U.S. Equity Markets Pare Losses as Investors Remain Calm

James Hyerczyk from ForexHound.com at 11/28/09

U.S. equity markets pared huge overnight losses after traders gobbled up stocks shortly after a gap lower opening. Investors jumped on the opportunity to buy cheaper stocks following the dramatic sell-off in global equity markets over the Thanksgiving holiday.

Equity markets were driven lower in Asia and Europe after debt problems were reported in Dubai.  This large corporation known as Dubai World allegedly asked for a $59 billion debt repayment postponement until May 2010.  The announcement sent shockwaves through commodity and equity markets as investors liquidated risky positions and sought safety in the U.S. Dollar.

Investors traded the markets in an orderly fashion, however, once the U.S. stock markets opened.  Traders bought up lower priced stocks from the opening with the December E-mini S&P 500 rising from 1077.75 to 1098.25.  The break from the recent high at 1112.25 only amounted to a retracement of the 1026.00 to 1112.25 range.  This retracement zone is 1069.00 to 1059.00.  The low the past two days was 1067.00. 

It’s hard to tell at this time if today’s rally was short-covering or fresh buying.  If the markets are indeed topping, then Friday’s rally may have taken place to set up a secondary lower top. A failure to make a new high on this current rally could be a strong sign that the top is in for the year.

December Treasury Bonds pared gains after a strong surge to the upside.  Friday morning’s rally was triggered by a flight to safety rally into U.S. Treasury markets.  Look for the direction of the stock market to dictate the movement and direction of the U.S. debt markets next week.

The U.S. Dollar gave back over 50% of its early morning gains as investors took profits after a strong two-day rise.  The inability to break equity markets lower after the opening helped drive up demand for higher risk assets.  Investors began selling the Dollar after it became clear that there would be no panic selling of higher risk assets.

Overnight the Dollar climbed sharply higher as global investors dumped stocks and commodities on concerns that Dubai World’s debt problems would escalate into a worldwide credit crisis similar to the one the U.S. faced when Lehman Brothers collapsed in 2008. Fear raced through the global investment community, making lower-yielding assets such as the Dollar and the Yen more attractive.  The situation in Dubai began to break late Wednesday night and spilled over into Thursday while U.S. markets were closed for the Thanksgiving holiday. 

Investors began to liquidate higher risk assets when the largest corporate entity in Dubai asked creditors for a six-month postponement of $59 billion in debt payments.  This action by the Dubai entity raised concerns that other emerging market entities may be overextended in debt which could lead to even more liquidation. 

Global financial markets took a huge hit as traders feared that banks were facing major exposure to Dubai World’s mounting debt issues. Once U.S. equity markets opened and were able to hold their lows, profit-takers hit the Dollar and the foreign currency markets posted a strong recovery from their lows. 

February Gold bounced back after a sharp sell-off on Friday. The stronger Dollar triggered a break in the precious metals complex but the inability of the Dollar to follow-through to the upside helped gold mount a strong comeback.  The down move in gold was accelerated when global traders began dumping dollar-based assets.  The late session rally in gold helped it avoid a week closing price reversal top.  A follow-through to the downside next week will be a sign that a short-term top is being formed.

March Crude Oil traded sharply lower early in the trading session. Lower equity prices and a higher Dollar helped provide the downside pressure.  Based on the main range of 67.46 to 83.60, a retracement zone was been formed at 75.53 to 73.43.  Friday’s low stopped slightly below the 50% price at 74.88.  The current rally from this bottom could falter inside 79.24 to 80.27.  Crude Oil could feel more downside pressure next week, if the Dubai credit problem blows up into something major.