Equity Markets Set to Rebound After Sell−off

James Hyerczyk from at 09/25/09

U.S. Equity markets are expected to open slightly better following yesterday’s hard sell-off.  Bargain hunters are boosting equity markets overnight, but the tone has definitely turned a little more bearish since earlier this week.  The NASDAQ may lead the markets lower because of bad earnings news from RIMM.  Some investors expect the negative tone to lead to profit-taking selling pressure on other major technology stocks. 

Technically, the stock indices are in a position to form weekly reversals down.  This would be a strong indication that a major top has been formed and could set up sharply lower markets next week. 

Weakness in the equity markets could trigger spillover buying in the Treasury markets as traders seek the safety of the T-Bonds and T-Notes. 

A slightly weaker Dollar could lead to early morning strength in the precious metals.  December Gold and December Silver are called steady to better.  An early rally is likely to be short-covering because yesterday’s sell-off turned the main trends to down in both of these markets.  Traders are also becoming concerned that a trade war with China could lead to less demand for both precious and industrial weakness.  This explains the weakness in the October Platinum and December Silver.

December Crude Oil is also expected to open a little better.  The weaker Dollar has encouraged shorts to lighten up positions following this week’s hard sell-off.  Supply and demand issues continue to weigh on this market.  Earlier in the week it was reported that ending inventories for crude oil and gasoline rose more than expected.  The primary cause for this was a drop in demand.

The U.S. Dollar is trading mixed against most major overnight. Traders are considering a slew of information including whether the global economy can continue to improve once the central banks begin to pull their stimulus plans.  There is also some debate taking place regarding how aggressive each central bank will be following their decisions to end their stimulus plans. 

Traders are also speculating on the activity of the G-20.  So far traders expect the G-20 to provide guidance regarding banking executive compensation and plans to better coordinate activity during financial crises.

The December Japanese Yen is the big winner overnight.  There is some carryover news regarding repatriation supporting the Japanese Yen overnight, but the biggest story is the comments from the Japanese Finance Minister who said he has ruled out intervention at current levels.  This provided some relief to traders who were concerned the government was becoming concerned about the rise in the Yen and its possible negative effects on exports.

The December British Pound continues to remain weak following yesterday’s huge sell-off.  The bulk of this week’s weakness in the British Pound was triggered by comments from Bank of England Governor Mervyn King.  King said he favored a weaker currency to help increase exports to support the U.K. economy.

A pick-up in demand for higher risk assets overnight is helping to boost the December Euro.  A slightly better stock market is helping to shore up this market.  A substantial retracement should drive it higher, but don’t look for new highs for the week on this move.  Expectations are for the Euro to go into a consolidation phase if the U.S. equity markets start a correction.

Better energy prices are providing some light support for the December Canadian Dollar overnight. The damage has been done to this currency, however, so don’t expect a major turnaround in the Canadian Dollar.  Look for a short-covering rally at best which is likely to be met with possible selling pressure later in the day.