The catalyst behind the movement in the assets classes this morning isnews of manufacturing expansion in China, the Euro Zone andsurprisingly the U.K. With this good news and so much cash on thesidelines, it looks as if equity markets are in a position to gap andgo from the opening.
The catalyst behind the movement in the assets classes this morning is news of manufacturing expansion in China, the Euro Zone and surprisingly the U.K. With this good news and so much cash on the sidelines, it looks as if equity markets are in a position to gap and go from the opening. This move to higher yielding assets is pressuring the U.S. Dollar this morning.
Today’s key report is the U.S. Institute of Supply Management’s Manufacturing Index. A report on construction spending will also be released today at 9 am CDT. Traders are expecting U.S. manufacturing to show an increase like the other major economic centers reported last night. The current market posture may change if this report comes well under expectations. Although it may not be trend changing news, it is likely to trigger a substantial break in equities and could reverse the weakness in the Dollar if it misses by a hefty amount.
All of the major asset classes are being affected this morning by the strong surge in the equity markets. Renewed confidence in the economic recovery is leading to demand for risk assets. The bullish news regarding the expansion of Chinese manufacturing is a sign that Asia may be leading the rest of the world out of the recession. This is helping to fuel economic optimism and increase appetite for risk. Asia, led by China, has the money to feed this appetite.
With money moving into higher yielding assets, commodities are expected to trade higher along with equities while lower-yielding assets such as the U.S. Dollar and Treasuries are expected to trade weaker.
The GBP USD is showing the most strength with a break out to the upside to a new high for the year. This currency pair has been the biggest surprise since March. While most analysts have been focused on the large budget deficit and poor housing numbers, the U.K. economy has been strengthening in other areas.
The Bank of England is scheduled to meet on Thursday, August 6th. Although traders believe the BoE will leave interest rates unchanged, today’s bullish manufacturing report is a strong sign that it will announce the end to its asset buyback program. Speculators betting on this announcement are most likely helping to drive this market higher.
The European Central Bank will also meet on August 6th. It was also expected to keep interest rates unchanged, but the recent change in global economic conditions may trigger a more hawkish response in its post -meeting comments.
Stronger crude oil and equity markets are helping to drive the Canadian Dollar higher. Gains may be limited however if the Bank of Canada expresses concerns about the high priced currency’s effect on Canadian exports.