U.S. Market Update: Reversal To Support Required

The European update stated that the global forex drivers (equity, commodity, and bonds) were showing divergence between futures valuations and cash market prices, and technically were not in alignment. That allowed some doubt to form regarding the ability of the major pairs to break and hold new ground against the Usd. Quote from the 02:35 EDT report;

Not to say that things cannot hold, just that forex traders will just need to see all of the major pairs starting to move, and that may require the European cash market momentum, from 03:00 EDT, to confirm the breaks. The three main global equity futures markets are all heavily overbought from last week's trade, and all look as though they will require a reversal to near-term support before being able to easily move higher.

That reversal has started to be put in place, and the major pairs are back to the initial European break-out points, after testing Friday lows, and highs in the overnight session. There is not enough market-wide participation to make the equity, commodity, and by default, forex break in early Monday trade. Market moves have shown that the short side of the dollar is favored, and has also shown that a sustainable long break in equities to back that short-dollar view, will not hold until momentum picks up, and at best, until a solid test of support is seen that sets a foundation to move higher from.

The present equity rally seems to defy the macroeconomic picture, and although it is accepted that any market price is nothing more than the perceived value from the participants contained therein, something is not adding up to this being easily sustainable without a reversal to support. The global economy is still in a contraction phase, even though the pace of decline has shown a noticeable slowdown, the unemployment rate is projected to increase to around 11% in the U.S., although just a few months ago the estimates were pointing out to a 9% rate.

Add to that, the fact that the consumer spending sector appears to be deep in contraction, as credit card defaults head towards record highs in both the U.S. and European markets. Moreover, the major central banks together with the IMF forecast a slow recovery period, which would have a strong weight on both consumer and business revenue streams, and expenditure.

If the equity rally continues without a near-term reversal, the traded market will see inflated values, higher commodity prices, and a lower Usd; all backed by an inefficient valuation model. The issue with that is the ease in which those automated values can re-align themselves, especially when backed by low employment, little access to credit, and diminishing consumer and business income flows.

The divergence between pricing model valuations and economic sense is also being seen in oil prices, a market where speculative interest has increased, in-line with equity valuations going higher. This shows the perfect example of automated trade, in something that has been allowed to grow, with nothing programmed to cover the lack of foundation in the corresponding supply market. Global oil consumption is forecast to move lower in 2009, however, but to keep aligned with inflated equity valuations, the pricing models are sending out buy orders, like equities, that do not match the forward valuations or supply/demand numbers.

Something will soon give, in the form of a near-term price reduction, or in economic expansion and growth that comes in quick time; either one will get things aligned. Right now, the economic expansion thought process looks as flawed as the inefficient pricing models that run the automated order process. Even more reason to bank a proportion of the initial moves, and lock in profits on anything taken. The Usd looks weak, but only in-line with as much as equity valuations look extended. A coming together of values looks more likely to happen than not, at least in the near-term.

The thing that will break one currency away from the others, is the economic output reads improving, and to a degree that takes the analysts by surprise, however, this week it is all U.S. based red flag numbers, and they really will have to show a marked improvement if they are to follow through above expectations. The New Home Sales numbers in the U.S. increased from 340k last month, to 380k this month, the first in a row of reports this week, that if continue the trend, will support equity valuations, and send the dollar lower as stocks are bought, and bonds are sold. However, maintaining that flow will take a minor economic miracle.