Strong U.S. Economic Data Supports Equity Markets
James Hyerczyk from ForexHound.com at 02/18/10
U.S. investors drove stock indices higher following better than expected housing starts, industrial production and import price reports. Trading was light and there was very little follow-through to the upside following a strong early morning session. Traders were able to hold the indices steady following the FOMC report. This report failed to generate a reaction in either direction as most traders felt the information in the report was already factored into the market.
The charts indicate that the main trend remains down in the three major indices and that this current rally is being driven by short-covering following the recent sharp sell-off. At this time the March E-mini S&P 500 is trading inside a key retracement zone at 1094.50 to 1107.00.
March Treasury Bonds and Notes traded sharply lower following the release of the better than expected U.S. economic news. The main trend turned down on the daily March Treasury Bond chart when the low pierced the old main bottom at 116’23. The improving economy drove yields higher as it gave the Fed more reason to begin hiking rates. The FOMC minutes helped trigger a late session sell-off. The minutes said the Fed was seriously discussing an exit strategy and hiking the discount rate.
April Crude Oil traded higher early in the session but sold off sharply when the Dollar soared to the upside. Technically, the daily closing price reversal top signals the possible start of a break back to $1087.00 to $1077.
Despite the stronger Dollar and weaker Gold, April Crude Oil managed to post a small gain. This market closed in a position to take out the recent main top at 78.04. Currently it is trading inside a key retracement zone at 76.98 to 78.74 which means a closing price reversal top may be imminent.
The U.S. Dollar posted strong gains against all major currencies as concerns about Greece’s ability to stick to its new strict budget flared up once again. In addition, a fresh wave of selling pressure hit the Euro after Moody’s Investor Service downgraded ratings on about 4 billion Euros of Greek bank hybrid securities. Both events encouraged investors to seek safety in the U.S. Dollar.
Besides rallying from demand from risk adverse traders, the Dollar also soared after the release of better than expected U.S. economic data. Housing starts, import prices and industrial production were all reported better than pre-report estimates.
The Dollar was able to maintain its gains throughout the session and even received a late session boost when the FOMC minutes showed that the Fed was strongly discussing hiking the discount rate and implementing an exit strategy. This helped add additional upside pressure to the Dollar because it meant that the Fed thought the recovery was far enough along to begin raising interest rates while withdrawing additional liquidity from the financial system.
Wednesday’s loss in the Euro erased all of Tuesday’s gains. Recent talk of a possible resolution to the Greek deficit situation has failed to attract sustained buying. Investors are still looking for more concrete guidelines before committing heavily to the long side. In addition, it has been widely reported that a record amount of short positions are working against the Euro. The weak close and increased downside momentum has the March Euro in a position to challenge last week’s bottom at 1.3531.
A rise in U.K. jobless claims and dovish comments from the Bank of England minutes helped fuel early weakness in the March British Pound. Additional selling pressure hit the British Pound following the release of stronger than expected U.S. economic data.
This morning the BoE said that the economy is “recovering, but only weakly”. In addition, it said the country faces “considerable” resistance as it expects credit to remain tight “for some time”. The information garnered from the BoE minutes suggests the central bank will remain dovish on the economy for a prolonged period of time.
In addition to the weak economy, the U.K. still faces a growing budget deficit and the possibility of a downgrade of its credit rating.
The falling Euro kept the pressure on the Swiss National Bank to once again intervene to weaken its currency. This triggered a sharp break in the March Swiss Franc. The strong economic news fueled the weakness in the March Japanese Yen.
