USD Gains As Investor Sentiment Evaporates

The regional European markets plunged throughout the session, with the major indexes falling as much as 3%, while the currency market pushed towards new yearly lows. All this has been caused by a market that is constantly looking to shed risk and buy assets seen as safe, such as U.S. Treasuries and the U.S. dollar.
The currency market has really only had one trading direction since the beginning of December and that is USD long/everything else short.
Problems in the Euro-area are a major destabilization factor for the global economy and this is currently being priced in by financial markets. If things turn out to be much worse in the Euro-area the global economy will probably experienced a double dip recession, and that is what is being priced in right now.

Various rumors are spreading throughout Europe, which eventually could lead to a deterioration of current situation. To counter this, the chances are that key politicians will organize press meetings, which eventually will led to sudden moves in the currency market. Traders should expect to see gaps at the Sunday open.

As Gold Soars, Is It Too Late to Cash In on the Rally?

Fears that the past weekend’s $1 trillion European rescue package will ultimately drive inflation resulted in investors piling back into gold.

Much of that demand is reportedly coming from Germany, where the memory of hyperinflation between the two world wars continues to significantly influence thinking.

The price of gold is at an all-time high, with demand at its highest level since the collapse of Lehman Brothers.

UBS said demand for gold coins is so high that supply is struggling to match demand and gold producers are ramping up production of coins to cash in on fears over rising inflation.

Gold is currently benefiting from the belief that central banks cannot raise rates, said Monica Fan, senior currency product engineer at State Street Global Advisors.

“Politically it would be very unpalatable to raise rates raising fears over inflation," Fan said. "With so much uncertainty out there gold has become a de-facto currency.”

Current DateTime: 10:12:29 12 May 2010
LinksList Documentid: 37100810

Fundamentals for gold remain strong given the rise of the middle class in Asia, and the "long term trend is bullish,” she said.

Stephen Perry, the chairman of The 48 Group Club and a China watcher, agreed that gold is likely to head higher.

“The economics of the world have changed drastically over the last three years," Perry said. "With so much uncertainty unresolved, gold will be a hedge against uncertainty.”

For the next six to nine months, gold could be a better hedge against inflation than traditional inflation hedges like the money markets and property, he added..

In addition to gold, silver will also rise, Chris Zwermann, the global strategist at Zwermann Financial in Frankfurt, said.

“Silver has broken through a key technical level and will make big gains over the next few days,” he said.

But not everyone agrees.

- Watch the video above for the full interview with Chris Zwermann.

There is no risk of inflation, instead concerns should be about deflation, Jochen Wermuth, the managing partner at Wermuth Asset Management told CNBC.

“When this trend becomes apparent gold will fall,” he said.

Investors should buy long-term puts to protect against lower gold prices over the medium term, Aaron Gurwitz, head of global investment strategy at Barclays Wealth, told CNBC.com.

“Prices may go higher from here, but ultimately they will fall and investors need to protect themselves,” Gurwitz said.

Stocks Plunge on Debt Concern

The euro slid to a 14-month low, global stocks tumbled for a third day and Spanish and Italian bond yields surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. Italy’s benchmark equity index plunged 4.3 percent to the lowest since July.
The euro sank to as low as $1.2654, while the MSCI World Index of 23 developed nations lost 1.5 percent at 12:25 p.m. in New York to extend its three-day slide to 5.2 percent, the biggest in more than a year. The Stoxx Europe 600 Index plunged 1.5 percent and the Standard & Poor’s 500 Index dropped 0.8 percent to an almost two-month low. Ten-year bond yields soared at least 0.22 percentage points in Spain and Italy and investors demanded 1.63 percentage points to own the Spanish debt instead of benchmark German bunds, the most in 13 years.
The European Central Bank held interest rates steady at a record low of 1 percent today and said it didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that it would take such measures. U.S. stocks and the euro pared losses as Greece’s parliament approved austerity measures demand by the European Union and International Monetary Fund as a condition of its 110 billion ($140 billion) bailout.
“The ECB seems more concerned about cracks to its credibility than cracks to monetary union,” said Christoph Reiger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “This approach can be considered consistent with the ECB’s principles. But it risks that the market will still force the ECB’s hand before long.”
2010 Gains Erased
The MSCI Asia Pacific Index today joined the MSCI World Index and the Stoxx 600 Index in erasing its advance for 2010. The S&P 500 is still up 3.7 percent for the year, clinging to gains as better-than-estimated earnings and economic data temper concerns about European debt. The index has slumped 5.1 percent from its high of the year last month.
U.S. benchmark indexes briefly erased losses today as Fed Bank of St. Louis President James B. Bullard said the U.S. labor market is “improving,” while Bernanke said the central bank is working to restore credit to worthy borrowers.
Bank of America Corp., General Electric Co. and Caterpillar Inc. tumbled at least 1.9 percent to lead declines in the Dow Jones Industrial Average as the 30-stock gauge fell below its lowest close since March 22.
Default Swaps Surge
The cost to protect against defaults on U.S. corporate bonds rose to a three-month high. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.8 basis point to a mid-price of 105.8 basis points, according to Markit Group Ltd.
A 110 billion-euro ($140 billion) aid package to avoid a default by Greece has failed to prevent bond yields from rising, driving up borrowing costs for countries including Spain and Portugal. Sovereign debt contagion may spread across Europe, affecting the banking systems of Portugal, Spain and Italy, as well as Greece, Moody’s Investors Service said in a report.
“It’s all about Europe,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “There’s a perception that what’s going on in Europe will be dragging the region back into a recession. The question is how much of that is going to be contagious to the rest of the world.”

S/P- 65% Off Yearly Highs. Global Markets Now In The Red YTD

Asian and European equity index have given back all of 2010 gains in the Tuesday sell-off, while the S/P has a taken a 65% reduction in its year-to-date gains, that were shed in three sessions of trade. In all, it goes to show how unstable the stair-step moves higher on very low volume in 2010 were, and how dangerous those lightweight moves are when support areas need to be tested.
We stated in April that forex charts had the look and feel of the sub-prime and credit crisis era. The increasing volatility in the 'one-day-up and one-day-down' moves that made and lost a year’s worth of gains in quick time are confirming a lack of leverage, lack of access to inter-bank margin, and more importantly maybe, a need now to find yield returns outside of equity markets.
Investors are absorbing the ultimate in stair-step up/elevator down moves that have wiped out equity index stop loss areas that now will take time to reset. The impact in forex trade has been to see Usd strength across the board as trade desks get long dollar-based Treasury notes, and liquidate long-equity positions. The move to Treasury notes pays out an average 3% a year, a humble amount, but none the less obviously an attractive enough return for investors to liquidate stocks, and run for the safety of Usd notes.
The Wall Street rally on Monday, that added nearly 2% after Warren Buffet talked up his investment in Goldman Sachs, has been wiped out in quick time on Tuesday. However, the initial overnight moves lower in Asian and European trade looked no different to any other day that traders have seen in all of April. The variable on Tuesday seemed to be that certain price points were taken in the European banking sector that obviously were set on low volume on the way up.
The main European banks dropped an average of 5% today, and were instrumental in triggering a slow and steady market-wide sell-off that allowed no chance of the typical relief rally to form. The increasing volume in getting out of positions, compared to the volume as trades were built over the last four months, was dramatic, and shows once again the danger of going higher on light volume.
Euro-zone fiscal worries have built to the degree that they now seem to rival the infamous Bear Stearns, Lehman Bros, Credit Crisis, and Dubai World headlines that created doubts in regard to the safety of each one’s ability to pull through. Some survived, and some did not, but there is no getting away from the fact that this current period of trade has a similar profile.
The question marks now hanging over fiscal policies overseas have allowed the Usd to gain an average 1% in Tuesday trade, but important to note is the fact that only one of the major pairs was able to break past support 2 or resistance 2 on the daily swing points. That much of a dollar index percentage gain would normally see the majority of pairs testing support or resistance 3 price points. That signals that a near-term reversal of Usd buying may happen ahead of the Asian session.
Whether this latest equity move will be as contagious as its predecessors, or whether the low-volume bulls find a way to once again reverse the reversal is yet to be confirmed. If equities move the S/P index off the current 1165 support, and manage to get anywhere close to 1175 or 1185 in near-term trade, the Usd will very likely be giving back the gains seen against Cad, Aud, Gbp, and will continue its long moves against Jpy, while Eur and Chf remain at the beck and call of sovereign investor sentiment.
Forex traders have seen a move unfold on Tuesday that could easily have been replicated on any given day in April, but unlike previous attempts, the perfect storm of headlines, sound-bites price point, and a surge of well timed volume came together on Tuesday to allow the drop to hold. The Japanese markets return from a five day bank holiday weekend tonight, and that should mix up the volatility even further.

Forex: Eur/Usd At One Year Low, Implied Volatility Turning Downwards

The currency market took a break during the overnight hours, following the strong moves seen lately. Price action during the Asian and the European sessions was relatively flat, with the major pairs retracing a small portion of the ground lost in recent trading. So far into the session, these moves can be seen only as a standard retracement off oversold levels, rather than a change in trend.
Most assets quoted in the financial market are trading in an oversold state due to the recent price action, with the Usd, Gold and Treasuries at the overbought line. These three are bought because they are seen as having very small risks. The U.S. dollar has the advantage of its status as a reserve currency at times of risk aversion, since 61.5% of the global currency reserve is held in the Usd.
The market had been characterized by a strong risk-aversion phase over the last few trading sessions, caused by a possible default in the Euro-zone. If Greece, or any other country, defaults on its debt obligations the global economy could experience a crisis similar to the one seen in 2008 and 2009.
Among the major currencies, the Eur took the biggest hit since it is right in the middle of the problems. The Eur/Usd plunged to one-year low, breaking below the 1.3000 psychological barrier in trade on Tuesday. Looking forward, the outlook of the pair lies to the downside, with a possible target in the 1.2500 area.
Interestingly, the Eur/Usd implied volatility turned to a downward slope, known as volatility skew, rather than the usual volatility smile that characterize the foreign exchange options market. This shows that options traders expect strong moves to the downside, with only limited upside action. For the currency options market, volatility skews are very rare.
The Usd will find even more buyers unless the situation in Europe improves quickly, which is unlikely, but some relief for the Eur and for the other major currencies might come at Thursday’s ECB Press Conference.

Euro Rises on Prospect for Greece to Receive Aid Soon

The euro gained today against most other major currencies on the speculation that Greece may accept to perform the budget cuts, which were requested by the European Union from Greece for the nation to receive the $159 billion financial aid.
The outlook for the euro improved on the prospect that Greece will receive the help soon as Jose Barroso, the President of the European Commission, expressed the certainty that Greece will get the aid ”in days”. This has brought some much-needed confidence in the markets and boosted the euro’s strength.
EUR/USD climbed to 1.3291 as of 14:05 GMT from its opening level of 1.3232. EUR/JPY rose to about 125.05 from the opening level of 124.44.

Consumers shine despite slower-than-expected GDP

While growth slowed from the fourth quarter's rapid 5.6 percent pace and was a touch weaker than economists expected, the details of the report from the Commerce Department on Friday were fairly upbeat.
"We continue to see a nice bounce back in output. We believe the second quarter is likely to be equally robust," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 3.4 percent rate in the first three months of 2010.
U.S. stock index futures trimmed gains after the data, while prices for government debt were flat. The U.S. dollar was little changed at lower levels versus the euro.
The report showed consumer spending accelerating at a 3.6 percent rate in the January-March period, more than double the 1.6 percent pace in the fourth quarter and the biggest rise since the first quarter of 2007.
By Chris Reese , Reuters

Stocks Plunge as Dollar, Treasuries Gain on Europe Debt Concerns

Stocks tumbled, with Europe’s benchmark index sliding the most since November, while the dollar and Treasuries rallied, as credit-ratings cuts on Greek and Portugal spurred concern that indebted European nations are moving closer to default.

The Stoxx Europe 600 Index slid 2.7 percent at 11:33 a.m. in New York, while the Standard & Poor’s 500 Index lost 1.6 percent. Crude oil sank 1.7 percent, while copper plunged 2.7 percent. The yield on the 10-year Treasury note tumbled 13 basis points to 3.68 percent, while the Dollar Index rallied 0.5 percent to 81.881.

Equities, Commodities Slide As The U.S. Dollar Gains

Dollar Index
The dollar index is holding the April pattern of trade: if Greece appears in the headline, then buy the Usd and sell everything else. The Usd benefits from the Greek crisis, due to its status as a global re by backing the most liquid bond market in the world; U.S. Treasuries. Favor Straddle-Usd plays for the moment.
S&P Futures
Equities used the stairs to go up at a snail's pace in recent trade, and then came down in the elevator the moment that the Greek Fiscal imbalance headline hit. This was seen very well in the S/P futures, but more especially in the regional cash markets across Europe. Equity trade is expected to remain under pressure during the upcoming cash sessions, as investors readjust their risk-profiles, absorb earnings season results, and await the IMF and G20 headlines. 12-month 96% correlation to Aud and Cad
Crude Oil
Usd strength has dragged crude oil lower in global trade, forcing price action to test the $82.00 – 83.00 support area, and is oversold on the near-term timeframes. If the dollar continues to gain ground, which will probably happen unless global equities find buyers in very quick time, expect the energy market to push lower. 12-month 95% correlation to Aud and Cad.
Gold Bullion
Gold has simply followed the trend of the Usd over the last few days of trading, without interfering in any way. The value of the Usd seems to be the only thing that counts when valuing commodities at the moment. On the daily chart, Gold is trading just above the 20-day moving average, and near the $1140.00 swing point area. 12-month 85% correlation to dollar index. 12-month 85% correlation to dollar index.

Canadian Dollar Jumps Road to Rate Hike Open

The Bank of Canada didn’t move the rates, but removed the comment regarding no rate hike till the end of Q2. A rate hike in the next meeting looks very probable. USD/CAD is approaching parity once again. Update on this strong currency.

While Mark Carney’s BOC left the main interest rate, the Overnight Rate, unchanged, it removed its own strains regarding a move on the rates. Here’s a quote from the statement, emphasis mine:

    "…the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."

I read this statement and see a rate hike at the next meeting. The statement explains that the conditions have improved, expressing optimism. In the past, leaving the commitment to keep rates low hurt the loonie. Now the opposite happens.

GBP/USD Closes Gap and Pushes Higher On Inflation

The British Pound had a bad start to the week – it opened significantly lower than Friday’s close – it opened at 1.5293, about 70 pips lower and below the 1.5350 support line. It later fell as low as 1.5191, a safe distance from the 1.5120 support line.

The recovery already began earlier, but the gap was closed only after the inflation figures were released. GBP/USD jumped higher and peaked at 1.5418 at the moment before retreating just under 1.54.

The Pound is now trading between 1.5350 and 1.5520 – this was both last week’s peak and also a support and resistance line when the Pound traded at higher ranges. Above 1.5520, the next significant resistance line is at 1.5833, which worked as a support and resistance line. The last attempt to break this line failed and sent the Pound way down.

Financial Shares Tumble After Goldman Sachs Charged With Fraud

Financial shares tumbled after the Securities and Exchange Commission charged Goldman Sachs Group Inc. with fraud related to packaging and selling collateralized debt obligations linked to subprime mortgages.
Goldman Sachs, the most profitable firm in Wall Street history, tumbled 10 percent to $165.02 in New York Stock Exchange composite trading at 11:12 a.m. in New York for the biggest intraday decline in a year.
A gauge of banks and brokerages in the Standard & Poor’s 500 Index sank 4.3 percent for its biggest decline since February 4 and the top loss among 24 groups. Bank of America Corp., Morgan Stanley and JPMorgan Chase & Co. lost at least 4.3 percent as all 27 companies in the S&P 500 Diversified Financial Index declined at least 1.7 percent after the SEC announced its action. Berkshire Hathaway Inc. Class A shares tumbled 5.1 percent.
Goldman Sachs misstated and omitted key facts about a CDO as the U.S. housing market was beginning to falter, the Securities and Exchange Commission said in a statement today. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president.
“I wouldn’t want to own Goldman stock right now,” said Keith Goddard, president of Capital Advisors, which oversees $810 million in Tulsa, Oklahoma. “If this turns out to be remotely true, do you want to be doing business with someone who doesn’t have your best interests in mind? That’s the accusation here.”

U.S. Stocks Fluctuate Near 18-Month High as Jobless Claims Rise

U.S. stocks fluctuated, with benchmark indexes hovering near 18-month highs, as a jump in jobless claims and concern the market has risen too far, too fast tempered growing optimism about earnings and the economy.
Hewlett-Packard Co., Coca-Cola Co. and Wal-Mart Stores Inc. led declines in the Dow Jones Industrial Average. United Parcel Service Inc. climbed 5.9 percent after the world’s largest package-delivery company raised its earnings forecast. Mariner Energy Inc. surged 39 percent after Apache Corp. agreed to buy the company.
The Standard & Poor’s 500 Index gained less than 0.1 percent to 1,211 at 10:31 a.m. in New York after the benchmark gauge for U.S. equities jumped 1.1 percent yesterday, its biggest gain in six weeks. The Dow Jones Industrial Average fell 5.06 points, or 0.1 percent, to 11,118.05 today.
“Seeing companies guide higher on earnings, like UPS, is very positive but on the job claims those are numbers we don’t want to see,” said Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York. “We don’t want this to be a jobless recovery and we want people to be working again because this is still a consumer-based economy.”
The S&P 500 threatened to snap a five-day rally after the Labor Department said initial jobless claims rose to 484,000 last week, an increase of 24,000 from the previous week and above the 440,000 estimated by economists in a Bloomberg survey.
RSI Climbs
The S&P 500’s relative strength index, a gauge of stock- market momentum, has been above 65 for 29 straight days, the longest stretch since 1986, according to Bloomberg data. A reading above 70 is a signal to sell for many technical analysts. The S&P 500’s RSI has been above 70 for five straight days and reached 78.34 today.

Oil Surges to 17-Month High

Crude oil surged to the highest level in 17 months as growth in American jobs and service industries signaled that the economy is recovering from the worst recession since the 1930s.
Oil climbed as much as 2.4 percent amid optimism that fuel demand will increase with an economic rebound. The U.S. is the world’s largest energy-consuming country. The Standard & Poor’s 500 Index climbed to an 18-month high.
“The market is in full embrace of the recovery thesis and is pricing it in accordingly,” said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund that focuses on food and energy commodities. “It’s enthusiasm that we’re coming out of this recession.”
Crude oil for May delivery increased $1.74, or 2.1 percent, to $86.61 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Earlier, futures touched $86.90, the highest intraday price since Oct. 9, 2008. Crude has climbed 65 percent in the past year.
Oil traded within a range of $68 to $84 a barrel in the six months ended March 31. Prices rose the past two months as improved investor confidence boosted world equity markets.
The S&P 500 gained 0.7 percent to 1,186.56, also on the jobs report.U.S. payrolls rose by 162,000 last month, the Labor Department reported April 2, when U.S. financial markets were closed for the Good Friday holiday. The report included 48,000 temporary workers hired by the government to conduct the Census.
Service Industries
U.S. service industries in March also expanded at the fastest pace since May 2006, according to the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy. The index rose to 55.4 from 53 in the prior month, exceeding the median forecast of 54 in a Bloomberg News survey of economists.
“The recovery is upon us,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. He said a rebound in manufacturing and transportation is spurring demand for diesel fuel, which supports heating oil prices.
Heating oil for May delivery gained 4.9 cents, or 2.2 percent, to $2.2657 a gallon, and gasoline for May delivery increased 2.46 cents, or 1.1 percent, to $2.3483 a gallon.