Wall Street closed lower for the first session in four on Monday. NYSE composite volume of 2.97 billion amounted to the lowest volume day of the year. The fragility among global issues and concerns over the falling dollar, rising commodity costs and increasing debt cast a dark cloud over equities heading into the summer months. The Dow Jones Industrial Average fell 26.11 points to 12,479.88, with 18 of its 30 components in the red. The Standard & Poor’s 500 Index slipped 2.13 points to 1,335.25. The Nasdaq Composite Index added 5.72 points to 2,825.88, its fourth session of gains.
The major indexes retained their downward slant after the Commerce Department reported that new-home sales rebounded 11.1% in March. New home sales in the U.S. rose more-than-expected last month, official data showed on Monday. In a report, the Census Bureau said that new home sales rose to a seasonally adjusted annual rate of 300.00K, from 270.00K in the preceding month whose figure was revised up from 250.00K.With trading volume at its lowest of the year, and after a run of gains, investors returned to some simmering worries about rising raw-materials prices.
Crude-oil futures ended a penny lower Monday, recouping some losses from the floor trading session but reversing from highs hit before the U.S. market opened. Crude oil dropped to $112.28 a barrel on the New York Mercantile Exchange. That ended a three-day winning streak for crude. Prices had traded higher during electronic trading in Asian and European hours but turned lower early on in New York’s floor session. The June contract hit $113.48 a barrel intraday but is traded around $111.24. Be aware, the weakness in commodities is expected to persist into the week.
Today’s Important Economic Announcements (GMT)
7:00 AM CHF Trade Balance & UBS Consumption Indicator
11:00 AM GBP UBS Consumption Indicator
1:50 PM GBP MPC Member Sentance Speaks
2:00 PM USD S&P/CS Composite-20 HPI y/y
3:00 PM USD CB Consumer Confidence
Gold began the week breaking new all-time records, but quickly reversed course. In the coming days, traders will focus on the Federal Reserve’s policy statement on the U.S. economy and interest rates due Wednesday and an unprecedented news conference by Fed Chairman Ben Bernanke following the statement. Fed officials are expected to hint at what, if anything, would replace the current asset-buying program set to end in June. If nothing is forthcoming it will deflate commodities in general. In other words, Bernanke will stop pumping money into the economy, thus lowering inflationary pressures. We expect Gold to continue heading south.
Stop Loss: 1,505.2
Take Profit: 1,490.0
Interest rate differentials appear to be the driving factor in the dollar’s demise. The spread between the 2-year German Bund and the 2-year US Treasury bond is trading at a difference of 110.6 bps in Germany’s favour today. Despite the rumours, a Greek default has not taken place over the holiday and the market continues to put a fence around the countries at risk (Greece, Portugal, Ireland), while focusing on yield differentials in Europe and the US. The US deficit is also taking center stage with last week’s announcement by S&P to put the US credit rating on a negative watch. A combination of rising European rates and a bloated US deficit should allow the EUR/USD to continue its bullish trend and test the 2009 high at 1.5140.
Stop Loss: 1.4493
Take Profit: 1.4625
Continued euro gains would also benefit the pound given the strong correlation between the EUR/USD and GBP/USD (0.80 from January 1 to mid-April) The BOE is also expected to raise interest rates in the near term. The spread between the UK 2-year and the US is currently at 41 bps. The 2009 high at 1.7040 would be a likely target for the GBP/USD. The Williams Percent Range on the daily chart has just crossed into the overbought zone, indicating that a bearish correction may occur shortly. Furthermore, the Relative Strength Index on the daily chart is currently at 80, lending further support to the theory will correct itself. Going short with tight stops may be the wise choice today.
Stop Loss: 1.6489
Take Profit: 1.6385
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