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Stocks Feel Pressure as Demand for Risky Assets Falters

James Hyerczyk from ForexHound.com at 01/13/10


U.S. equity markets closed lower on Tuesday as investors dumped higher yielding stocks in favor of safe-haven assets.  The news that China may begin raising interest rates pressured demand for higher yielding assets throughout the day. Commodity related stocks were under pressure today because of an expected drop in demand for raw materials. Bank stocks also dragged the markets lower because of a proposed fee by the Obama administration on banks that received federal aid during the credit crisis. 


March Treasury Bonds were able to mount a strong gain as investors dumped equities in favor of safer, lower yielding assets.  A breakout above 116’05 fueled an acceleration to the upside into a 50% level at 116’28. Further upside momentum could trigger a further appreciation to 117’14.


February Gold broke sharply on Tuesday following a rally to $1151.30 earlier in the week. This move completed a 50% retracement of the $1227.50 to $1075.20 range created from December 3rd to December 22nd.  The stronger Dollar and news that China may begin removing stimulus from the economy helped to curtail demand for higher risk assets. 


Monday’s closing price reversal top in March Crude Oil ignited a sharp sell-off today.  News, that temperatures on the East Coast were expected to moderate caused speculators to take profits in heating oil after a huge run-up.  In addition, traders speculated that demand for crude oil from China would fall if its central bank began hiking interest rates and removing government stimulus.


The U.S. Dollar finished higher on Tuesday against a trade weighted basket of currencies while losing ground to the Japanese Yen and British Pound. Risk aversion was high as demand for safer assets rose after China’s central bank took action to prevent the economy from overheating. This was a strong hint that it was prepared to raise interest rates and end government stimulus measures.


Demand for lower-yielding assets helped pressure the March Japanese Yen.  Early last night, buying power helped create a new main bottom at 1.0679.  Based on the monthly range of 1.1774 to 1.0679, the chart indicates plenty of room to the upside with 1.1273 a potential upside target. 


The March British Pound opened slightly better and advanced throughout the day following a report which showed the U.K. trade balance narrowed.  Traders attributed the improvement to an increase in exports.


The news from China helped weaken demand for higher yielding assets and consequently the March Euro early in the trading session. Since the opening, however, the Euro was able to fight back to finish slightly better under choppy trading conditions.


A drop in demand for higher yielding assets helped to pressure the March Swiss Franc. In addition, traders were still expressing concerns that the recent rapid rise in the Swiss Franc versus the Euro would bring an intervention by the Swiss National Bank to the market.


The March Canadian Dollar weakened following Monday’s closing price reversal top. Investors were reacting to hawkish comments from Canadian Prime Minister Harper.  On Monday he expressed his concern that the rapid rise in the Canadian Dollar would have possible negative effect on the economy.  His comments served as a verbal intervention.  Weaker crude oil and gold also helped to pressure the Canadian Dollar today.

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