Tuesday, February 9, 2010

Global equity markets are up sharply after reports that the Greek sovereign debt problems will be resolved shortly. Stock investors are driving up indices as confidence is being restored to the markets. Bargain hunters are also stepping in to take advantage of lower priced equities.

Last night, the Dow closed under 10,000 for the first time since November 2009. Some read this as a bearish sign while other saw this as a chance to gobble up cheap stock. For days, the major indices had been trading as if waiting for a catalyst. The developing story out of the Euro Region could be the catalyst which drives these indices sharply higher today.

Treasury futures could be under pressure today. Demand for higher risk assets could lead to liquidation of safety plays put on by nervous investors the past few days. Additional pressure could be coming from the increase in supply from the upcoming Treasury auction. One sign of impending weakness is the penetration of a support level at 118’24.

The weaker Dollar is helping to trigger a strong recovery rally in April Gold. The recent break may have been overdone to the downside which gave longer-term investors a chance to re-enter long positions at cheaper prices.

Greater demand for risky assets is also helping to give March Crude Oil a boost. Although the supply and demand picture remains bleak, cheap prices following the recent sell-off and the weaker Dollar are reasons enough to re-enter on the long side.

The U.S. Dollar is under pressure overnight as traders are liquidating long positions on the prospect that a deal to rescue Greece from its sovereign debt problem is being worked out in Brussels. Speculation is rising that some kind of “bailout” package is being created which would help shore up the Greek budget and help restore confidence in the Euro Region.

In a scene out of the movie “Wall Street”, the travel habits of ECB President Trichet are being tracked as if they are an indication of an impending deal. It has been reported that Trichet cut back a trip to Australia to attend a European Union meeting in Brussels. The market is reading this as a sign that negotiations have reached a critical point and that an announcement of a plan to back Greece and perhaps other struggling nations is ready to be revealed.

Appetite for risk is being renewed as investors are gaining more confidence that Greece’s fiscal problems will be resolved and the threat to the global economic recovery will be diminished. Both commodities and stocks are on the rise, taking with them commodity-linked currencies such as the Canadian and Australian Dollars.

Volatility is expected to increase as long Dollar traders begin to exit positions. At the same time, investors will continue to be cautious and may overreact to any news that indicates the impending deal has hit a snag.

The March Euro is trading sharply higher on the possibility that the Greek fiscal problems will be resolved in an orderly fashion. Investors are covering short positions aggressively in an effort to lock-up recent profits. In addition, new long positions are being entered as bullish traders anticipate the possibility the Euro will return to a more reasonable price level.

The March British Pound is mounting a strong recovery after trading lower for several days. The gains in the Pound are most likely a relief rally, triggered by short-covering. Investors are still skeptical about the U.K. economy as well as sovereign debt issues of its own.

The March Japanese Yen is trading higher as demand for risky assets returns to the market. Traders are lightening up safe haven positions in the Japanese Yen. Volatility is likely to be high once the announcement of the plan to shore up Greece’s finances is released.

The rally in the Euro is taking the pressure off the Swiss National Bank to intervene. This is helping the March Swiss Franc strengthen. The SNB will do anything to defend its currency against deflation and this includes applying intervention when necessary. As long as the Euro appreciates versus the Swiss Franc, the SNB will avoid using intervention as its main tool to maintain stability and order to this currency relationship.

The return of demand for risky assets is helping to boost equities, gold and crude oil. This is leading investors to step up demand for the March Canadian Dollar.

Please do not hesitate to contact us at 1-800-971-2440, with any questions.

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