Archive for May, 2012

U.S. Dollar Index Breaks Above Primary Downtrend; Likely To Head Higher

Posted in U.S. Dollar Index (DXY) on May 31st, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

Supported by modest economic growth in the United States and the likelihood of a recession in Europe, the U.S. Dollar Index (DXY) broke above primary downtrend resistance at the 81.25 level.  The expectation of slower growth in China, or the possibility of a harder-than-expected “landing” in that country have also bolstered the greenback with dollar shortages emerging in places like Indonesia and Venezuela. Recent concerns over the solvency of a number of Greek and Spanish banks have also added to the preference for dollars.

While not yet in an overbought condition on the monthly time frame, the likelihood for further dollar strength is reasonably high. When looking at longer-term charts, the next key trend line resistance level on the DXY sits at 86.85, although it declines over time.

Nevertheless, a move toward that level would likely be accompanied by continued political and financial uncertainty in Europe, which in turn could have a negative impact on China, India and Japan. In addition, further dollar strength would likely have a negative affect on U.S. equities and commodity price which could send 10-year U.S. Treasury note yields to new all-time lows.

In theory, lower interest rates along with cheaper commodity costs should be a boost to the consumer. The problem is that a prolonged decline in commodity prices as well as a spate of unusually low interest rates might be a reflection of slower-than-expected global economic growth; or even the possibly of a contraction. With the prospect of massive sovereign deleveraging, at hand such a scenario might be viewed as a classic case of the Keynesian “liquidity trap.”

S&P 500 Index Breaks Key Support; More Weakness Expected

Posted in The S&P 500 Index (SPX) on May 24th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

After spending several months in a relatively narrow trading range, the S&P 500 Index (SPX) finally broke below key trend line support at the 1,319 level with all major technical oscillators positioned bearishly. The current set-up suggests that a possible move down toward key trend line support at the 1,174 level will likely occur over the coming weeks or months.

Worries that a “run on the banks” of Greece, Spain and possibly Italy clearly has investors fearful about default contagion, or the nationalization of a number key institutions. That said, a bold move by the ECB could stem some of these concerns if it acts quickly. Even if a Eurozone backstop were to be implemented, the underlying problems causing current fears may only diminish marginally, however.

Nevertheless, European bank woes appear to be playing a big role in the decline in the Eurodollar and a concurrent rise in the U.S greenback. In turn, this currency shift has put downward pressure on both commodity prices as well as U.S equities in recent weeks.

Unless clearer political and banking footholds get established in Europe soon, continued downward pressure on the Eurodollar, commodity prices and equity prices will likely be realized. Further, 10-year U.S. Treasury and German Bund yields will presumably extend their respective declines to new all-time lows. If this occurs, a number of sovereign debt spreads should continue to widen to distressing levels.

Adding to investor nervousness was last week’s revelation of an unexpected $2B-to-$5B loss at J.P. Morgan. At the very least, this news along with a dramatically flatter yield curve has caused a sense of unease over the profitability of  large U.S. banks in general, sending the financial sector sharply lower. Since a bullish move in the equity markets is usually accompanied or led by a rise in the financial sector, a renewed move lower in bank stocks is a big negative.