Stock Rally Fizzles as Investors Square up Ahead of Fed Announcement

James Hyerczyk from ForexHound.com at 01/27/10

U.S. equity markets could not hold on to its earlier gains and fizzled into the close. Earlier today, the market got a boost, driven higher by good corporate earnings reports and a better than expected consumer confidence report.

Before the opening, stock markets were called lower after a volatile Asian trade triggered by a possible debt rating cut in Japan and another sign that China was serious about tightening its monetary policy. Trading became progressively rangebound as investors began to close positions ahead of the Fed FOMC meeting.

Treasury futures opened higher because of increased demand for safer assets, but cooler heads prevailed throughout the day-session, sending higher risk assets up and fixed income markets lower. The March Treasury Bonds once again failed inside a major 50% retracement zone, but managed to close off its low to prevent a daily closing price reversal. Look for sideways trading overnight.

February Gold opened lower because of the stronger Dollar, but turned around when the Dollar failed to follow-through to the upside. Oversold technical conditions seem to be helping this market form a support base. Don’t be surprised by a short-covering rally back to $1119.10.

March Crude Oil was under pressure overnight, but the lack of follow-through to the downside after the New York opening triggered an intra-day short-covering rally. The buying came in slightly better than the December 22nd bottom at 73.52. A bottom may be forming, but it’s most likely going to be short-covering rather than fresh buying. The charts indicate there is room to the upside with 79.14 the next possible target.

The U.S. Dollar managed to hold on to its overnight gains despite a lackluster trading session. Following a couple of overnight events and intra-day economic reports, the Dollar remained range-bound as many large traders stood aside ahead of tomorrow’s Fed FOMC announcement.  Traders are looking for the Fed to leave interest rates alone and to continue to leave them low for “a prolonged period of time”.

The Dollar surged overnight, driven by bearish news out of Asia. The Dollar rallied sharply overnight after a couple of negative economic events drove traders to the safety of the Greenback.  The Dollar was up today against European and Pacific Rim nations while falling against the lower yielding Japanese Yen. The initial move to the upside was triggered by Japanese debt issues and more evidence that China was beginning a tight monetary policy.

Firm U.S. corporate earnings reports coupled with a better than expected U.S. consumer confidence helped weaken the Dollar at one point during the day because of an increase in demand for higher risk assets. Investors didn’t turn outright bearish on the Dollar, but instead realized that the new data was sufficient enough to warrant a lightening of positions. The Dollar also got a boost from the new Obama proposal to freeze the budget in certain areas for three years.  This sent a sign to traders that the U.S. was serious about its burgeoning debt situation.

Greater demand for lower-yielding assets helped to drive the March Japanese Yen higher this morning.  Most of the buying took place early last night after the S&P debt rating service put a negative spin on Japan’s AA credit rating.  Talk is circulating that S&P may cut the rating to -AA after expressing concerns about Japan’s ability to gain control of its growing debt levels as well as stave off the deflationary pressures haunting the economy.  Technically, the Japanese Yen neared a key upside target at 1.1227 before profit-taking drove it off the low.

The Bank of Japan voted to keep interest rates unchanged at its last meeting, but reiterated its commitment to fighting deflation. In the meantime, it raised its deflationary forecast from a predicted drop of 0.8% to 0.5%.

In addition to Japan’s debt rating concerns, China singled out the banks required to raise their reserve ratios for excessive lending while telling others to stop lending. Both events are signs that the Chinese government is serious about shoring up its finances and cooling down the economy.  This action is expected to keep pressure on demand for commodities.

General weakness in higher risk assets helped to pressure the March Euro. This market traded weaker but held above last week’s low at 1.4027. A failure at this price could trigger a further decline to 1.3800.  Losses may have been limited because of the possibility that Greece’s debt problems may be resolved by a new bond issuance.

The March British Pound traded sharply lower after the U.K. GDP report showed the economy grew slower than expected. The low figure of 0.1% was smaller-than-forecast and showed that the economy narrowly avoided prolonging the recession.  This report confirms that the U.K. economy is lagging behind the rest of world’s recovery and could signal that additional stimulus may be needed to revive the economy. Technical retracement areas prevented this market from collapsing.

Lower crude oil and gold continued to pressure the March Canadian Dollar while threatening to weaken the Canadian economy. Upside momentum indicates that .9303 is the next downside target. Recent action by the Bank of Canada to provide stimulus to the economy is also helping to weaken the Canadian Dollar. Technically, this market is overbought, but will remain steady to better unless a resistance angle at .9461 is violated.