U.S. Traders Fail to Bite on Strong Equity Market Open

James Hyerczyk from ForexHound.com at 01/11/10

U.S. equity markets opened stronger as expected as traders renewed their demand for higher risk, higher yielding assets. Without any economic reports to concern investors, expectations were for a trend day with a bias to the upside.  After the New York trading session opened sharply higher, U.S. traders failed to bite on the higher opening, causing the markets to break to the downside. This was the typical pattern throughout 2009 where investors would back away from strong openings and instead wait for meaningful dips to take the market back into value zones.

March Treasury Bonds and March Treasury Notes traded mostly lower on Monday.  Demand for higher yields was the primary cause of the weakness as traders sold fixed income instruments in an attempt to capture better yields in equities.  Investors are becoming concerned that the government is working on providing additional stimulus to help create jobs. This is likely to pressure Treasuries as it will increase the debt supply.

The weaker Dollar triggered a strong surge in February Gold.  The first upside objective at $1151.30 was reached fairly easily overnight.  The next upside target is $1169.30.  A break back under the 50% level at $1151.30 could trigger a decline to $1127.20 over the near-term.

News of strong demand from China during December helped trigger an upside breakout in March Crude Oil but today’s closing price reversal top at 84.45 could be a sign that the selling is greater than the buying at current levels..  Chinese imports for crude oil were up a whopping 24% during December. Today’s action indicates that this news may have already been priced into the market. Despite the bullish news, overbought conditions and an unstable chart formation indicate that this market is vulnerable to a correction to 78.99.

The U.S. Dollar is trading sharply lower as China reported a 17.7% increase in exports and a 55.9% increase in imports.  The surge in exports was the first rise in 14 months.  Pre-report guesses were for only a 4% increase. Due to the timing of the report, and its extreme bullishness, the Australian and New Zealand Dollars both had rare gap openings Sunday night.

Dollar bulls are still reeling from the soft U.S. Non-Farm Payrolls report on Friday.  Traders had been looking for the report to show that job losses had remained flat or perhaps that new jobs had been created during December.  Instead the government reported that 85,000 new jobs were lost. 

Adding more fuel to the bearishness were comments from St. Louis Fed President James Bullard who signaled that interest rates weren’t going to move higher over the near-term.  Bullard said, “interest rates may remain low for quite some time”.  He also added that the Fed’s zero interest rate policy is “on hold”.  He couldn’t have made his position any clearer. In addition to talking about the future direction of interest rates, Bullard said the Fed faces a challenge when adjusting its asset-purchase program because of the possibility of inflation.

With the light economic calendar today, traders will have a chance to digest Friday’s Non-Farm Payrolls report and its impact on the economy.  So far the bets have been placed on a weaker Dollar and renewed interest in higher yielding assets as evidenced by the surge in equity and commodity prices.  Traders should note that the soft employment report has not changed the outlook for a recovery, but it has pushed back the Fed’s timetable for increasing interest rates.

Later during the trading session, Atlanta Federal Reserve President Dennis Lockhart speaks to the Rotary Club of Atlanta.  Look for him to reiterate what Bullard already said last night.  His comments are expected to be dovish.

The U.S. Dollar fell sharply on Monday as bullish traders pared positions on the thought that the U.S. economy will not be able to keep pace with the global recovery.  Before the Forex markets opened, China solidified itself as the driving force behind the global economic recovery when it reported more upbeat export news.

The Greenback traded sharply lower as China reported a 17.7% increase in exports and a 55.9% increase in imports.  The surge in exports was the first rise in 14 months.  Pre-report guesses were for only a 4% increase. Due to the timing of the report, and its extreme bullishness, the Australian and New Zealand Dollars both had rare gap openings Sunday night.

Dollar bulls were still reeling from the soft U.S. Non-Farm Payrolls report on Friday.  Traders had been looking for the report to show that job losses had remained flat or perhaps that new jobs had been created during December.  Instead the government reported that 85,000 new jobs were lost. 

Adding more fuel to the bearishness were comments from St. Louis Fed President James Bullard who signaled that interest rates weren’t going to move higher over the near-term.  Bullard said, “interest rates may remain low for quite some time”.  He also added that the Fed’s zero interest rate policy is “on hold”.  He could not have made his position any clearer. In addition to talking about the future direction of interest rates, Bullard said the Fed faces a challenge when adjusting its asset-purchase program because of the possibility of inflation.

Monday’s light economic calendar gave traders a chance to digest Friday’s Non-Farm Payrolls report and its impact on the economy. Bets were placed on a weaker Dollar and renewed interest in higher yielding assets as evidenced by today’s early surge in equity and commodity prices.  Traders should note that the soft employment report has not changed the outlook for a recovery, but it has pushed back the Fed’s timetable for increasing interest rates.