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Renewed Demand for Risky Assets Pumps Up U.S. Equities

James Hyerczyk from ForexHound.com at 01/04/10


Renewed demand for higher risk assets helped to drive the March E-mini S&P 500 through the December high at 1126.50 to 1129.75.  A better than expected U.S. Manufacturing report helped to underpin the U.S. markets and create upside momentum.  Traders seem to be positioning themselves for further upside on expectations the economy will continue to improve. 


A surge in demand for higher yielding assets is also helped drive crude oil and gold prices higher.  A firm undertone was present throughout the day at the expense of the Dollar. 


The strong rally in February Gold turned the main trend to up on the daily chart on the move through $1114.50.  The daily chart indicates this market is poised to rally another $30 back to a retracement zone at $1151.30 to $1169.30.  A break in the Dollar will put upside pressure on the gold. Upside momentum seems to be building for a big move to the upside.


A better than expected surge in Chinese manufacturing helped to trigger a breakout to the upside in March Crude Oil. Traders are expecting to see increased demand for energy.  In addition, cold weather in the U.S. has led to a pick-up in demand for heating oil and natural gas. The last main top at 81.52 was broken overnight, setting the stage for a test of the October top at 83.60.  


March Treasury Bonds closed lower but inside of a range.  Technical factors indicate oversold conditions but the fundamentals remain bearish. Concerns about oversupply have this market in a position to weaken further but sellers were reluctant to press it.  Look for a change in trend to up on a trade through 115’29. 


Monday’s strong rally in global stock indices and break in the Dollar renewed talk of the resumption of the negative correlation between global equity markets and the U.S. Dollar. Aggressive traders appeared to be already placing bets today that the Fed would continue to leave interest rates low for a prolonged period of time.  Today’s action suggests that investors could be getting comfortable with taking on more risky assets once again.


The chart pattern in the U.S. Dollar Cash Index suggests that a new secondary lower top is forming at 78.22 and that the trend is poised to turn down on a break through the last main swing bottom at 77.33. The next downside objective is 76.31 to 75.80, which gives the market plenty of room to the downside.


The Dollar opened the first trading session of the year slightly better but a strong surge in U.K. and China manufacturing data helped to pressure the Dollar overnight.  These two better than expected reports triggered renewed interest in demand for higher risk assets. Speculation is that global manufacturing will provide the spark for a worldwide recovery.

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