Commodities, Stocks Weaken as Traders Seek Safety

James Hyerczyk from ForexHound.com at 02/04/10

Commodity and stock markets are trading lower overnight as risk aversion is driving investors toward safer, lower-yielding assets. U.S. economic reports may have to take a backseat today as traders express their concerns with growing European sovereign debt issues by selling off higher risk assets.  Trading may be volatile today as thin conditions ahead of tomorrow’s U.S. Non-Farm Payrolls Report continue to be the highlight.

The key level to watch in the March E-mini S&P 500 is 1084.50. Holding this level could attract buyers which will limit losses. A failure to build support at this level is likely to pressure this market further with 1069.50 the next downside target.

March Treasury Bonds are trading higher. This market could see a sharp rise to the upside if European debt worries continue to pressure equity markets. Traders may be encouraged to buy Treasury Bonds and Notes for safety. A medium-term view indicates that 118’24 is resistance. The developing downtrend pegs 116’06 as the next downside target.

The stronger Dollar is pressuring April Gold. Selling pressure has put this market in a position to test a key retracement level at $1101.40. Downside momentum could trigger an even harder break to $1094.30.

Yesterday’s bearish crude oil inventory report along with a drop in demand for higher risk assets is pressuring March Crude Oil overnight. The charts indicate that 75.29 to 74.63 are the next downside targets.

The Dollar is trading higher versus all major currencies except the Yen. Investor concerns about the sovereign debt woes in Greece will simply not go away. Traders are taking protection overnight in the Dollar and the Japanese Yen.

The March Euro is heading lower, pressured by concerns that despite the proposal of a new budget plan, Greece lacks the means to deal with its deficit issues on its own. Fears are also being raised that the fiscal problems in Greece are not isolated and may spread throughout the Euro Region should it default on its debt.

This morning the European Central Bank will make its monetary policy announcement. The consensus says that interest rates will remain at the historically low 1% level. The focus will be on ECB President Trichet’s press conference. Although he will discuss the Euro Zone economic situation as usual, he will most likely be peppered with questions regarding the growing concerns about Greece. Traders are anticipating that he will warn other countries about getting their budgets in order. In addition, he will address the possibility that the ECB or the European Union will come to the rescue of Greece. This is unlikely, however, because they both lack the authority to enact such a move. It may take action from the International Monetary Fund to avoid a catastrophic collapse.

Adding further to the Euro’s woes was the news that German Factory Orders plunged 2.3%. This report coupled with the recent string of good U.S. economic reports signals that the global recovery may be uneven with the U.S. surging while Europe remains stagnate. Despite the European economic problems, the main issues facing the Euro remain the Greece situation and debt relief. 

The Bank of England is expected to announce this morning that interest rates will remain at a historically low level. The key to the direction of the March British Pound will be whether BoE members vote to continue purchasing assets in an effort to support the economy. The poor showing in the last quarterly GDP report and softening money supply growth are two reasons why the BoE may decide to expand or extend its quantitative easing program. The recent performance in the economy shows that the U.K. stimulus programs have been a failure. Some may argue that expanding the program will be inflationary as evidenced by the most recent spike in U.K. consumer inflation. This could cause a split vote amongst BoE officials.

The March Japanese Yen is rallying this morning as investors seek safety in lower yielding assets over concerns about the possibility of sovereign debt default. The Japanese Yen tends to strengthen during economic turmoil and uncertainty. Look for this pair to be the risk sentiment indicator today. As long as the fear of default exists, the Yen should continue to appreciate. At this time, the Bank of Japan has no plans to halt the rise in its currency. This could help fuel a steep rally in the Japanese Yen over the near-term.

The stronger Dollar is pressuring demand for commodities, namely gold and crude oil. This is helping to pressure the Canadian Dollar. Upside momentum is building which could send the March Canadian Dollar back to the last main bottom at .9326 rather quickly.

The weakening Euro has once again raised fears the Swiss National Bank may intervene to prevent the Swiss Franc from appreciating too much versus the Euro. This is helping to pressure the March Swiss Franc this morning. The Swiss Franc is in a position to test last week’s low at .9397.  This is where this pair stopped last week following an intervention by the SNB.