Equity Markets Finish Higher on Friendly U.S. Economic Data

James Hyerczyk from ForexHound.com at 02/01/10

U.S. equity markets rallied late in the session to close above key retracement points as traders set aside their recent worries and returned from the sidelines. The markets opened firm then surged to the upside following a better than expected U.S. manufacturing report. Good news from the consumer side also helped to support the rally.

The March E-mini S&P 500 found support at a .618 retracement price at 1069.50 early Monday morning, but it is the close over the 50% price at 1084.50 which should trigger further upside movement. The charts indicate a rally to 1107.00 is likely over the near-term.

Greater demand for risk is helped to pressure Treasury futures. Fear had been driving investors into the safety of the March Treasury Bonds and March Treasury Notes. Better than expected U.S. economic reports also contributed to the weakness. These reports are signs that the U.S. economy is improving moves the Fed closer to hiking interest rates which is bearish for Treasury prices. The bigger picture still indicates that March Bonds are finding resistance inside a major retracement zone at 118’24 to 119’24. A close under 118’24 will indicate weakness that could trigger the start of a break back to 116’06.

The weaker Dollar helped to support April Gold. Short-traders continue to respect the December main bottom at $1076.50. Oversold conditions have made this market ripe for a short-covering rally.  This is likely to happen if the Dollar weakens further. Look for the rally to find resistance at $1120.50 to $1131.40.

The upbeat U.S. manufacturing report helped drive March Crude Oil higher on Monday. Demand for higher risk also helped support the market. Oversold conditions encouraged shorts to lighten up their positions as this market approached the December bottom at 72.53. A weaker Dollar is also likely to help rally crude oil. The bigger picture still suggests weakness, however, because of low demand and high supply.

The U.S. Dollar lost ground against most of its counter-parts as better than expected U.S. economic data sent money into higher risk assets while paring the safety premium built into the Dollar last week.

The Dollar was under pressure from the get-go this morning following a round of position squaring overnight in the European and Asian markets. Many traders were lightening up on overbought positions in the Dollar in anticipation of a choppy two-sided trade ahead of this Friday’s U.S. Non-Farm Payrolls Report.

This morning the Dollar got a little boost following the release of two better than expected economic reports, but was unable to build on the small gains. The reports showed a rise in consumer spending in December and an increase in U.S. manufacturing data last month. Although the Dollar was down today, there will be a point in the near future where the Greenback begins to benefit from the improving U.S. economy.

The March Euro traded better throughout the U.S. session after firm overnight trading. Relaxed concerns about the fiscal crisis in Greece triggered today’s short-covering rally. Investors expect to hear more upbeat news on Wednesday when the European Union releases its official opinion on Greece’s efforts to shore up its budget. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level.

Concerns over a poor economy, growing fiscal deficit and the upcoming U.K. election helped to pressure the March British Pound. Traders also remain pessimistic about how the economy will respond following the ending of the Bank of England’s quantitative easing program. Today’s trade indicates that bearish traders respected the late December main bottom at 1.5832.

The March Japanese Yen traded lower following reports which showed improvement in the U.S. economy. Traders took the risk premium off the table and returned to looking at the improving economic data as the main reason to own the U.S. Dollar versus the Japanese Yen. The chart indicates that upside momentum could trigger a rally back to 1.0950 over the near-term.

The March Swiss Franc finished higher. Better than expected U.S. economic reports helped trigger an intra-day sell-off, but this didn’t amount to much. Monday’s trading action shows that conditions have calmed after last Friday’s surge to the upside. The weaker Euro versus the Swiss Franc late last week may have triggered an intervention by the Swiss National Bank. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Look for renewed upside pressure on the U.S. Dollar if the Euro continues to strengthen. Based on current conditions, the Swiss Franc may rally back to .9645 before finding resistance.

Firmer equities, gold, and crude oil helped the March Canadian Dollar form a closing price reversal bottom. The Canadian Dollar weakened last night, but sellers stopped short near the December bottom at .9303. Demand for higher risk and overbought conditions on Monday helped trigger today’s short-covering rally. The chart indicates this market is likely to retrace its recent break with .9553 the next likely target.