lower equity prices, a stronger Dollar and low demand.  A shift in trader mentality out of higher yielding assets could drop this market into the low 70’s over the near-term.  Speculators drove this market higher and speculators leaving this market will drive it lower.

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