Stock fall as Investors Shun Higher Risk Assets

James Hyerczyk from ForexHound.com at 01/20/10

 

U.S. equity markets are trading lower as investors dump higher risk assets. The weakness started on the Shanghai Exchange overnight after China asked banks to stop lending for the rest of the month. This sent a signal to traders that the easy money environment will be coming to a close. Investors are reacting as if the news from China will curtail the global economic recovery.

Last night IBM reported strong earnings but this news couldn’t carry the market. This morning, IBM is leading the Dow Jones Index lower. Investors may have been standing aside while awaiting the special election results from Massachusetts. The news that Republican Brown defeated the Democratic machine could pressure healthcare stocks, but insurance stocks may benefit if the current healthcare plan gets defeated.

The stronger Dollar indicates that investors are looking for lower yields and safety. This should continue to weigh on higher yielding, higher risk assets like equities.

March Treasury Bonds and Treasury Notes are trading higher. Traders are driving down yields as they seek shelter from falling equity markets. If safety remains the theme throughout the day, then look for more appreciation in bonds and notes. Look for a late afternoon test of a downtrending Gann angle at 118’10.

February Gold is down sharply. Stronger demand for the Dollar is putting pressure on gold. Both a retracement level at $1119.10 and an old main bottom at $1118.50 failed to hold and the market plunged further to a .618 level at $1108.80 before finding some light support at $1106.80. News that China is asking banks to limit loans could mean the end for excessive demand for precious and industrial metals.

March Crude Oil failed to follow-through to the upside after Tuesday’s closing price reversal bottom. The pattern hasn’t been negated, but there doesn’t seem to be enough buying power to confirm a valid bottom. Currently this market is trading inside a retracement zone at 78.99 to 77.70. A slowdown in demand from China could put additional pressure on this market today. 76.00 is the next potential downside target.

The U.S. Dollar is continuing to push toward new highs at the mid-session against most major currencies as investors seek refuge in lower-yielding currencies following the announcement by China that it was asking banks to curb lending for the rest of the month.

China’s attempt to reign in bank lending is an attempt to put the brakes on a massive lending spree in an effort to cool the economy. The availability of easy money through government stimulus and favorable loan conditions helped fuel a huge surge in the Chinese economy. The pace of the growth is a concern for central bank officials. Tomorrow, China is expected to report double-digit 4th quarter GDP growth.

The Dollar is also receiving a boost from the election of a Republican to a key U.S. Senate seat in Massachusetts. This event is bullish for the Dollar because some feel it may signal an end to excessive government spending that has been weakening the Greenback.

The combination of China’s aggressive tightening action along with the Republican victory is boosting the Dollar while putting pressure on equities and commodities.

The March Euro continued its freefall on concerns over Greek budget issues. Overnight the move accelerated to the downside after International Monetary Fund Managing Director Dominique Strauss-Kahn said Greece’s debt woes are “serious”. Without any aid from the European Union, or the European Central Bank, look for Greece’s debt issues to continue to mount.

European officials have stood there ground about providing financial help to Greece, saying that it is not their problem to solve. They also fear that providing aid will mean other countries such as Spain, Portugal and Ireland will begin lining up with their hands out in expectations of free money.

Technically, the March Euro broke through the December bottom at 1.4217, reaffirming the down trend on the weekly chart. The chart indicates that 1.3800 is the next major downside target, although 1.4000 may provide some psychological support. At this time, it looks as if the only event that can turn the Euro around will be if the EU or ECB provides help to Greece.

The March British Pound is trading sharply lower at the mid-session after support failed. Overnight Bank of England Governor Mervyn King issued a dovish comment about Tuesday’s higher than expected inflation report. Earlier losses were limited, however, after a report showed that the U.K. unemployment rate fell at the fastest pace since April 2007 in December.

Although the British Pound failed to form a closing price reversal top on Tuesday, it sold off, nonetheless, when a 50% support price at 1.6355 was violated. The chart indicates that 1.6175 is the next downside target.

Overnight the BoE’s King said that Tuesday’s reported spike in inflation was a short-term event and not likely to last. The cause of the surge in inflation was most likely the additional stimulus the BoE added in late Fall.

China’s order to reign in bank loans is likely to slow down the growth in the global economy and put pressure on higher yielding assets. This should help to put upside pressure on the March Japanese Yen, but so far trading has been lackluster and sideways.

The Japanese Yen is at a critical point on the charts. Although Tuesday’s closing price reversal top was confirmed by a follow-through break last night, the lack of follow-through to the downside should be a concern to the bears. Traders seem to be indecisive about which way to play the Japanese Yen.

The March Swiss Franc continued to break after it broke through a key retracement price and an uptrending Gann angle. The break in the Euro is making Swiss central bankers nervous which could lead to a surprise intervention.

On Tuesday, the Bank of Canada left interest rates unchanged, but took measures to weaken the Canadian Dollar by increasing its asset-buyback program. Weaker stocks, gold and crude oil could put additional pressure on the Canadian Dollar.

Technically, a new main range has been formed in the USD CAD at .9303 to .9780. The first downside target of this range is .9510. A breakdown under this level will trigger a further decline to .9461.