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Shift in Risk Sentiment Boosting U.S. Equities

James Hyerczyk from ForexHound.com at 02/16/10


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Confidence that the European Union, Greece situation is close to a resolution is helping to drive up demand for risky assets. This is helping to boost the U.S. stock indices ahead of the opening.  Traders are also becoming more confident in corporate earnings reports because of the recent improvements in the economy.


The improving economy and talk of higher interest rates by Fed Chairman Bernanke are helping to boost yields, thereby pressuring March Treasury Notes and March Treasury Bonds. Last week’s auction boosted supply which helped weaken Treasuries further.


The pick-up in demand for risky assets is helping to underpin April Gold and April Crude Oil. Gold is trading as if speculators anticipate a drop in the Dollar.


Greater appetite for risk is helping to pressure the Dollar overnight. Reduced demand for safer assets is helping to drive up higher-yielding currencies. The weaker Dollar is providing a boost for stocks and commodities.


Oversold conditions are helping to buoy the March Euro. Some traders feel that short traders may have overreacted to the situation in Greece. This is helping to trigger a short-covering rally due to oversold conditions.  News that the European Union may be considering providing aid to Greece may also be encouraging traders to lighten up short positions.


The March British Pound is trading slightly better prior to the New York opening. A report showing that inflation accelerated in January to its fastest pace in 14 months helped trigger a short-covering rally. Inflation was up 3.5% which exceeded the Bank of England’s target of 2.0%. This prompted a response by BoE Governor Mervyn King to explain the rise. Traders are becoming less confident in the BoE’s ability to help the economy while at the same time preventing a surge in inflation.


The Dollar is down slightly against the Japanese Yen. Despite increased demand for risky assets, the Japanese Yen is showing strength. This is most likely being triggered by Japanese repatriation of Yen due from bond redemptions and coupon payments on Treasury securities. Traders are also expressing their concerns about the Bank of Japan’s ability to control deflation over the near-term. Investors feel this is going to force the BoJ to maintain interest rates at 0.10%.


The March Swiss Franc is gaining ground overnight. The strengthening Euro is diminishing the possibility of an intervention by the Swiss National Bank. This is helping to trigger a short-covering rally.


Stronger gold and crude oil are boosting the Canadian Dollar. Greater demand for risky assets is the catalyst behind the move. Overall, this pair is likely to remain inside of its long-term range. Higher stock prices could fuel a rally throughout the day.

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