April 2010

North American Commodity Update

Commodities – Energy

The Longest Build in Inventories in Five Years Turns Crude to its First Lost in Seven Days

Crude Oil (LS NYMEX) – $85.95 // -$0.89 // -1.02%

After forging a remarkable breakout to a 17-month high and subsequently extending the longest bull trend since the December/January rally, crude was would have to eventually trade speculative momentum for fundamental drive. This switch proved unfavorable for the commodity. The first decline in seven days Thursday was partially the response to breakout exhaustion; but it would further align itself to a disappointing round of fundamental data and more importantly to the consensus on risk appetite across the financial markets. Looking for guidance on investor sentiment, we can see that crude was advancing on its own momentum. Looking to other recognizable benchmark’s measures of traders’ appetites, we see that the Dow Jones Industrial Average has found itself unable to surpass 11,000, while Wednesday’s decline was the biggest in six weeks; and carry interest continually loses momentum in its two-week advance. Given this general consensus, strength in oil from a speculative perspective is diverging far from what markets would suggest is reasonable. As a measure of the inactivity of the markets and lack of concern over a possible reversal, the CBOE Crude Volatility Index is hovering just above a 27-month low at 29 percent. In addition to the negative bias contributed by risk trends, the dollar’s strength through the day would add additional weight to the commodity as the primary pricing instrument for spot and futures transactions in the Western hemisphere.

It is possible for a market to overlook a technical or speculative sense of overbought and oversold given the correct fundamental contributions. Over the past few days, strong economic data and the support to growth that the Fed’s dovish monetary policy position leaned towards offered a boost to the production/consumption equation exactly where it was needed: long-term demand. However, this positive outlook was undermined by today’s data. Most pertinent for energy traders was the greater-than-expected 1.976 million barrel increase in the Department of Energy’s crude oil inventory figures for the week ending April 2nd. This increased net holdings to 356.2 million barrels; but more importantly the growth trend is the longest since the 11 consecutive weekly increased through December 3rd, 2004. Other statistics from this data release were similarly discouraging. Crude imports rose 5.5 percent to 9.56 million barrels – the highest level since September. So, while refineries may be operating at their highest levels since October (at 84.5 percent) there is little significant price threat to come from the supply side. In macroeconomic news, the final reading of the fourth quarter Euro Zone GDP numbers were revised down. The region reportedly stagnated through the end of the year with a deeper than expected 2.2 percent drop in consumer spending. Adding to the discouragement UK service sector activity would pullback form a more than three-year high in its March reading and US consumer credit numbers dropped for the 12th time in 13 months – a sign that the world’s largest consumer base will not turn to financing to compensate for high unemployment and receding wage growth.

Commodities – Metals

Gold Rallies to a 12-Week High as Sovereign Debt Risk Outweighs Dollar Strength

Spot Gold – $1,149.70 // $15.40 // 1.36%

While most other capital markets were on the lam, gold put in for a remarkable rally Thursday morning. While there was a fundamental component to the period’s advance, there is little doubt that the metal was enjoying a certain degree of momentum from its own appeal as a speculative asset. Jumping from its two-week rising trend channel, spot would clear its March 3rd swing high at $1,145 and move on to twelve-week highs. For a fundamental footing, the commodity’s appeal would stem from ongoing concerns over the deterioration of sovereign credit ratings and its very real influence over fiat assets. Turning once again to Europe, fears that Greece is heading towards a financial crisis and possible default (should the rescue plan fall apart, as seems likely at this point) would drive the spread for the nation’s 10-year debt to a new record above its German counterpart. Reminding the market that the troubles in the European region are not isolated to Greece, the final reading on fourth quarter GDP was revised down to no change. Without a significant economic recovery, the financial troubles in the region will further weigh on governments’ ability to work down deficits and stabilize their markets. In fact, the concern that there is no reserve fiat currency safe enough to stand as a secure store of wealth has become so prominent amongst gold traders that other fundamental roles (like the metal’s value as a speculative asset and dollar-hedge) have been temporarily overlooked. However, as with oil, the commodity can only ignore these other drivers for so long.

Spot Silver – $18.18 // $0.24 // 1.34%

Silver overtook a temporary technical boundary of congestion Wednesday and progressed to its highest level since January 20th. This advance – and its relatively tame pace – resembles the advance that the Dow has maintained for a few months now. However, the unique influences of the US dollar and the correlation to gold have stepped in to further alter silvers pace and pitch. Today, a pullback in equities (drop in risk appetite) and advance in the US dollar were outweighed by the influence that the commodity’s more expensive counterpart has enjoyed.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

U.S. Equities Tumble on Fed Rhetoric, Consumer Credit Data

U.S. Session Key Developments

•    Consumer Credit Declined More Than Expected in February
•    Fed Policy Makers Release Mixed Rhetoric Regarding Interest Rates
•    Crude Oil Pulls Back Slightly, Gold Surges Over $1150 Per Ounce

U.S. stocks declined today following mixed commentary from policy makers at the Federal Reserve and a worse-than-expected consumer credit reading for February.  The Fed commentary made evident the central bank’s uncertainty of market conditions going forward, and pushed the S&P 500 over 0.5 percent lower to 1,182.  Fed President Ben Bernanke said that the labor market contains the “toughest problems” and “we are far from being out of the woods.”  Bernanke specifically cited “very weak” hiring and a “troubled” commercial real estate market as tough hurdles for the economy to overcome going forward.  As for interest rates, Bernanke did not take a position, but New York Fed President William Dudley reiterated the view that the federal funds rate needs to be “exceptionally low for an extended period.”  Kansas City Fed President Thomas Hoenig, however, said that the Fed should raise the benchmark rate “soon” to about 1 percent to avoid asset bubbles.  Hoenig has consistently objected to the Fed’s “extended period” language this year regarding low rates.  The rhetoric increased market uncertainty, leading to a sell-off of riskier assets such as equities and crude oil.  Furthering the decline was the 3:00 PM release of consumer credit for February, which showed that borrowing fell $11.5 billion, the most in three months.  The drop was the twelfth in the past thirteen months and furthered the notion that consumer spending may be slow to rebound.

As for specific commodities, crude oil dropped over 1 percent to $85.64 a barrel as the U.S. dollar rallied against its major cross currencies.  The U.S. Dollar Index gained for a second consecutive day, closing above 81.60.  Despite the greenback strength, gold gained 1.5 percent to $1153, the metal’s highest close in 12 weeks.  Silver rallied over 1.2 percent to $18.15.

DJIA 30                     10,897.52                      -72.47                       -0.66%
The Dow Jones Industrial Average posted the worst performance among major U.S. indices as 24 of the 30 Dow stocks closed in the red.  Verizon shares dropped over  3 percent on the day and shares of rival AT&T fell 2.5 percent as investors and traders attempt to play rumors of a Verizon iPhone to be released at some point this year.  The rumored release of the product is June, 2010, but many believe this estimate to be too optimistic.  Other losing stocks today included Alcoa and Caterpillar, whose shares fell over 1 percent each on reduced investor optimism regarding the economic recovery.

S&P 500                       1,182.45                           -6.99                       -0.59%
The broad-based S&P 500 fell over 0.5 percent as all ten index components closed lower today.  Telecommunications was the worst performing sector, dropping over 2 percent, while utilities and energy shares fell 0.9 percent each.  Oil giants Exxon Mobil, Chevron, and ConocoPhillips (the largest oil & gas companies in the S&P) declined under 1 percent as oil prices fell back to the $85 a barrel level.  Alternate energy firm First Solar Energy gained 5 percent today, as investors begin to look for alternatives to crude oil, whose price has spike from the $70-$80 range to $86 yesterday.

NASDAQ                     2,431.16                         -5.65                       -0.23%
Shares on the tech-heavy Nasdaq posted a slight decline despite a small gain for technology stocks.  Micron Technology posted a 3.2 percent gain on the day to help push the sector higher.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Oil Maintains its Bearing, Loses Momentum

North American Commodity Update

Commodities – Energy

Oil Maintains its Bearing, Loses Momentum

Crude Oil (LS NYMEX) -  $86.820 //  $0.20 //  0.23%

It is an inevitability of all breakouts. Eventually, momentum will fade and a new or renewed trend will either settle or reverse. For crude, the aggressive rally over the past week was finally met with a day of rest. In fact, Tuesday’s advance was the smallest since the commodity engaged its upswing. Nonetheless, the day’s bullish close marked the sixth consecutive daily advance to yet another 17-month high. This puts the market’s health into perspective. However, establishing the probabilities that crude’s climb will proceed unfettered is a little trickier. Leveraging a speculative weight on the energy market today, other growth-sensitive capital asset classes reported a notable pullback in risk appetite. This was most obvious in the Dow Jones Industrial Average’s inability to overtake the psychologically-fortified 11,000 figure and the safe-haven dollar’s ability to put in for an advance through the session. The speculative bid was quieted with the return of economic liquidity just as concern over Greece’s financial health and the viability of its EU / IMF contingency plan was revived. Naturally, the tempered investor optimism would weigh on crude; but the subsequent strength this turn afforded the US dollar (the benchmark pricing instrument for the Light Sweet crude traded in the United States) would further curb the commodities attempts at appreciation.

Despite the diminished enthusiasm amongst the speculative crowd, demand-and-supply fundamentals have notably improved over recent weeks. This past week’s remarkable improvement in global manufacturing activity and the remarkable increase in US payrolls have helped to spread the notion that the world’s economy is already in the developmental stage of the recovery (the most volatile and malleable). From the macroeconomic picture today, a few economic indicators would further bolster the case of a strong return to growth. In Japan, the leading economic indicators report grew for a 12th consecutive month in a sign that expansion for the world’s second largest economy would contribute to the closing the production/consumption gap. Other secondary readings to support the growth cause included; an RBA hike based on above trend growth forecasts; a notable advance in UK construction activity and the first positive reading from European investors in 22 months. However, there is still a long way to go before early signs of growth actually translates into progress for working down the supply glut. Reminding us that the there is still an imbalance in the energy complex, the API reported a 1.07 million barrel increase in crude oil inventories through last week. This sets the tone for tomorrow’s more closely watched Department of Energy stockpile report, where the government is expected to report the ninth consecutive increase in oil holdings.

Commodities – Metals

Concerns Over Greece, Unchecked Inflation Push Gold to New Monthly Highs

Spot Gold -  $1,134.30   //  $2.40  //  0.21%

Curbed risk appetite would certainly hold gold back Tuesday; but other fundamental variables would ensure the metal would advance on the session, extend a notable rising trend channel and push the spot to its highest level in a month. Having surpassed $1,130, gold bugs have found a little more freedom in carrying the market on capital gains expectations. However, there was certainly a fundamental component to gold’s advance as well. The most influential driver was the fear generated in an unsubstantiated report that Greece would not tap the IMF for loans should the government be unable to meet its debts; because the rates charged by the international bank would be far too expensive. While this would make little sense on the Greek government’s part because it is well-known that Germany (among others) would not have agreed to a coordinated relief effort unless the IMF was involved. Therefore, excluding this source of financial aid would likely preclude support altogether. Regardless of whether these concerns held water or not, their impact on Greek yields was incontrovertible. The yield on the benchmark 10-year note rose above 7 percent for the first time since January. Naturally, this revived concern over the health of the European Union and the region’s currency. And, while the dollar would benefit from this uncertainty (and subsequently work against gold as the metal is one of the greenback’s favored hedges), gold’s independence of the fiat asset class would add an additional level of safety. In addition to the EU concerns today, the UK Prime Minister would stoke uncertainty by finally setting the national election for May 6th (a stability concern), while the Federal Open Market Committee’s policy minutes contained a warning about moving too early on interest rates (bolstering the inflation outlook and weighing the dollar).

Spot Silver  -  $17.93   //  -$0.15  //  -0.83%

In dollar terms, silver finds most of its fundamental function as an alternative to the currency and as a risky asset that stands on the opposite side of the greenback. However, looking at the performance of the commodity against other fiat measures, there is clearly a level of demand that can be established through the safety appeal as silver correlates to its more expensive counterpart (gold). In euro terms, silver advanced today to its highest level since March of 2008, while the commodity hit a record high when measured in pounds.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Asia/Pacific Shares Mixed on Tuesday, RBA Hikes Interest Rate to 4.25%

Asia Session Key Developments

• RBA Raises Cash Target for the Fifth Time in Six Meetings
• Japan’s Coincident Index Rises to Highest Since July 2008
• Hang Seng Index Closed on Observance of the Ching Ming Festival

Asia/Pacific shares were mixed on Tuesday as Japanese stocks pushed lower on the day, ending a three-day winning streak, while the S&P/ASX 200 rallied overnight after being closed for the Easter Holiday. Meanwhile, the economic docket in Australia showed that the central bank raised the overnight cash rate target to 4.25% in April from 4.00% the previous month, which was in line with economists’ expectations, while another report showed job advertisements rose 1.8% in March, marking the second consecutive monthly increase. In Japan, the leading index jumped to 97.9 in February from a revised 96.9 in the previous month, while the preliminary reading for the coincident index rose to 100.7 during the same period, marking the highest level since July 2008.

Nikkei 225                          11,282.32

Stocks in Japan pared yesterday’s advance, leading the Nikkei 225 to shed 56.98 points (0.50%) and close at 11,282.32. Half of the components pushed lower on the day, with basic materials leading the way, tumbling 1.28%, while telecommunications added 0.36% to taper the decline. Shares of Clarion slumped 9.05% after Nomura Holdings assigned a “reduce” rating for the stock, while West Japan Railway rallied 3.85% as UBS raised its outlook for the firm to “buy” from “neutral.” In addition, Toyota Motors retreated 1.05% as the U.S. regulators fined the world’s largest automaker with a record $16.4M fine for failing to notify the government about the defects in its gas pedal, while Japan Steel Works slipped 1.38% on the back of lower commodity prices.

Hang Seng                        21,537.00

Closed in observance of Ching Ming Festival

S&P/ASX 200 Index           4,953.70

Shares in Australia pushed higher on Tuesday after being closed yesterday in observance of the Easter holiday, leading the S&P/ASX 200 to advance 46.00 points (0.94%) and close at 4,953.0. Nine out of the ten components rallied on the day, with technology leading the way, climbing 2.17%, and was followed by a 1.52% increase in basic materials. Shares of BHP Billiton added 1.55% as Australia’s competition regulator extended its review of Rio Tinto Group and BHP’s iron ore joint venture, while National Australia Bank rose 1.05% amid the Reserve Bank of Australia raising its key benchmark cash target to 4.25% in April from 4.00% in the month prior. At the same time, Sigma Pharmaceuticals dived 8.89% as the company was downgraded from “neutral” to “underperform” by Macquarie, while OM Holdings added 2.19% as the company is reconsidering a secondary listing on the Hong Kong Stock Exchange, which may take place in the second half of the year.

Notable Asian Session Event Risk / Economic Releases

U.S. Stocks Rally, Get Set to Test New Psycological Levels

U.S. Session Key Developments

•    Traders React to Friday’s Jobs Report
•    Pending Home Sales, Service Industries, Unexpectedly Grow
•    Commodities Soar 1.1 Percent on Improved Economic Sentiment

Traders returned from the three-day weekend in a chipper mood as equities were universally higher and both the Dow and the S&P 500 get set to test key psychological levels.  Traders had a chance to react to Friday’s jobs data, which showed that the U.S. economy added 162,000 jobs last month, the most in three years.  Today’s economic docket provided even more support for the market rally.  The National Association of Realtors reported that pending home sales unexpectedly grew 8.2 percent in February.  Analysts surveyed by Bloomberg, on average expected home sales to stay unchanged from January.  Additionally, the Institute for Supply Management’s index of service industries rose to 55.4, the fastest rate in more than three years.  Commodities rallied as the positive data increased confidence that the world’s largest economy is recovering.  The CRB Commodity Index, paced by energy, was up 1.1 percent.  Natural gas contracts for June delivery climbed 4.7 percent to $4.30 per MMBtu and crude oil contracts for June delivery climbed 2.1 percent to $86.75 per barrel.  Minutes from the last FOMC meeting are released tomorrow and could be the catalyst needed to break 11,000 on the Dow and 1,200 on the S&P 500.  A continued environment of low interest rates combined with improvements in the economy is beneficial for trading risk assets.

DJIA 30                     10,973.55                      +46.48                       +0.43%
The Dow Jones Industrial Average is all set to flirt with 11,000 only two months after dipping below 10,000.  Today’s gains were led by American Express and Caterpillar, which added 2.3 and 1.6 percent respectively.  Both companies typically prosper in economic expansions as consumers spend more and businesses invest in heavy machinery.

S&P 500                       1,187.44                           +9.34                       +0.79%
The Standard & Poor’s 500 index made a new 18 month high, as it reaches levels unseen since September 2008, and gets set to test its own psychologically significant level of 1,200.  The commodity space provided major strength as energy stocks gained 1.6 percent as a group and basic materials stocks added 1.5 percent.  The two sectors rallied off of the strength of gold, copper, aluminum and oil.

NASDAQ                     2,429.53                         +26.95                     +1.12%
All ten sectors of the Nasdaq Composite gained today, as the tech heavy index led major U.S. indices higher.  Tech stocks gained 1.1 percent as more than three out of four stocks advanced in the group.  Shares of Apple contributed 1.5 points to the advance as the tech giant advanced 1.1 percent.  The company closed at a record $238.49 as it said it sold more than 300,000 iPads on top of 1 million iPad applications and 250,000 e-books all in the device’s first day of availability.

Written by Gary Chalik, CFDTrading Research
Please send any comments about this report to GChalik@fxcm.com

Breakout Momentum and a Delayed NFP Reaction Carries Crude to New Highs

North American Commodity Update

Commodities – Energy

Breakout Momentum and a Delayed NFP Reaction Carries Crude to New Highs

Crude Oil (LS NYMEX) -  $86.68 //  $1.81 //  2.13%

A strong open to the new week for capital markets after an extended holiday weekend would encourage a strong performance from crude oil. The third consecutive advance for this benchmark commodity has established remarkable momentum at fresh 17-month highs. Having surpassed the $84-level swing high last Thursday, there has been a notable interest among the speculative crowd to participate in this next leg of a larger bull trend. Looking at the delayed open interest on the benchmark NYMEX active futures contract, net positions rose 1.35 million contracts through Thursday – the highest level since March 18th (back when the gauge rose to a recent historical high). Today’s strength is no doubt sourced from the overall rebound in risk appetite. With most US market’s closed this past Friday for the US non-farm payrolls report, investors in the different asset classes had to play catch up. With only currency and bond traders online to trade the actual release, the initial response was one that encouraged interest rate forecasts, which subsequently boosted the dollar. However, the detrimental effect a higher currency would have on oil was overshadowed by the tentative gains in growth-related assets that would naturally develop alongside improved confidence in economic health. That being said, there was a notable limit to optimism in the Dow Jones Industrial Average. This is perhaps partly a side effect of a significant portion of the market still out for the holiday. If European shares help cycle the market even higher tomorrow, crude traders may soon see the $89.50 level that represents the mid-point of the 2008 to 2009 tumble that brought the commodity from record high to five-year low with the fallout from the worst financial crisis in generations.

So far, we have primarily assessed this past Friday’s employment data for its influence on risk appetite trends. However, the data has a substantial influence on expectations for overall economic activity. While the 162,000 jobs added to US payrolls may not provided much of a dent to the more than 8 million lost jobs over the previous two years, it is nonetheless seen as another milestone towards recovery for the world’s largest economy and energy consumer. Furthermore, an improvement in the health of the US economy is often interpreted as a leading sign of strength for the rest of the world. Adding to crude traders’ expectations of a recovery in consumer and factory-based demand for fuel, both the ISM service sector activity report and pending home sales data reported stronger than expected readings for their respective readings. Accounting for more than three-quarters of the business sector, service sector activity marked its best clip of expansion since May 2006. For the American consumer, the unexpected 8.2 percent jump in signed housing contracts for February offered a bearing towards recovery. However, this data could be skewed by the potential expiration of a government tax incentive this month. Looking out over the rest of this week, scheduled macro data will pick up; but central bank activity and interest rates activity will fight for control over price action.

Commodities – Metals

Gold’s Climb Steady but Lacking the Force that Oil has Established

Spot Gold -  $1,1126.55   //  $6.75 //  0.60%

Gold would advance for the third time in four days Monday thanks to a combined advance in risky positions and simultaneous easing of the US dollar. This precious metal has more often than not found its fundamental ties a point of contention in recent weeks. However, the development of a few of the more influential drivers has proved beneficial. The key to the day’s advance was the restraint of the US dollar. This past Friday, the benchmark currency would benefit from the lack of liquidity during the holiday period by responding to Friday’s non-farm payrolls as a sign that rate hikes were moving up the calendar (and the dollar would in turn find greater valuable against its liquid counterparts). As one of the favored hedges to the greenback, this news did not sit well with the gold bugs. However, with the start of the new weeks, investor sentiment would take over and a rise in risk appetite would temper the currency. Not only would the commodity gain as a hedge; but its own appeal as a speculative asset would also improve given the relatively ‘discounted’ levels it stands at compared to recent record highs. Moving forward, the push and pull between dollar hedge and speculative asset will continue. However, with the Fed holding a meeting, at which the discount rate is expected to come under debate, there is a chance that interest rate expectations could once again overwhelm the fundamental picture. As an interesting aside, delayed volume data on the active gold futures contract contracted through the market’s recent upswing. Furthermore, the CBOE’s Gold Volatility Index is just off an 8-month low at 18.1 percent.

Spot Silver  -  $18.01   //  $0.09  //  0.47%

Without a conflicting role as a safe haven asset, silver would turn dollar weakness and a rise in risk appetite into new two-and-a-half month highs. With spot now above the $18 mark, another milestone has been surpassed and it will be easier for bulls to carry on. However, the attachment to US currency and investor confidence often unequal parts exposes the metal to a significant level of volatility. Looking ahead to Tuesday, European markets will come back online and the Dow will once again look at 11,000 as a benchmark to surpass. On the other hand, with the Fed deliberating on whether or not to hike the discount rate, the greenback could in fact be ready to extend its rebound.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Employ Caution in Emerging Markets As Sharp Pullbacks Are the Norm

In light of the recent over-performance of the MSCI Emerging Markets index, a gauge for Emerging Market equities, it seems necessary to analyze what led to this over performance, the current risks to continued growth of the EM space, and what this activity could mean for the industrial markets.  Throughout the market recovery from March to January, investors underwent a “flight to risk.”  Investors sought out assets with the highest yields and sold-off low-yielding treasuries that they had accumulated during the span of the recession.  Yields on 10-Yr US Treasuries went from as low as 2.53 percent in March to as high as 3.84 percent in January.  With that much outflow of capital from T-bills, and the riskiest assets residing in the EM space, emerging market equities were primed for a sharp break.

As the market rally quiets, the correlation between risk and emerging market equities has began to unwind and fundamentals have come into play.  Nowhere is that more true than in China, which is at the forefront of all emerging market talk.  China’s benchmark equity index, the Hang Seng, had a 120-day correlation of 0.97 with the S&P 500 at the height of the recovery, a sign of risk appetite’s overall influence.  That correlation has now dropped to 0.05, which means the two are barely related at all.

China, which at the height of the recovery looked to be in shape to challenge the world’s economic superpowers, now seems like it may be in the midst of “the greatest bubble in history” to quote James Rickards, former general counsel of hedge fund LTCM.  In part, that is due to the 4 trillion yuan ($586 billion) stimulus plan that China adopted during the crisis.  The plan allowed the country’s economy to grow 10.7 percent in Q4 2009, a rate that many experts believe to be unsustainable.  Even China’s central bank recently said that it sees new asset bubbles emerging in certain parts of the world that were brought on by “ultra-loose” monetary policies.  Unless the PBoC heeds its own advice and takes significant steps to reel in inflation caused by the stimulus, steps that would include raising rates or allowing a free floating exchange rate, China’s growing asset bubble is likely to burst and those skeptical of risk should be ready for the inevitable reversal.

In order to position for a turnaround in the emerging market space, it would be beneficial to know where investors are storing their money after selling emerging market assets.  If world equities are any indication, the answer would seem to be developed nations.  The chart below shows the relationship between the US’s World Market Share compared to that of the four leading emerging market countries, known collectively as the “BRIC” nations.  Most recently, that relationship has turned negative, especially among Brazil and China.  In other words, investors selling EM equities are using the proceeds to buy US equities leading to an increase in the US’s World Market Share and a decrease in the respective EM nation.  In the case of China, if an asset bubble were to lead to an economic downturn and the aforementioned relationship were to hold, there would be a mass “flight to safety” in the form of selling of Chinese assets across the equity, bond, and real-estate space and buying of safe U.S. assets like treasuries and Consumer Staples.  Besides the “flight to safety,” the general lack of liquidity for emerging market securities will put added pressure on prices, providing more than enough incentive for emerging market investors to tread carefully in the coming months and to take precautions in case the worst were to happen.

Written by Gary Chalik, CFDTrading Research
Please send any comments about this report to GChalik@fxcm.com

European Equity Markets Closed For Easter Holiday

Europe Session Key Developments

•    European Equities Markets Closed for Easter Holiday
•    Crude Oil Trades Above $86 a Barrel, Precious Metals Gain on Dollar Weakness
•    Sterling Continues Ascent Versus Greenback
•    Euro Declines Slightly, Pushes EURUSD Rate Below $1.35

Most European stock markets were closed today for the Easter holiday, but there was action in the currency markets following a better-than-expected U.S. home sales report for February and a strong ISM reading for March.  Investors cheered the bullish news, buying up riskier assets such as equities and commodities and selling U.S. dollar holdings, driving the U.S. Dollar Index down to 81.12.  The British Pound gained against the Dollar for the sixth time in seven sessions, pushing the GBPUSD exchange rate over $1.528.  The euro did not perform as well, however, declining versus the greenback for a second day on expectations that the U.S. Federal Reserve will tighten its monetary policy before the European Central Bank does.  By day’s end, market swaps implied an expected 90 basis point hike by the Fed over the next twelve months, while only a 65 basis point increase by ECB policy makers over the same time frame.

Looking ahead to the re-opening of stock markets tomorrow, there are a few key economic releases that could drive sentiment.  At 7:15 GMT, Switzerland will release its CPI reading for the month of March, and at 8:30 GMT, the Euro Zone’s Sentix Investor Confidence report will be released for the month of April.  Economists expect a 1.4 percent annual rise in Swiss inflation for March and an increase from -7.5 to -5.2 for the April Sentix Confidence reading.

FTSE 100                         5744.89                     –.–                     -.–%

CAC 40                             4034.23                     –.–                     -.–%

DAX                                    6235.56                     –.–                     -.–%

IBEX 35                          11067.90                    –.–                     -.–%

FTSE MIB                     23206.31                    –.–                     -.–%

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Euro May Correct Further against US Dollar

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Euro / US Dollar

Failure to extend lower warns that a larger correction is underway in the EURUSD towards 13820-14030 as either a 2^nd or B wave.  Near term structure is unclear (which probably means in itself that a larger correction is indeed underway).  Sentiment readings such as COT also suggest near term Euro strength as speculators hold a record amount of Euro short positions.

British Pound / US Dollar

Either a triangle or flat is underway as a 4^th wave correction in the GBPUSD.   In the event of a flat, the pair would exceed 15386 slightly before reversing.

Australian Dollar / US Dollar

The rally from below 9000 is impulsive (5 waves), which suggests additional strength as long as the AUDUSD remains above 9127 (last week’s corrective low).  Measurements place objectives at 9363 and 9509 (100% and 161.8% extensions of the 8985-9221 advance).  However, beware that 21 day ATR is at its lowest since the July 2008 top.  This low level of volatility indicates complacency and the potential for a reversal.

New Zealand Dollar / US Dollar

No change: “The NZDUSD is marching to its own beat as a top may already be in place at 7185.  The decline from there is impulsive (5 waves), which reinforces the bearish bias.  I favor the downside against 7185.  A move through there would expose 7240.”

US Dollar / Japanese Yen

The USDJPY has traded to a fresh 2010 high and the larger trend is up but I do expect a pullback near term since a 5th wave rally from 8962 may be complete.  One reason to favor the 5^th wave interpretation rather than a 3^rd of a 3^rd wave interpretation is the divergence with momentum at the high on intraday charts.  3^rd waves tend to possess the strongest momentum, which is not the case right now.  9300 is initial support.

US Dollar / Canadian Dollar

The USDCAD has traded to fresh 2010 (and lowest since July 2008) lows and the next levels are potential support are near 9900.  9914 is the 61.8% extension of the 13068-10782 decline and 9892 is where the decline from 10307 (probably a 5^th wave) would equal the decline from 10784-10368 (1^st wave).

US Dollar / Swiss Franc

The USDCHF has broken below 10500 and parallel channel support, which negates the previously held bullish bias.  The next level of potential support is 10350 (100% extension of 10908-10504).

Gold

“Gold has traded sideways since December and appears to be building a bullish base.  Specifically, the base could be a complex head and shoulders (the head itself is a head and shoulders).”  A break above 1145 is needed in order to confirm the inverse head and shoulders pattern and propel the yellow metal to fresh highs.

Light Crude

Sights are now set on 90 and perhaps 100.  The rally from the January low may be wave 5 within an impulse from the 2008 low.  Bigger picture, the advance from the 2008 low is either a 1^st or A wave.  Following completion of this rally, larger wave 2 or B will unfold; bringing crude back to at least 70.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.  Traders can meet me at the FXCM Expo in Las Vegas on May 3rd and 4th.  You can register to attend at www.fxcmexpo.com.

Dow Marches Higher Takes Aim At Pre-Lehman Levels

Short-Term Technical Outlook

The Dow appears poised to test resistance at 11,240-61.8% Fibo of 14,167-6,470, the technical level is near pre-Lehman levels which is where we may see the current rally stall. However, we have started to see consolidation ahead of psychological resistance at 11,000 which could also be a turning point.

The S&P 500 like the Dow is on track to test major resistance at 1,228-61.8% of 1,576-666. However, trendline resistance could slow gains with the psychological barrier of 1,200 offering another roadblock.

The NASDAQ has seen its advance slowed by trend line resistance near 2,415. However, the next major barrier is the August 15, 2008 high of 2,473 which could be tested before any major retracement.

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