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Proceeding With Caution!
By Mike Conlon | May 26, 2010
After the furious selling pressure that has taking place in world markets; yesterday, the US stock market was able to rebound and reverse most of its early morning losses. In what has become a familiar pattern, traders push the Euro lower in the overnight session, which causes commodities and stock futures to sell off until the US market opens. At that point, the US fundamentals take over as Europe closes and the potential for reversals is much greater.
And that’s the beauty of the forex market. Once the European session closes, the potential for risk decreases as business is concluded for the day. Every day that the European session can close without some major negative news is a good thing for global economic stability.
So overnight the news was relatively benign; allowing market participants to step back in slowly with risk appetite, though the trend for the Euro is still clearly down. An orderly decline in the Euro is not a bad thing; furious selling based on fear is.
So there is some mild risk-taking in the market, and perhaps a bit of short-covering. Better-than-expected durable goods numbers in the US extend the economic recovery story, however the Euro debt crisis will still be the ultimate factor in global market sentiment.
In the forex market:
Aussie (AUD): The Aussie is higher this morning, as an index of leading economic indicators rose at its fastest pace in almost 13 years. The Australian economy has been one of the better performing economies, and the Aussie has taken a hit as of late due to the unwinding of carry trades.
Loonie (CAD): The Loonie is also higher, catching a bid from its correlation to oil prices, which is back up over 70.5, sporting a 2.5% gain. Prospects for a rate hike at next week’s policy meeting are still on the table, and I mentioned yesterday that now may be an excellent time for the BOC to hike, as the Loonie has sold off due to Euro concerns.
Kiwi (NZD): The Kiwi is also moving higher as risk appetite is beginning to pick up going into the open of the US stock market session. Mild risk-taking as investors “dip their toes back in” is taking place.
Euro (EUR): From the “no news is good news dept.”, the Euro is lower but experiencing a more orderly decline as total meltdown has been avoided so far in the trading session. European stock markets have rebounded from yesterday’s decline, in a sign that the selling may have been excessive. There are still some good growth stories around the Euro zone, however expect Euro weakness to continue as the debt crisis continues. Also Italy announced $30 billion in budget cuts.
Pound (GBP): With a day of rest in the Euro zone, the market has turned its eye toward the UK economy. The Pound is lower this morning as the OECD said that the UK needs to be concerned about potential inflation and may need to raise rates and remove asset purchases going forward in addition to cutting its budget. There is still obvious concern about the UK economy, however at this point it still looks to be in better shape the EU.
Dollar (USD): The Dollar is meandering around as it wants to be weak as equity futures are higher this morning, but is being held up by alternative currencies (Euro, Pound) being weaker. This could cause a shift in the way the dollar trades; reversing from an inverse to a positive correlation with US stock markets. Or we could see a reversion to mean. Durable goods orders rose 2.9% last month, more than doubling the expectation of 1.3%.
Yen (JPY): The Yen is lower vs. all but the Pound and Euro as investors cautiously take risk. BOJ officials are concerned about “excessive involvement” in the allocation of capital, as it attempts to combat deflation. This brings back into focus the debate between monetary and fiscal stimulus, with the BOJ essentially saying they don’t have much room left to maneuver.
Mild risk-taking is happening today as world markets rebound from lows not seen in some time. Every day the Euro zone can get by without a major catastrophe happening will help the markets gain confidence in the global economic recovery.
There are still some good economic growth stories coming from around the globe, and it is sort of becoming a situation where one region has to pick up the slack while another is struggling. The same situation occurred when the US was at the brink of disaster back in 2008 and things looked bleak.
But we made it through. And with global cooperation and support, the EU will as well.
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Topics: What To Look At In The Market | 1 Comment »
May 28th, 2010 at 11:53 am
Great article