Stock Index Futures Sell Off Ahead of Fed Statement
James Hyerczyk from ForexHound.com at 12/15/09
Equity markets sold off sharply into the close ahead of tomorrow’s Federal Reserve Open Market Committee meeting. Traders have been reluctant to chase stocks higher this week despite better than expected economic news which showed the U.S. economy is improving.
March Treasury Bonds and Treasury Notes traded under pressure all day. Investors continued to drive yields higher in anticipation of a rate hike by the Fed by June 2010. Traders are nervous that the Fed may put out a more hawkish comment tomorrow which may move up the date of the first rate hike in years. Today’s better than expected U.S. producer prices and industrial output reports helped trigger a hard intra-day break in both markets.
February Gold moved higher after trading sharply lower overnight because of the stronger Dollar. Gold bottomed at $1112.00 this morning after the release of the U.S. Producer inflation data. Today’s action could be a sign that traders have exhausted gold’s relationship with the Dollar and may now shift to reacting to an inflationary scenario.
March Crude Oil held yesterday’s low at 72.45 and held firm throughout the day. The boost in U.S. Industrial Production helped to contribute to the rally as it indicates a possible increase in demand for energy in the future. At the close, the market held a .618 price level at 73.63. The chart formation indicates a rally to 75.53 is possible over the short run.
The U.S. Dollar traded higher all day as speculators increased bets that the Fed would issue a more hawkish monetary policy statement tomorrow. Last night the main trend turned up on the weekly chart leading to a firm opening this morning.
The March Euro stopped just short of piercing 1.4500. Overnight, sellers hit the Euro hard following the release of the German ZEW Economic Expectation Index report. Better than expected U.S. economic data and concerns over Euro Zone bank exposure to Greece, Portugal and Spain debt helped accelerate the decline.
The March British Pound was under pressure all day but remained inside of a retracement zone at 1.6292 to 1.6154. Overnight news that U.K. November CPI increased to 1.9% was largely ignored by traders since the pre-report guess was for an increase of 1.8%. This currency is not likely to move until it breaks out of its short-term trading range.
Today’s better than expected U.S. Industrial Output report put downside pressure on the March Japanese Yen as it sent a signal to traders that the Fed was coming closer to hiking its benchmark interest rate. Traders have become more confident that the Fed will hike rates sooner than expected while the Bank of Japan is expected to keep interest rates unchanged at 0.10% on December 17th. The increase in the spread between the two interest rates helped trigger a reversal in the carry-trade. Investors bought Dollars to payback loans while simultaneously borrowing Yen.
Weaker Gold and the stronger Dollar helped trigger an overnight break in the March Swiss Franc. The down move accelerated throughout the day following the release of the better than expected U.S. Industrial Output report. This currency is now at its highest level since October. Swiss traders are pricing in possible banking issues with Euro Zone banks.
The March Canadian Dollar traded weaker on Tuesday but remained inside the two month range. Stronger gold helped this market turnaround after early downside pressure. Firmer crude oil could help limit losses.