Global stock markets are fluctuating overnight ahead of this weekend’s meeting of G–20 leaders. Leaders are expected to discuss the prospects for weak global economic growth, sovereign debt issues in Europe and financial regulation reform. The conclusion is that nothing too concrete should come out of this conference.
After a year of negotiations, a compromise was reached in the new financial regulations bill last night. The new legislation is expected to curtail banking trading activity which is expected to pressure industry profits because of the newly proposed tougher oversight and tighter regulations. After hammering out a few details, the bill is expected to be signed by the President around July 4.
Final revision of the GDP report showed that the economy grew at 2.7%. The rate of change argument shows that the economy may be in a deceleration. Stocks turned negative on the news. Consumer spending fell as well as business spending. The news doesn’t appear to be positive based on the initial reaction by traders.
Stock index futures fell sharply lower on Thursday as investors slashed positions following a weak outlook for the economy and bad earning expectations for consumer–oriented and energy stocks.
Risk averse trading was highlighted once again on Thursday. Investors have been shifting to a capital–preservation mode since the strong rally on Monday ended with a dramatic closing price reversal top. Large traders have also been nervous as House and Senate lawmakers sought to finalize legislation designed to tighten oversight of the financial industry more than expected.
On Wednesday, the Fed added fuel to the fire by stating the economy is “proceeding” rather than growing as previously stated. Thursday, U.S. economic data was mixed. Weekly jobless claims fell by 19,000 to 457,000. This event didn’t trigger a celebration by investors however as many still felt the decline was not enough to revive the outlook for jobs. A smaller than expected drop in durable goods also did not do anything to change the minds of investors.
Technically, the September E–mini S&P 500 closed under a minor Fib level at 1072.50, indicating further weakness is likely. The bigger picture suggests the market just completed a major retracement that indicates another leg down is coming.
September Treasury Bonds are trading flat overnight after a tremendous rally this week stopped short of taking out the high for the year at 126’05. It looks as if upside momentum slowed as we reached this level as traders waited for fresh news regarding the economy and the stock market. A desire for safety and less risky assets should help push the T–Bonds through resistance today.
August Gold is trading higher but still about $15 below its high for the week at $1266.50. Traders seem a little confused about which direction to take in this market because of mixed fundamentals. At this time the market is trading lower for the week which could produce a closing price reversal top. This technical pattern suggests the possible start of a 2 to 3 week break if confirmed. Signs of a slowdown in the global economy and a cut in government spending could encourage investors to shed their positions as the outlook for inflation would slow down.
The U.S. Dollar is posting a strong gain this morning especially against the commodity–linked currencies but losing ground to the lower yielding Japanese Yen. This is usually a sign that traders are shying away from risky assets and seeking shelter in the Dollar. If demand shifts back into U.S. equity markets then look for the Dollar to weaken.
The September Euro rallied on Thursday as economic woes continued to pressure the U.S. Dollar. Weakness in the stock market triggered by a so–so weekly jobless claims report and only a slightly better than expected durable goods report encouraged traders to pressure the Dollar.
With the outlook for the economy looking bleaker, and the problems in Europe already priced into the market, today’s action is a sign that traders may be willing to shed positions in the Dollar in favor of the Euro at least in the short–run.
Early in the session, the Euro was down against the Dollar after a slump in Greece bond sales overnight raised some concerns about the quality of debt in the Euro Zone. The weak U.S. data, however, allowed the Euro to overcome this weakness and move higher.
Monday’s closing price reversal top in the Euro was an indication of selling pressure, but this move ended following an expected 2 day break. The market approached its minimum objective at 1.2172 but never reached it on Wednesday as weak housing data and a gloomy outlook by the Fed for the economy triggered a sell–off in the Dollar.
The current pattern suggests that move upside is possible with 1.2609 the next objective. It is also possible that a secondary higher bottom is forming which will be even more confirmation that the Euro is set up for a rally.
Following two days of strength in celebration of the budget released by the new U.K. government, the September British Pound was unable to hold on to its gains and closed lower. This pattern could be indicating a tired market. With the main trend up however, only a 2 to 3 day break can be expected. A test of 1.48100 is likely during this time period. A close under this price indicates more serious selling pressure is developing.
The strength in the Euro triggered a rally in the September Swiss Franc. A new main bottom was formed at .8992. Bullish traders will likely trail their stops slightly under this level. Thursday’s action took out the last main top at .9099. Upside momentum indicates that a Fib retracement level at .9191 is likely. A rally through this level should trigger an acceleration to the upside.
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