July 18 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
During a volatile trading session on Tuesday, global stocks pared earlier losses by securing modest gains epitomized by the Dow Jones Index gaining almost 80 pips and the NASDAQ rising by 0.45%. Investors struggled to adopt a clear stance yesterday after Ben Bernanke informed the US Congress that the Fed was already prepared to instigate further quantitative easing although he stopped short of defining a precise timescale. Bernanke preferred to keep his cards very close to his chest instead of issuing any definitive signals to the markets which are coming more desperate by the day for precise clarification about future Fed stimulus policies. With reference to the US economic recovery, Bernanke explained that it was impeded by two major uncertainties which were the European debt crisis and the looming US fiscal cliff. Consequently, he stated that the Fed had revised its predictions for US economic growth downwards to below 2%.
Since the financial crisis began in 2008, the US Federal Reserve has adopted policies to force long-term interest rates to levels as low as possible by purchasing over $2 trillion in mortgaged-related and government debt. However, despite all its efforts the economy is still not expanding fast enough to substantially reduce unemployment. To reverse this trend, the Fed has promised to hold interest rates at historic lows until at least 2014. In addition, the central bank extended its Operation Twist by six months at its last meeting. Bernanke emphatically advised Congress yesterday that the Fed was already actively researching into new stimulus tools to implement should deflation risks increase or if the labor market continues to flounder. Investors will now have to anxiously wait until the Fed convenes at its next meeting, scheduled for the end of this month, for further clarity about its future intentions.
Yesterday, the pair plummeted by over 110 pips to a daily low at 1.2187 before rallying after Bernanke hinted that the Fed was ready to boost the US faltering economic recovery with further stimulus. As a result, the EURUSD surged later in the session producing a sizeable tail (Low to Close) on the rightmost candlestick in the process. There is a contest between two powerful forces at present which are trying to gain control of the directional movements of the EURUSD. On the one hand, the USD gains strength from the negativity produced by the European debt crisis, global economic slowdown and a weak US Corporate earnings season. However, the potential threat of devaluation lingers over the USD from future Fed stimulus action. With the Fed now staying on the sidelines at least in the near-term, consider selling the EURUSD if price falls below 1.2262.
At the start of Bernanke’s testimony yesterday in front of the US Congress, the British pound came under significant pressure from the USD with the GBPUSD plunging by over 110 pips before the pair located solid support near 1.5550. Investors were initially disappointed after Bernanke failed to define a distinct timescale for the introduction of new stimulus measures. However, as his testimony proceeded Bernanke advised that the Fed was already primed and ready for action to instigate new quantitative easing should the risks of deflation increase or if the labor market continues to struggle. These remarks were sufficient for the GBPUSD to ignite a sharp rally with the pair paring nearly all its losses to close near 1.5650. With the Fed playing a wait-and-see game in the short term, the threat of an imminent devaluation of the USD is removed. As such, sell the pair if price drops below 1.5618.
Significant buying pressure late during yesterday’s trading session created a large tail (Low to Close) on the rightmost candlestick. Initial remarks by Bernanke caused the AUDUSD to plunge by almost 70 pips to a daily low of 1.0234 before his later clarification enabled the pair to rally strongly paring all of its losses and closing just above its opening price. Analysts are now anticipating that the AUDUSD will strengthen in the short-term because of a reduction in global volatility and a break in the monetary easing cycle of the Reserve Bank of Australia. However, a slowdown in the Australian economy could result in future AUD weakness over the longer term. Consequently, consider opening a new CALL currency option with the AUDUSD as its underlying pair if pair can surge above 1.0341.
USD/CHF is inversely correlated to the EURUSD. This feature was again present yesterday with the CHF tracking the movements of the Euro against the USD very closely. The USDCHF initially surged following Bernanke’s early comments only to plunge later in the session after he provided deeper insights. A sizeable wick (High to Close) was created by this process on the rightmost candlestick . Many professional traders exploit the well-defined inverse correlation between the USDCHF and the EURUSD to hedge their bets. With stimulus action on hold for the moment, buy the USDCHF if pair jumps above 0.9831.
Gold pared most of its losses yesterday by rallying late in the session to record just a modest loss at market close. The price of the precious metal tracked the stock markets higher after Bernanke informed the US Congress that the Fed was ready to help boost the stalling US economic recovery should the need arise. Gold is very sensitive to the stimulus policies of global central banks because it is used by investors to hedge against inflation. For example, this commodity has already been sold-off a number of times this year after the Fed did not commit to a new round of quantitative easing. With the Fed on hold for the present, a bearish sentiment should preside over the gold markets at least in the short term. Sell gold if its price drops below $1,588.78 per oz.
Oil prices rose yesterday amid concerns that the Iranian nuclear program and the North Sea disputes could interfere with the supplies of this commodity. With a bullish bias prevailing, buy oil if its price jumps above $91.38 per barrel.
A prominent market analyst informed the markets yesterday that the usage of Facebook, the world’s leading social network, had slumped significantly in the last six months. In particular, the number of subscribers had particularly fallen in Europe and the USA, with America recording a decline of 1.1% during the last six months. Following this announcement, the shares of Facebook slumped by 1% during yesterday’s session.
Samsung Electronics Co completed a deal yesterday to purchase the location technology and mobile phone connectivity of the chipmaker, CSR, for $310 million. The shares of Samsung appreciated in value by 1.39% on Tuesday as a result of this development.
A surging market, resulting from Bernanke stimulus hints, helped the shares of both Apple and Google to rise with those of the former inching slightly higher by 0.01 % to $606.94 while those of the latter climbed by 0.31% to $576.73. With a fresh bullish optimism prevailing over the markets, consider buying Apple if its share price breaks above $607.23 and buy Google if its share price jumps higher than $577.28.