Stock Indices Falter on Sovereign Risk Worries

James Hyerczyk from ForexHound.com at 02/10/10

Stock Indices tried to mount a rally early in the trading session, but failed to hold on to gains by the end of the day. The markets were trying to follow-through to the upside early in the session on the heels of stronger markets in Europe.  Buyers were reluctant to chase the indices higher after news surfaced that the resolution of the Greek debt problems would be delayed for a day or two.

The market strengthened a little after Fed Chairman Bernanke’s hinted at higher interest rates. Traders took this as a sign the economy was recovering enough to warrant an exit strategy by the Fed. Look for increased appetite for risky assets to send equity markets soaring once the EU makes its announcement regarding its loan guarantees to Greece. 

Treasury futures finished sharply lower following comments from Fed Chairman Bernanke hinting at a hike in the discount rate. Although Bernanke did not pinpoint when interest rates would rise, he did propose the Fed’s strategy on ending stimulus and hiking interest rates. Additional pressure came from the increased T-Bond and T-Note supply which will hit the market after the Treasury auction. Finally, if the European Union announces its plan to help out Greece, Treasuries are likely to feel more pressure because safe haven investors will begin exiting their positions. 

April Gold finished slightly lower. The stronger Dollar triggered a profit-taking break because of the lack of follow-through to the upside following Tuesday’s bullish move. If a favorable announcement regarding Greece is reached over the next few days, then look for the Dollar to break and gold to rally. The inability to break gold sharply lower is a sign that traders feel a viable decision is imminent.

March Crude Oil bucked the trend in commodities and finished higher. Oversold conditions and speculation that a solution to Greece’s debt woes will be reached over the near-term helped to give crude oil a boost. Stronger stock prices also helped crude oil at times but became a non-factor once equities turned lower. Wednesday’s rally stopped at a .618 retracement level at 74.78.

The Euro finished lower as the lack of concrete news regarding the European Union’s plan to guarantee Greece’s debt caused investors to remain nervous and skeptical that a resolution would be reached over the next few days.

The U.S. Dollar finished higher against most major currencies except the Canadian Dollar. The Dollar opened the New York session overnight and managed to hold on its gains throughout the day although earlier gains against the Canadian Dollar were erased.

Once investors became satisfied that the EU would postpone any announcements about the Greek deficit problem for a day or two, they turned their focus on the testimony of Fed Chairman Ben Bernanke. 

Bernanke gave the Dollar a boost after hinting that the Fed was gearing to hike interest rates as part of its exit strategy. While most investors have been trying to forecast when the Fed would begin raising the Fed Funds Rate, Bernanke surprised everyone by stating that the Fed may raise the discount rate charged on direct loans to commercial banks.

Although it finished lower, the March Euro closed inside yesterday’s range. The chart pattern suggests that a supportive base could be being built. Last week’s low at 1.3584 and this week’s high at 1.3838 are both holding indicating impending volatility. Depending on the outcome of the EU/Greece resolution, this market is set up for a break out in either direction.

The March British Pound finished sharply lower. Spillover selling from the weaker Euro provided some early selling pressure, but the bulk of the selling came after the Bank of England cut its inflation forecast and hinted at extending and expanding its quantitative easing stimulus.

Bernanke’s comments regarding higher interest rates helped weaken the March Japanese Yen. Today’s action was a pure interest rate differential play. Gains were limited on the possibility risk aversion would return to the markets if the EU was unable to come to a decision on the Greek debt problem.  If Greece’s problems resurface, then look for investors to seek safety in the Japanese Yen.

The weaker Euro helped drive the March Swiss Franc lower as it reignited the possibility that the Swiss National Bank would intervene to weaken its currency. A stronger Euro will pressure the U.S. Dollar versus the Swiss Franc. The failure to reach a resolution of the Greek debt problems could put more pressure on the Euro tomorrow while helping to boost the U.S. Dollar against the Swiss Franc. The size of the possible break in the Swiss Franc will depend on how strongly traders feel the SNB will intervene.

The March Canadian Dollar erased earlier losses and finished higher for the day. The U.S. Dollar posted strong gains early as traders shunned risky assets and Fed Chairman Bernanke hinted at raising interest rates. Oversold conditions were the primary reasons for the mid-to-late session rally in the Canadian Dollar. Gains were further boosted by stronger crude oil and a stable equity market.