Fundamentals:
S&P futures saw a slow drift lower overnight even after positive manufacturing and employment data from the United States. Another market positive story came from Ireland, where bank officials suggested that the country is closer to accepting a bailout from the European Union. All of this, including a successful IPO from GM, did little to push markets higher, which suggests that the recent bull run is losing momentum and this will probably continue until the next round of economic data.
Today, traders will be assessing the German producer prices report, which will be released at 7:00 GMT. The consensus expectation is for a rise of 4.1% on a yearly basis vs. a 3.9% rise previously. This number is significant because these price rises will ultimately filter into consumer prices if this trend continues, and this is highly probable given the current level of commodity prices. If this trend does continue, central banks will be forced to consider raising interest rates to keep inflation at manageable levels, and this will have a marked effect on bond prices.
Ben Bernanke will speak in Frankfurt today, defending the Fed’s stance on global stimulus strategies. Yesterday, his comments centered on China, arguing that the country’s economic policies are causing global currency imbalances. From this, we can conclude that the Fed is not averse to using methods to force China respect market fundamentals and restore equilibrium in the currency markets.
Bankers in Ireland have indicated that they are closer to accepting economic stimulus but this is not being seen in Portugal and Spain, where officials seem to believe that their circumstances are different from the situations in Ireland and Greece. This argument might have some validity if we factor in the idea that inflation will need to moderate on a long term basis before real growth is a possibility. Deflationary economies generally have a difficult time achieving growth, so markets will need to consider these factors before drawing conclusions relative to Spain and Portugal. We have yet to see a test of the 1200 level in the s & P 500. Further developments in the current European debt crisis will determine whether or not we see that by the end of the week.
Technicals:
Commodities:
Gold has been caught in relatively right ranges for the past few days, after making new lows at 1330. Prices did rally to the 38% retracement of the move from 1417, which comes in at 1363. A break here does look possible, given the lack of any meaningful pullback from this Fib level. That said, hourly indicators are bearish, and a break of support at 1350 brings 1330 back into view.
Currencies:
The EUR/USD continues to make gains after bouncing off of support at the 50% retracement of the move from 1.2650, at 1.3470. We have now broken out of the hourly downtrend channel that we were watching on the hourly charts. Next resistance is seen at 1.3750. On balance, the short term bias is upward, after the channel break, but one possible obstacle comes from the bearish hourly RSI.
Stocks:
The S & P 500 is coming close to the psychological level at 1200. This area looks like a good sell, however, given the 4H channel break earlier in the week and the violation of Fib support at 1180. Risk to reward is also very favorable, as the next real target to the downside does not come in until 1150. There should be some support at 1170 but without a meaningful break of the 1200 level, 1170 does not seem likely to hold prices for very long.