STOCK INDEX FUTURES
After sharp gains late last week, global equity prices are mostly lower due to renewed fears that the European debt crisis could get worse. There are worries that European banks will need more capital in an effort to shore up their balance sheets.
This bearish influence is being partially offset by talk of a new White House economic stimulus plan that may be unveiled as early as tomorrow.
Keep in mind that a gridlocked Congress is bullish for stock index futures, according to history. As we get closer to the elections in November, the political influence on the market will play a more important role. One of the larger internet betting sites is predicting a 70% probability that the Republicans will take control of the House, while there is a 59% probability that the Democrats will retain control the Senate.
CURRENCIES
The "safe haven" currencies, the U.S. dollar and the Japanese yen are higher in light of renew sovereign and corporate debt worries in the euro zone. The Japanese yen was supported after that Bank of Japan left their benchmark interest rate unchanged at ten basis points.
Much of the selling pressure on the euro stemmed from ideas that the Basel Committee on Banking Supervision will recommend increased capital requirements on European banks when it meets today. The fear is that this could restrict the ability of banks to lend. In addition, there were reports in the U.S. press that the recent stress tests on European banks were "fudged."
The euro was also weakened by a report that showed German factory orders unexpectedly dropped in July. Factory orders were down 2.2% from June, which compares to an estimate of a .5% advance.
It is widely expected that the Bank of England will leave their benchmark interest rate unchanged at a record low of 50 basis points when they meet on September 9.
The "commodity currencies," the Australian dollar and the Canadian dollar fell in a "risk off' move over the weekend. The was some additional pressure on the Australian dollar after the Labor Party made a deal with two independents that would made a tax on mining companies more likely. The Reserve Bank of Australia left their benchmark interest rate unchanged at 4.5%, as expected.
Financial markets are predicting a 65% probability that Bank of Canada will increase their benchmark interest rate at tomorrow's policy meeting by 25 basis points to 1%.
In spite of the current weakness this morning, the long term upside target for the Australian dollar remains at 95 and the long term upside objective for the Canadian dollar is parity with the U.S. dollar.
INTEREST RATE MARKETS
Futures are higher due to the renewed focus on the tenuous debt situation in Europe.
In spite of this, the charts are looking toppy for the longer dated Treasury futures, after two major uptrend lines were taken out last week on the downside.
Currently, there is a 77% probability that the FOMC will increase their fed funds target by at least 25 basis points on or before their November 2, 2011 meeting.
For more information, I can be reached at 877.690.7303 or via e-mail at alan.bush@archerfinancials.com. Additional research can be found at www.archerfinancials.com/research.aspx.
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