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October 08, 2009

Strong Move Overnight, Triggered By Unexpected Profit From Alcoa
by Brewer Futures Group

U.S. equity markets are expected to open higher following a strong move overnight, triggered by an unexpected profit from Alcoa. This news made traders more optimistic about the rest of the earnings season. Investors will also be watching today's jobless claims and same-store sales reports for further clues that the U.S. economy is on the road to recovery. Investors are hoping the same-store sales report shows that consumers are beginning to loosen up and spend.

Yesterday, U.S. stock markets managed to close higher after a tentative trading session. At times traders seemed nervous committing to the long side ahead of the start of earnings season. At the close the December E-mini S&P 500 finished better than 50% of its current 1075.75 to 1015.00 range. This is technically a bullish signal. After the close, Alcoa reported better than expected earnings. This news is setting the tone for higher markets today. Investors will be looking for improved earnings along with an increase in revenues.

December Treasury Bonds and Notes surprisingly closed better on Wednesday despite rallies in gold and equities. Technical indicators showed that the T-Bonds were poised to test 121-00 before seeing any significant interest, however, buyers stepped in on Tuesday to halt the break early and help drive prices higher on Wednesday.

T-Bonds have retraced 50% of their break from Friday so it is still possible they will be forming a secondary lower top for a drive to lower prices. With Treasuries, equities and gold showing gains, one has to wonder which one is going to give. The strong rally in the equity markets overnight is putting pressure on the Treasuries, leading to a call for a lower opening.

The U.S. Dollar Index reached its lowest level in two weeks overnight. Increased appetite for risk is helping to put downside pressure on the Dollar versus a basket of currencies.

Yesterday, the U.S. Dollar was up most of the day before settling mixed. By the close of the day, the British Pound, New Zealand Dollar and Japanese Yen all managed to post modest gains versus the Dollar. Weak crude oil prices kept downside pressure on the December Canadian Dollar.

Early this morning the Bank of England and the European Central Bank meet. Both are expected to announce that interest rates will remain at historically low levels. Traders are more interested in the comments about their respective stimulus plans. The BoE just recently increased funding of its plan while the ECB's Trichet is on record calling for its plan to remain intact until the economy stabilizes.

December Gold posted another strong gain overnight. Yesterday's rally came as a surprise because of the strength in the U.S. Dollar, the rally overnight erased all doubt that gold is strong as investors seek to use it as a hedge against Dollar weakness.

Analysts are saying investors are buying gold in anticipation of a weaker Dollar and inflation. These reasons are contrary to the thinking in the T-Bond pits which is looking for low inflation and stabilized growth in the economy. If over-speculation is driving gold higher then this market could be setting up for a big break. December Silver seems to be lagging gold. This means that a break in gold could cause significant damage to the silver market.

The energy complex finished lower yesterday led by weaker crude oil prices. On Tuesday demand for higher risk assets drove crude oil higher, Wednesday's inventory figures brought them back down. Although speculators can drive this market higher, the supply/demand picture should continue to limit gains. Look for a higher opening due to the strength in equity markets and the weakness in the Dollar.

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Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.