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Stocks Weaken on Alcoa Report; China Monetary Policy

James Hyerczyk from ForexHound.com at 01/12/10


Global stock markets weakened overnight after Alcoa released mixed results following yesterday’s close.  In addition, news that China may begin raising interest rates is pressuring demand for higher yielding assets. Commodity related stocks may feel pressure today because of an expected drop in demand for raw materials. Bank stocks may also drag the markets lower because of a proposed fee by the Obama administration on banks that received federal aid during the credit crisis.  The charts indicate the March E-mini S&P 500 is set-up for a near-term break to 1129.00 over the near-term.


March Treasury Bonds are expected to see buyers today following a pick-up in demand for safer assets.  The current chart formation is potentially bullish because of the support base that has been built. Watch for a sharp acceleration to the upside following a breakout over the last main top at 116’05.


February Gold is faltering overnight following a rally to $1151.30. This move completes 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 is helping to curtail demand for higher risk assets.


Yesterday’s closing price reversal to in March Crude Oil was confirmed overnight.  The current chart formation suggests that this market is set-up for a break to 78.99 over the near-term.  News that temperatures on the East Coast are expected to moderate is causing speculators to take profits in heating oil after a huge run-up.  In addition, traders are speculating that demand from China is likely to drop if its central bank begins hiking interest rates and removing government stimulus.


The U.S. Dollar posted a strong gain overnight against most major currencies as demand for safer assets rose amid speculation that Chinese borrowing costs were set to rise.


A couple of overnight news stories gave the Dollar a boost, both related to China.  The first news story that supported a stronger Dollar was the report that China allowed its first bond yield hike in 20 weeks.  This move by the Chinese central bank served as notice to market participants that bank officials are willing to execute a pre-emptive strategy to prevent the economy from overheating.  This strategy would also include the withdrawal of stimulus measures.


A story by Reuters reporting that China Investment Corp. executive Peng Junming said the U.S. Dollar was likely to appreciate from current levels also provided a boost to the Greenback.  He also reportedly said that both China and the U.S. were on track to raise interest rates in the second half of the year.


Reuters quoted Junming as saying, “I think the Dollar is at its bottom now.  There will be very limited space for the Dollar to drop further.”


The news service also reported his view on the Japanese Yen.  “The Yen is what, I think, has the worst outlook. The Yen will continue to drop, unlike the Dollar, which will not serve for long as a source of funding carry trades.”


Weaker global equity markets also helped buoy the Dollar overnight. This could mean that the inverse relationship between stocks and the Dollar may be re-emerging after taking a brief rest during December. 


There is only one major U.S. economic report today.  Economists are predicting that the November U.S. Trade deficit widened during November.  The data used in this report took place when the Dollar was falling rapidly so it shouldn’t have that great of an impact on today’s trade since the data is stale. Nonetheless, traders should watch for a reaction only if the report is extremely out of line with pre-report guesses.  Economists are predicting that the trade deficit widened to $34.6 billion from $32.9 billion in October.  The fact that imports rose faster than exports is directly attributable to strong demand for foreign goods.


The news from China helped weaken demand for higher yielding assets and consequently the March Euro which had been poised to move higher in the wake of the soft U.S. jobs outlook from Friday.  Risk appetite could take a hit today, setting up a possible decline over the short-run back to 1.4386.  A turnaround in demand for higher risk assets will put the Euro back on pace to complete a 50% retracement back to 1.4680.


The March British Pound is expected to opening slightly better after falling overnight following a report which showed Britain’s property market unexpectedly lost momentum in December.  The overnight resurgence in the counter-trend rally has helped re-establish support at 1.6036. The main trend is down and will turn up following a rally through the last main top at 1.6240.


Demand for lower-yielding assets is helping to support the March Japanese Yen.  The overnight buying spree has 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. 


Mixed Japanese economic data hit the market overnight.  It was reported that the current-account surplus grew more than expected in November.  A second report showed that bank lending dropped for the first time in four years.  This was a sign that deflation may be having its effect on loan demands.


Falling demand for higher yielding assets is helping to pressure the March Swiss Franc.  In addition, traders are still concerned that the recent rapid rise in the Swiss Franc versus the Euro may bring an intervention by the Swiss National Bank to the market. At this time the Swiss Franc is ping-ponging inside of a retracement zone at .9806 to .9873. 


The March Canadian Dollar is falling overnight in a follow-through break following yesterday’s closing price reversal top.  The chart formation suggests that a 50% retracement of the recent rally to .9510 is likely over the near-term.  The main trend is up, but investors have been taking profits since late yesterday following comments from Canadian Prime Minister Harper.  He issued a statement expressing his concerns about the rapid rise in the Canadian Dollar and its possible negative effect on the economy.  His comments served as a verbal intervention.  Weaker crude oil and gold could help pressure the Canadian Dollar also today.


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