U.S. Equities Post Strong Gains on Renewed Interest in Higher Yielding Assets

James Hyerczyk from ForexHound.com at 02/17/10

Confidence that the Greek budget deficit problem may be improving helped to drive up demand for risky assets. This helped to boost U.S. stock indices. Traders were also becoming more confident about improvements in future corporate earnings because of the recent improvements in the economy. The strong rally in the March e-Mini S&P 500 has put this market in a position to test a key retracement area at 1094.50 to 1107.00.

Technical factors may have driven up demand for March Treasury Bonds. A successful test of a key 50% retracement price at 117’01 triggered a strong short-covering rally. Upside momentum could trigger a further rally to 118’24 before new selling comes in. Investors do not expect too much upside activity because of the growing U.S. budget deficit and huge supply of bonds in the market.

Increased demand for higher risk assets and thin, narrow trading helped boost April Gold and April Crude Oil. The weaker Dollar was the biggest contributors to the rallies in these two markets.

The weaker Dollar has triggered huge rallies in April Gold and April Crude Oil.  Demand is soaring for higher risk assets as traders believe that the recent break in the Euro may have been overdone. The strong rise in Gold is a sign that traders expect the Dollar to weaken further as the European Union/Greece situation works its way out.

The Euro soared on Tuesday as news that Greece is ahead of its deficit-reduction targets boosted investor confidence. Traders celebrated the news that Greece may not require any bailout from the European Union by driving the EUR USD higher while posting its biggest gain in seven months.

Short-covering was most likely the driving force behind Tuesday’s rally which means a retracement is likely at some time this week. If this market is truly ready to change the trend to up, then fresh buying has to come in on the next test of the recent bottom. Bullish traders will try to set up a secondary higher bottom.

The GBP USD finished the day higher.  A report released overnight showed that inflation accelerated in January to its fastest pace in 14 months. This news helped trigger a short-covering rally. Inflation was up 3.5% which exceeded the Bank of England’s target of 2.0%. This prompted a response by BoE Governor Mervyn King to explain the rise. Traders are becoming less confident in the BoE’s ability to help the economy while at the same time preventing a surge in inflation. Demand for higher risk assets helped the Pound overcome the economic issues it is facing.

The USD JPY finished slightly better on light trading. The week-long Chinese holiday may be playing games with the volume. Early during the trading session, the Dollar was trading lower against the Yen as Japanese investors repatriated gains from U.S. Treasury investments. Later, demand for higher risk assets and the stronger U.S. economy helped to drive investors out of the safety of the Japanese Yen into the U.S. Dollar.

The strengthening Euro diminished the possibility of another intervention by the Swiss National Bank. This helped to trigger a profit-taking break in the USD CHF. Traders should watch for a huge correction in this market should the Euro continue to post strong gains.

Sharply higher gold and crude oil boosted the Canadian Dollar on Tuesday. The main trend in the USD CAD is down on the daily chart. Today’s downside momentum has been strong enough to push this market through a key retracement zone at 1.0501 to 1.0436.  Despite the sharp sell-off, most investors expect this market to remain inside the 1.0224 to 1.0780 range over the near-term.

Greater demand for risky assets is helped to boost the AUD USD. Tuesday’s strong rally exceeded a key 50% price at .8953. The next target is now .9042. Traders also reacted positively to the news from the Reserve Bank of Australia minutes. This report showed that the RBA vote to keep interest rates unchanged in February was closer than originally thought. This opens up the door to future rate hikes.

Renewed demand for higher risk assets helped drive up the NZD USD. Thin market conditions because of the Chinese holiday helped this market surge to the upside. The chart indicates that .7124 is the next upside target. Technically oversold conditions also helped to drive out weaker shorts.