Equity Markets Rebounding after Last Week's Sell−off

James Hyerczyk from ForexHound.com at 01/25/10

U.S. equity markets are expected to open better this morning following last week’s hard sell-off. Investors dumped stocks late last week as sentiment shifted toward less risky assets. The combination of a stronger Dollar, monetary tightening in China and a proposal by Obama to end financial institution prop trading weighed heavily on traders last week. While these conditions are expected to continue to linger this week, the bulk of the focus will be on the Fed FOMC meeting which takes place on January 27th. Traders will be looking for clues as to when the Fed will decide to begin to raise interest rates.

Treasury futures are trading lower overnight as demand for lower yielding assets dropped overnight in Asia and Europe. Demand for safety helped to lower yields and boost the March Treasury Bonds and Treasury Notes last week. This bodes well for the next auction because it looks as if the Treasury will be able to offer lower yields. Supply concerns are likely to limit gains, however.

February Gold is mounting a strong comeback following last week’s sharply lower trade.  Investors dumped commodities because of the stronger U.S. Dollar. News that China was beginning to shift toward a tighter monetary policy means less demand for precious and industrial metals. Furthermore, a slow down in demand will mean lower inflation which lessens the need for gold as a hedge. Most of the overnight move can be attributed to short-covering and profit-taking.

March Crude Oil is trading sideways-to-lower overnight following last week’s collapse.  The prospect of a stronger Dollar and weaker demand from China are the driving forces behind the weakness. New regulations regarding position limits also led to massive liquidation.  Could weather moving to the East may drive up demand for heating oil which could underpin crude oil today.

The U.S. Dollar is trading mostly lower versus most major currencies overnight with the exception of the Japanese Yen. Following last week’s news driven rally, Dollar traders may choose to stand on the sidelines or lighten-up positions during the two days leading up to the Fed FOMC meeting on January 27.

Short-term overbought conditions are also contributing to this morning’s weakness. In addition, investors are still trying to decipher the impact on the Dollar of Obama’s proposal to restrict financial institution trading. Concerns are also building surrounding the approval of Fed Chairman Bernanke to another term. Both events triggered knee-jerk reactions in U.S. equity markets late last week and could be signaling less future demand for U.S. assets.

The March Euro is up overnight. Traders should continue to monitor the budget situation in Greece. On the bearside, traders are still concerned about Greece’s budget deficit spiraling out of control due to the possibility of a default. This matter is not expected to go away and may even escalate if similar problems develop in Spain and Portugal.

The March British Pound is trading higher overnight. Oversold conditions and position squaring is helping to boost the British Pound. The U.K. economy is still the driving force behind this market’s weakness.

The March Japanese Yen is trading lower following a volatile week which saw the Greenback lose ground. This market could turn around quickly today if U.S. stock markets weaken and demand for lower yielding assets rises. The Bank of Japan is expected to leave interest rates and stimulus alone at this week’s meeting, but could threaten to intervene if this currency rises above 1.12. 

The March Swiss Franc is trading higher overnight. Last week’s closing price reversal bottom is contributing to this morning’s strength. The chart pattern suggests that this market is likely to continue to rally until it reaches a key resistance zone at .9702 to .9743. Traders should also watch the Euro. A sudden drop in the Euro versus the Swiss Franc could lead to renewed talk of intervention by the Swiss National Bank.

Oversold conditions in gold, crude oil and equities could help support the March Canadian Dollar today. Overall, this market can best be described as rangebound. A stronger Canadian Dollar has been met by Bank of Canada activity which helps to weaken it. This pattern is likely to continue until the Canadian economy can sustain itself.