May 23 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
For the second consecutive day, global equities managed to rise during the early part of yesterday’s session before tumbling back into negative territory late in the afternoon. Initially, investors were buoyant on prospects that a meeting of European leaders later today would produce some new policies that would help resolve the bloc’s deteriorating debt crisis. However, hope turned to sorrow as yesterday progressed with the markets growing increasing more nervous that anything tangible would emerge from these talks. The basic concept booted away yesterday was that the summit would be considering the introduction of regional bonds to be underwritten by the entire Eurozone membership. However, this French driven initiative is unlikely to receive any serious support from Germany after Angela Merkel dug her heels at the recently held G8 meeting by refusing to alter her strict austerity stance.
Consequently, after what appeared to be an encouraging day traders had to watch as stocks plunged during late Tuesday. Other events also helped fuel this decline such as fresh rumors pointing to a swift Greek exit from the Eurozone and the evolving drama over the valuation of Facebook shares. Some investors are still clinging to hopes that the new French premier, Francois Hollande, can inject some fresh blood and ideas into the European summit starting in Brussels later today. Basically, he will attempt to introduce policies that are able to raise badly needed cash to help support the fragile Greek banking sector. In particular, Hollande stated that he wanted the meeting to focus on all policies that can help boost growth and jobs in the Eurozone.
The Euro struggled badly against the USD yesterday by losing over 100 pips, ahead of the highly awaited European summit that is scheduled to commence today in Brussels. This is because many investors are expecting that despite all the hyped-up rhetoric, very few real workable policies will emerge from these talks that can help control and solve the current difficult Greek and Spanish banking problems. Consequently, the EURUSD plunged late yesterday to a low of 1.2657 placing the pair within striking distance of last week’s low at 1.2641. With the USD continuing to benefit from the increasing chaos in Europe in its capacity as a safe-haven asset, consider opening a new PUT option with the EURUSD as its underlying asset if price can achieve a sustained drop below 1.2635.
In the last few days, the UK prime minister, David Cameron, and the chairman of the Bank of England, Mervyn King, have strongly stated that the biggest threat to the UK economic recovery was the European debt crisis and have urged European leaders to adopt more aggressive actions in order to resolve this contagion menace. The GBP is now under significant pressure from the USD with the GBPUSD falling by almost 70 points and is now approaching 2 month lows once again. As investors are currently in no position to be able to assess the risks associated with the substantial Greek and Spanish banking problems, the USD will continue to flourish in the near-term in its role as a safe-haven asset. Consequently, look to sell the pair if its price plummets below 1.5732.
The Australian dollar competes well against the USD during periods when risk appetite dominants but badly during those when the global economy is under stress such as the present time. This is because the performance of the AUD is highly correlated to that of the commodity markets which has been suffering badly in recent months. This is partially why the AUDUSD plunged by over 120 pips yesterday as well as the chaos of the European debt crisis again taking center-stage. With new rumors circulating about an early exit of Greece from the Eurozone, the USD continues to strengthen as a safe-haven asset. With such a bearish sentiment prevailing, consider activating a PUT currency option using the AUDUSD as its underlying asset if price dips below 0.9795.
The CHF mirrored the movements of the Euro yesterday by weakening significantly against the USD. The pair reversed Monday’s downward respite by climbing almost 100 pips to close near 0.9470. The performance of the CHF is correlated to that of gold so when this precious metal appreciates in value, the USDCHF falls as the CHF strengthens. This is another reason why the CHF is struggling badly to compete with the USD and has suffered a 450 pip loss since the start of May. With the USD benefitting as a safe-haven asset from the European chaos and the slowdown in the global economic recovery, the directional movements of this pair are dominated by a strong bullish bias. As such, consider buying the USDCHF is price can surge above 0.9500.
Gold plummeted yesterday afternoon in unison with the falling EURUSD. Analysts cited the increasing anxiety of investors fearing that nothing tangible will emerge from the European Summit starting today, that can resolve the bloc’s debt crisis, as the primary reason for this development. After gold failed to penetrate its significant resistance level at $1,600 per oz. on Monday, the rot then set in causing prices to collapse back towards $1,570 per oz. The price movements of this commodity are dominated at present by a strong bearish sentiment. As such, look to open a PUT commodity option using gold as its underlying asset if its price falls further below $1,563.52.
Oil prices fell yesterday following the news that an agreement could be reached between Iran and the U.N. nuclear watchdog about Tehran’s nuclear program which would suppressed concerns about any disruptions in oil supplies. As oil is presently contending with a heavy bearish sentiment, look to sell it if its price plunges below $90.84 per barrel.
Investors were still in a stunned state over the total scrambles surrounding the Facebook IPO when even more distressing news came knocking on the door. Reuters informed the Markets late Monday that a lead underwriter within the event’s main insurer, Morgan Stanley, had significantly reduced his Facebook revenue forecasts just days before last Friday’s IPO. As this data could well have become available to other third parties before shares were placed on offer, two top U.S. financial regulators recommended yesterday that the disturbing events surrounding the IPO of Facebook should be placed under investigation. As a result, Facebook shares finished yesterday by falling 8.9% percent to $31 which means that this company has lost more than $19 billion of its market value in just two days.
The late retraction of the global equity markets late yesterday caused both Apple and Google to close at losses despite the fact that earlier during the day their shares had been trading positively. Apple’s shares dropped by 0.77% to close at $556.97 while those of Google fell by 2.17% to finish the day at $600.80. With the European debt crisis casting a strong bearish sentiment over equities, look to sell Apple if its price plummets further below $553.64. Similarly, consider selling Google shares as a wise move if their price drops $596.94.