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U.S. Equities March Higher as Investors Gain Confidence

James Hyerczyk from ForexHound.com at 02/11/10


All three major stock indices finished the day sharply higher after earlier weakness driven by a possible pact between the EU and Greece and better than expected weekly jobs data.


Thursday’s rally indicates that confidence may have been restored to the financial markets. This renewed confidence is tied to possible improvements in the global credit markets and signs that the U.S. jobs market may be confirming the developing recovery. Traders feel that an agreement between the EU and Greece will increase appetite for risk and bought in anticipation of the news. The March E-mini S&P 500 is on path to test a 50% level at 1084.50.


The strong rally in April Gold market is a strong indication that the pact between the European Union and Greece is imminent, thereby driving up demand for risky assets. Speculators are anticipating that the agreement to shore up the debt in Greece will be released shortly. This release of this news should pressure the Dollar and underpin the gold market. Gold closed near a minor retracement level at $1095.10. A breakout through this level could trigger a further rally to $1105.60.


March Crude Oil posted a strong rally following early session weakness. Crude oil was under pressure earlier in the session because of uncertainty over the EU/Greece pact and the stronger Dollar. Oversold conditions and the possibility of a weaker Dollar over the near term could boost this market even further on Friday. Traders are looking for increased demand for risky assets to continue as confidence returns to the financial system. In addition, signs of an improving economy may increase demand for energy.  The charts indicate this market has a clear shot at testing 78.44 over the near-term, but it must hold 73.77 to complete the move.


News of an impending agreement between the Greece and the EU helped to pressure March Treasury Bonds and Notes. Traders sold off safe haven positions in anticipation of a resolution to the Greek deficit woes. Wednesday’s comments from Bernanke, hinting at a hike in the discount rate also pressured Treasury futures. Furthermore, traders feel that yields will rise because of the new supply of Treasury debt hitting the market.  117’01 is a key retracement level for March Bonds. Downside momentum could trigger a further decline to 116’14. Talk is circulating that foreign investors, especially China, may cut back on their demand for bonds because of credit risks. This may drive up yields.


The March Euro made a successful test of last week’s low at 1.3584 and finished close to the middle of this week’s range. Early in the session, the Euro broke sharply but buyers came in to defend the low. Volatility is expected to continue to be high as traders are reacting to news or the lack of news regarding the possible announcement by the European Union of a plan to support the Greek economy. 


The daily chart pattern suggests this market is being wound tightly. The longer it remains in a tight range the stronger the breakout move. A rally through this week’s high at 1.3838 should put this market on path to retrace to at least 1.4079 over the near-term.


Timing the swings of the market has been difficult this week as news has been sporadic. One thing that has been made clear is an agreement between the EU and Greece has been reached. The main issue driving the Dollar and the Euro today is the details of the pact. Some bullish Euro traders apparently were led to believe that a bailout out would take place, but that does not appear to be the case.


Talk is circulating that the pact is a show of solidarity by the European Union. This is likely to mean that the EU as well as the International Monetary Fund will maintain a watch over the Greek budget and assure adherence to its strict requirements. Furthermore, loans will be provided when deemed necessary to shore up the Greek economy.


Skeptics maintain that this type of agreement will not last and that similar issues are likely to flare up in Portugal and Spain. These issues will once again test the foundation of the European Union. If anything, trader reaction has been less than bullish although the door has been left open for a substantial short-covering rally in the EUR USD.


The March British Pound tested this week’s low at 1.5534 before mounting a strong recovery rally. This market appears to be forming a support base and like the Euro is awaiting details of the Greece rescue plan. Shorts are likely to cover as the details of the rescue are released. 


Technically, this market has a short-term upside target of 1.5801 to 1.5865. Gains could be limited because of the economic issues in the U.K. On Wednesday, the Bank of England lowered its inflation estimate while hinting at expanding and extending its quantitative easing program. Furthermore, just because Greece is being helped out does not mean the deficit issues facing the U.K. will go away. Over the short-run, the focus may shift away from Greece to the U.K. credit rating.


The March Japanese Yen finished the day slightly higher during an almost lifeless trading session. Thursday’s strength comes as a surprise because the combination of the Greek rescue plan and Bernanke’s talk of raising the discount rate earlier in the week should have been supportive for the Dollar. In addition, increased appetite for risk should have triggered a more bullish response. Short-term oversold conditions could be triggering the weakness. The lack of movement in this market could be suggesting that traders remain nervous about the condition of the financial system.


The weaker Euro helped drive down the March Swiss Franc. The low of the day was within a few pips of last week’s low at .9264. This was also near an area where the Swiss National Bank finished last week’s intervention action. Because of the magnitude of the situation in Greece, traders may be waiting for the actual release of the details from the EU/Greek pact before committing to the short-side. A recovery rally in the Euro over the past few days should underpin the Swiss Franc because it eliminates the need for the SNB to intervene to protect the value of its currency and its economy against deflation.


Canadian Dollar traders ignored the stronger Dollar and instead chose to focus on the strength of gold, equities and crude oil. The March Canadian Dollar opened higher, but broke a little early in the session as the Dollar strengthened and risky assets fell.


Technically, this current rally in the Canadian Dollar is related to last Friday’s closing price reversal bottom. The main trend on the daily chart turned up today on the move through .9583, but gains were been limited after a successful test of a 50% price at .9553. A failure to hold this level will trigger a further rally to .9607. The bigger picture suggests more rangebound trading should be expected.


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