Rebound in Euro Helps Boost Risky Asset Demand
by James Hyerczyk
Easing tensions in the Euro Zone are helping to boost demand for higher risk assets. Since last week, the Euro has been trying to form a bottom but has been met by both fundamental and technical obstacles in the process. On Wednesday, rumors that China was re-evaluating its Euro-denominated bond portfolio sent the single-currency lower along with crude oil and stock indices. Overnight trading was another story, however.
Last night China's foreign exchange reserves manager denied a news report that it was considering the sale of some of its holdings of Euro-denominated bonds. This helped the Euro rebound, sending the Dollar lower against most currency-linked commodities. With the Dollar trading lower, demand for higher risk assets rose.
U.S. stock indices are trading sharply higher this morning after regaining all of its loss from Wednesday. Earlier in the week, a closing price reversal bottom was formed in the June E-mini S&P 500 at 1036.75. This reversal bottom was confirmed on Wednesday but the lack of follow-through to the upside and the news about China's concerns about the Euro encouraged traders to take profits after a huge rally.
Overnight, the E-mini S&P 500 regained its composure and rallied sharply higher, taking out Wednesday's high in the process. With conditions in the Euro Zone apparently stabilizing, investors are shifting their attention to the strong U.S. economic data. This is helping to drive stock indices higher. Expectations are that this trend should continue throughout the day.
Technically, the June E-mini S&P is poised to drive higher. Upside momentum is building which should take this contract to at least 1105.75 over the short-run and perhaps to 1122.00 if conditions continue to improve. There is one obstacle at 1100.75 this morning, but once this level is overcome, the market is likely to surge.
One problem with the stock market lately has been the lack of follow-through buying following strong overnight surges. It seems the Asian and European traders have been getting the jump on U.S. investors. This has been indicated by the lack of follow-through to the upside following strong openings. If buyers fail to chase the market higher this morning, look for an early session break, followed by a drive higher into the close. This pattern will indicate there is real demand taking place for equities.
September Crude Oil is also the recipient of stronger demand this morning due to the strengthening Euro. The surge overnight has helped make 69.62 a new main bottom. Based on the longer term range of 92.18 to 69.62, a new retracement zone has been formed at 80.88 to 83.54. This is the next potential upside target over the short-run. The main trend remains down, but the chart indicates plenty of room to the upside.
Holding above a key 50% level at 72.16 and more short-covering in the Euro and the commodity-linked currencies will help give crude oil a boost also.
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