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Stocks Could Weaken as Risk Sentiment Shifts away from Higher Risk Assets

James Hyerczyk from ForexHound.com at 01/15/10


Stock Index Futures are trading lower overnight as investors are shifting out of higher risk assets.  Concerns that a tighter monetary policy in China will lead to a slow down in the Chinese economy is encouraging traders to lighten up on higher yielding assets. Traders are also being cautious ahead of today’s earnings reports.  Momentum has slowed down despite higher prices this week.  Investors are worrying about taxes, bank fees and the healthcare package, and their possible negative impacts on the economy.


Treasury futures are trading higher this morning after a strong turnaround on Thursday.  Strong demand for Treasury Bonds at yesterday’s auction helped send yields down and prices up. Falling demand for risky assets could drive more money into fixed income instruments today.


February Gold is trading lower because of the stronger Dollar.  News that China’s economy may actually slowdown is also triggering lower demand for raw materials.  In addition, a slowdown in demand from China will lessen gold’s appeal as a hedge against inflation.  The inability to rally back to $1151.00 yesterday is a sign of weakness.  Downside momentum could take this market through a 50% level at $1119.10 to the .618 level at $1108.80.


March Crude Oil is headed toward its first weekly lower close since early December.  A drop in demand from China is taking out speculators who bought earlier in the week.  Currently this market is resting on a 50% price at 78.99.  A failure to hold this level will trigger a further decline to 77.70.


The U.S. Dollar is trading higher against a basket of currencies as traders seem to have taken risk out of the equation.  Earlier in the week, China announced measures to tighten up bank lending requirements.  This is raising concerns that China’s economy may slowdown, thus decreasing demand for commodities and other higher risk assets.


Today’s U.S. economic reports will highlight inflation and production.  The Consumer Price Index is expected to show little growth with guesses ranging from 0% to 0.1%.  Industrial Production is expected to increase by 0.6% to 71.9%


Although these reports are expected to produce knee-jerk reactions in the Forex markets today, the primary focus will be on risk sentiment. This week’s move by China is telling the market that interest rates will be rising and the government is getting ready to slowdown, if not end, its stimulus measures.


The March Euro is trading weaker as traders are raising concerns about Greece’s ability to gain control of its debt issues.  The daily chart indicates that a short-term range has been formed at 1.4217 to 1.4579.  This range creates a retracement zone at 1.4386 to 1.4217.  Overnight, the upper end of this zone was tested.


Overnight, the March British Pound tested a major 50% price at 1.6355 and sold off.  The main range is 1.6870 to 1.5832.  A key retracement zone has been formed at 1.6355 to 1.6478.  A new short-term range has been formed at 1.5895 to 1.6354.  This range sets up the next possible downside target at 1.6125 to 1.6036.


Concerns over a slowdown in the Chinese economy are driving traders to lower yielding assets, namely the Japanese Yen. Overnight the March Japanese Yen is trading stronger.  Based on the main range of 1.1774 to 1.0679, the charts indicate that 1.11273 is the next upside target.


After trading in a tight range for most of this week, the March Swiss Franc is finally showing downside momentum following a breakdown under .9806.  A new short-term range has been formed at .9522 to .9875. This range sets up a possible short-term retracement to .9699 to .9657.


The March Canadian Dollar held the October top at .9792 and is now trading lower.  The last time the market was up at this level, the Canadian government issued a stern statement regarding its concerns over the rise in the Canadian Dollar and its negative impact on the economy.  This week, Prime Minister Harper voiced similar concerns.  Long traders have to be nervous in this area out of fear the BoC may apply measures to the market to weaken its currency.

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