Optimism Helping to Drive U.S. Equity Markets Higher

James Hyerczyk from ForexHound.com at 02/09/10

U.S. stock markets are trading sharply higher at the mid-session, driven by reports that the Greek sovereign debt problems will be resolved shortly.  Stock investors are driving up stocks across the board as confidence is being restored to the markets. Bargain hunters have also stepping in to take advantage of lower priced equities.

On Monday, the Dow closed under 10,000 for the first time since November 2009. Some read this as a bearish sign while other saw this as a chance to gobble up cheap stock. For days, the major indices had been trading as if waiting for a catalyst. The developing story out of the Euro Region is the catalyst behind today’s sharp rise.

Treasury futures are trading under pressure today because of technical and fundamental reasons. Demand for higher risk assets is leading to liquidation of safety plays put on by nervous investors last week. Additional pressure is coming from the increase in supply from the upcoming Treasury auction. One sign of impending weakness is the penetration of a support level at 118’24.

April Gold is trading higher, driven to the upside by the weaker Dollar and demand for risky commodities. The recent break may have been overdone to the downside which is helping to give longer-term investors a chance to re-enter positions at cheaper prices.

Greater demand for risky assets is also helping to give March Crude Oil a boost. Although the supply and demand picture remains bleak, cheap prices following the recent sell-off and the weaker Dollar are reasons enough to re-enter on the long side. The first upside target is a retracement zone at 74.63 to 75.29.

Appetite for risky assets is helping to drive down the U.S. Dollar at the mid-session. Profit-taking and fresh selling is apparent as investors adjust their portfolio positions in anticipation of a resolution to the sovereign debt problems in Greece and the neighboring Euro Region.

At this time, the resolution appears to be specifically designed for Greece. Investors are still skeptical as to whether similar problems in Portugal and Spain will get the same treatment. These concerns could be helping to limit today’s gains.

The March Euro is trading sharply higher at the mid-session on the possibility that the Greek fiscal problems will be resolved in an orderly fashion. Investors are covering short positions aggressively in an effort to lock-up recent profits. In addition, new long positions are being entered as bullish traders anticipate the possibility the Euro will return to a more reasonable price level.

The March British Pound is mounting a strong recovery this afternoon after trading lower for several days while breaking key support levels. The gains in the Pound are most likely a relief rally, triggered by short-covering.  Investors are still skeptical about the U.K. economy as well as sovereign debt issues of its own.  U.K. traders are worried that its oversized budget deficit will encourage debt rating services to lower its credit quality.

Aggressive demand for higher yielding assets is helping to push the March Japanese Yen lower. Traders have been lightening up safe haven positions in the Japanese Yen. Volatility is likely to be high once the announcement of the plan to shore up Greece’s finances is finally released.  Long positions in the Yen and other Asian currencies have been building for several weeks because the current fiscal problems, driving these markets seems to be isolated in Europe.

Today’s Euro rally is taking the pressure off the Swiss National Bank to intervene on the Swiss Franc’s behalf. This is helping to strengthen the March Swiss Franc. The SNB will do anything to defend its currency against deflation and this includes applying intervention when necessary. As long as the Euro appreciates versus the Swiss Franc, the SNB will avoid using intervention as its main tool to maintain stability and order to this currency relationship.

Higher equities, gold and crude oil are helping to fuel demand for risky assets. This action is leading investors to step up demand for the Canadian Dollar while exerting pressure on the US Dollar. The charts are indicating this currency is likely to return to the middle of its “super range” at about .9553.