U.S. Equities Could Suffer Under Obama Plan

James Hyerczyk from ForexHound.com at 01/22/10

U.S. equity markets could feel downside pressure if President Obama’s plan to end trading by financial institutions becomes a law. Investors feel this proposal will have a negative impact on bank earning’s which could weaken their stock prices. In addition, the proposal is making the Dollar less attractive.

Technically, the March E-mini S&P 500 changed the trend to down on the daily chart with its move through 1109.75. A retracement level at 1105.00 stopped the slide, however. Holding this level could trigger a retracement rally to 1126.00. A break through 1105.00 could send the market to 1100.00 then 1095.00.

Demand for safety is helping to lower yields and boost the March Treasury Bonds and Treasury Notes. The March Bonds penetrated a swing top at 119’08 but failed to attract follow-through buying. This market is currently trading inside the retracement zone of the 123’00 to 114’16 range. This zone is at 118’24 to 119’24. Profit-takers could come in if stocks begin to strengthen.

February Gold is still trading down despite the weaker Dollar. It looks like it will take a significant break in the Dollar to trigger fresh buying or a short-covering rally.  Short-term support is at 1086.60. Resistance is at 1108.70.  News that China may cut back on demand and Obama’s proposal to limit bank trading are weighing on trader decisions.

March Crude Oil continued its decline overnight as traders dumped higher risk assets. The news that China may begin tightening its monetary policy which could lead to less demand for crude oil is weighing heavily on this market.

The U.S. Dollar is down against a basket of currencies overnight as global investors assess the impact of President Obama’s proposal to limit trading by financial institutions. The early read is that investors feel the proposal is Dollar negative and in the long-run may discourage investors from buying U.S. assets.

So far the reaction has been mild, highlighted by light position evening. Traders may also be using this proposal as an excuse to take profits following a strong surge in the Dollar and amid overbought conditions. Trading may not be a volatile as Thursday as foreign central banks assess Obama’s proposal while working on banking regulation plans of their own.

The March Euro is trading better. Oversold conditions and position evening following the U.S proposal to curb trading by financial institutions are the primary drivers behind the rally.  A persistent rumor that the European Union may lend Greece money to shore up its budget deficit helped limit losses yesterday, and may still be in the market today. An agreement by the EU and Greece is likely to trigger a massive short-covering rally which could send this currency to 1.4340 rather swiftly.

The Obama proposal could not help the March British Pound which fell once again overnight. A report that U.K. retail sales grew at a slower pace than forecast is helping to weaken the British Pound overnight. At this time, the Pound is plowing through minor retracement points and holding a level at 1.6108.  A break through this price is likely to trigger an acceleration to 1.6071.

The March Japanese Yen is strengthening further following yesterday’s closing price reversal bottom. Upside momentum is building which could send this pair to a major 50% price at 1.1273.  President Obama’s plan to curtail trading by financial institutions is making lower yielding assets more attractive to the benefit of the Yen. The move in the Yen is likely to draw a stern comment from the Bank of Japan which favors a weaker currency. 

Upside pressure is on the March Swiss Franc following yesterday’s closing price reversal bottom. The combination of oversold conditions and less demand for the Dollar is helping to apply the pressure. The slightly better Euro is also helping to aleve some of the pressure on the Swiss National Bank to intervene. The chart pattern suggests a move to .9701 is likely over the short-run.

Despite calls for a weaker Dollar, the March Canadian Dollar continues to weaken. Currently this market is on the bear side of a 50% price at .9510 and testing a .618 level at .9461.  A breakout under this level could trigger an acceleration to .9430.