What might have been an otherwise dull market open to a mid-June week of trading was bolstered by China’s surprise statement that it would allow for greater currency flexibility of the Yuan. China has been fixing its currency to the Dollar so that it might maintain a high level of export business. Congress and the White House may have been distracted by the BP spill and the sovereign debt crisis across the Euro-zone, but China’s unfair currency practices have popped up occasionally as a reason to impose sanctions on Chinese imports. This move by China would certainly alleviate pressures on Congress to act aggressively, at least until after the November elections. A stronger Yuan vs. Dollar would help improve our exports to that rapidly growing country, giving our beleaguered industrial stocks a boost. While a stronger Yuan would certainly help our exports, it also would be a positive for Europe. Asia is a key trading partner and the EZ’s ability to increase exports at this time is a much-needed positive. Retailers came under some pressure, as they are net importers of goods from China. As the Euro-market averages rallied over 1% across the board, the Euro found early strength. This certainly helped give our markets a positive start on the week.
Unfortunately, the Euro was unable to maintain its early spike to 1.25 vs. the Dollar. There is some technical resistance starting at 1.25, but the two key Euro/Dollar levels are its late May spike to 1.2672 and its declining 10-week moving average at 1.2671. Obviously, these two are coincident at the moment and provide more substantial short-term resistance. Cantor’s Asian economist, Uwe Parpart, offered a word of caution on the pace of the revaluation. If the Yuan were to rise by 6% versus the Dollar over the course of the next year, it would match the 2005 revaluation pace. Anything less than that would be considered disappointing. As investors started to separate the rhetoric from the expected action, the Euro slid to a loss on the day, back near the 1.23 level. Support is at the 21-day moving average at 1.2216 and its May low at 1.2144. If we start breaking below these supports, the Euro could come back into focus as a bearish catalyst and steal the thunder from a positive earnings season.
This is a fairly busy week of economic data, but is mainly focused on the Housing sector. This is one of the weakest corners of our economic recovery, so expectations should be low. The data we’ve seen to date have been below expectations, so we would expect investors to be bracing for bad news, especially from the New Home Sales report because it reflects contracts post-stimulus. That should be a nasty number, down near 20% on an annualized basis. Existing Home Sales, which are out today, is a May figure and represents closings, which are still reflecting stimulus supported data through June. Expectations are for a gain of 6.0% to 6.12 million annualized units. Treasury auctions are the highlight this week, with everything from 1-month to 7-years. This demand for capital should provide a small negative for the equity markets, as it is a distraction for the flow of capital. $10 billion of new supplies are coming to market. There was also some question as to whether or not the potential appreciation of the Yuan would draw capital attention to that market over our Treasury market. We did see rates rise slightly across the curve, but the bigger picture outlook should not be impacted by this new Yuan target.
qVisa V (+5.0%) and MasterCard MA (+4.2%) got a big boost from what appeared to be concessions during committee meetings of the financial reform bill. The restrictions on what the credit card companies can charge was viewed as too restrictive and would result in reining in lending at a vulnerable time for the economy. However, the attention on the financial reform package is probably doing more harm than good, at this point. The S & P Financial SPDR, XLF did pop through 15 at the open, which is its 200-day moving average, but gave up all of the day’s gain by the close. That seemed to be the theme across the market. The enthusiasm over China’s comments on the Yuan turned to disbelief that it would be anything of any significance, and therefore the initial reaction was unsupported. Friday was a quadruple witching expiration, and there were positions probably needing to be reestablished. However, it was clearly the impact on the Euro, its initial rally and subsequent failure, that moved the market. The push into the “risk trade” at the open turned sour. Selling in Tech and small cap unwound the bullish effort. The Philly Semi Index SOX was up 6 points, then down 6 points, and eventually closed off less than a point. The NASDAQ lost 0.90% and the Russell 2000 gave up 1.0%. The swift bearish sentiment went after risk, and that resulted in additional caution.
Technically, the morning rally did hit a milestone for short-term technical traders. The S & P peaked in April at 1220 and subsequently fell to an intraday low of 1040. A 50% retracement, considered technical resistance on the recovery rally by Gann and Fibonacci traders, is at 1130. Low and behold, the S & P spiked to 1131 at the open and backed away. Spooked by all the negative talk about the significance of a failed rally, the bears jumped on the pullback story. However, this is just a target for resistance and not necessarily a call for the end of the world. The averages may continue to go through more “back and fill” consolidation action, but we remain far from raising a red flag about another leg to the downside. The unwinding of the leadership trade was disconcerting, but a day does not constitute a trend. Let’s see how the market handles bad news from the housing sector.
What might have been an otherwise dull market open to a mid-June week of trading was bolstered by China’s surprise statement that it would allow for greater currency flexibility of the Yuan. China has been fixing its currency to the Dollar so that it might maintain a high level of export business. Congress and the White House may have been distracted by the BP spill and the sovereign debt crisis across the Euro-zone, but China’s unfair currency practices have popped up occasionally as a reason to impose sanctions on Chinese imports. This move by China would certainly alleviate pressures on Congress to act aggressively, at least until after the November elections. A stronger Yuan vs. Dollar would help improve our exports to that rapidly growing country, giving our beleaguered industrial stocks a boost. While a stronger Yuan would certainly help our exports, it also would be a positive for Europe. Asia is a key trading partner and the EZ’s ability to increase exports at this time is a much-needed positive. Retailers came under some pressure, as they are net importers of goods from China. As the Euro-market averages rallied over 1% across the board, the Euro found early strength. This certainly helped give our markets a positive start on the week.
Unfortunately, the Euro was unable to maintain its early spike to 1.25 vs. the Dollar. There is some technical resistance starting at 1.25, but the two key Euro/Dollar levels are its late May spike to 1.2672 and its declining 10-week moving average at 1.2671. Obviously, these two are coincident at the moment and provide more substantial short-term resistance. Cantor’s Asian economist, Uwe Parpart, offered a word of caution on the pace of the revaluation. If the Yuan were to rise by 6% versus the Dollar over the course of the next year, it would match the 2005 revaluation pace. Anything less than that would be considered disappointing. As investors started to separate the rhetoric from the expected action, the Euro slid to a loss on the day, back near the 1.23 level. Support is at the 21-day moving average at 1.2216 and its May low at 1.2144. If we start breaking below these supports, the Euro could come back into focus as a bearish catalyst and steal the thunder from a positive earnings season.
This is a fairly busy week of economic data, but is mainly focused on the Housing sector. This is one of the weakest corners of our economic recovery, so expectations should be low. The data we’ve seen to date have been below expectations, so we would expect investors to be bracing for bad news, especially from the New Home Sales report because it reflects contracts post-stimulus. That should be a nasty number, down near 20% on an annualized basis. Existing Home Sales, which are out today, is a May figure and represents closings, which are still reflecting stimulus supported data through June. Expectations are for a gain of 6.0% to 6.12 million annualized units. Treasury auctions are the highlight this week, with everything from 1-month to 7-years. This demand for capital should provide a small negative for the equity markets, as it is a distraction for the flow of capital. $10 billion of new supplies are coming to market. There was also some question as to whether or not the potential appreciation of the Yuan would draw capital attention to that market over our Treasury market. We did see rates rise slightly across the curve, but the bigger picture outlook should not be impacted by this new Yuan target.
qVisa V (+5.0%) and MasterCard MA (+4.2%) got a big boost from what appeared to be concessions during committee meetings of the financial reform bill. The restrictions on what the credit card companies can charge was viewed as too restrictive and would result in reining in lending at a vulnerable time for the economy. However, the attention on the financial reform package is probably doing more harm than good, at this point. The S & P Financial SPDR, XLF did pop through 15 at the open, which is its 200-day moving average, but gave up all of the day’s gain by the close. That seemed to be the theme across the market. The enthusiasm over China’s comments on the Yuan turned to disbelief that it would be anything of any significance, and therefore the initial reaction was unsupported. Friday was a quadruple witching expiration, and there were positions probably needing to be reestablished. However, it was clearly the impact on the Euro, its initial rally and subsequent failure, that moved the market. The push into the “risk trade” at the open turned sour. Selling in Tech and small cap unwound the bullish effort. The Philly Semi Index SOX was up 6 points, then down 6 points, and eventually closed off less than a point. The NASDAQ lost 0.90% and the Russell 2000 gave up 1.0%. The swift bearish sentiment went after risk, and that resulted in additional caution.
Technically, the morning rally did hit a milestone for short-term technical traders. The S & P peaked in April at 1220 and subsequently fell to an intraday low of 1040. A 50% retracement, considered technical resistance on the recovery rally by Gann and Fibonacci traders, is at 1130. Low and behold, the S & P spiked to 1131 at the open and backed away. Spooked by all the negative talk about the significance of a failed rally, the bears jumped on the pullback story. However, this is just a target for resistance and not necessarily a call for the end of the world. The averages may continue to go through more “back and fill” consolidation action, but we remain far from raising a red flag about another leg to the downside. The unwinding of the leadership trade was disconcerting, but a day does not constitute a trend. Let’s see how the market handles bad news from the housing sector.