May 24 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
European affairs once again dominated the markets yesterday with the Dow Jones Industrial Average plummeting by over 190 points at one point on Wednesday before rallying later in the session. The primary worry behind this decline was the uncertain future of Greece as a Eurozone member. If this nation does decide to leave, then the financial markets could then enter a new difficult and dangerous phase because the risks associated with such a calamity are totally unknown. European politicians were desperately attempting to prevent such an outcome yesterday by agreeing to produce contingency plans for each of the remaining bloc members if a Greek exit becomes a certainty. This plan of action was agreed during a one hour teleconference held by the Eurogroup Working Group on Monday.
During the European summit meeting held late last night, leaders were expected to debate the new euro-zone bond initiative as well as growth-oriented policies. This meeting was anticipated to be a heated affair as the viewpoints of the new French premier, Francois Hollande, are directly opposed to those of the German Chancellor, Angela Merkel. Investors are now desperate for any positive solutions to emerge from this summit that are capable of alleviating the European two-year old debt crisis. One prominent analyst summarized the scale of this plight by stating that the markets were in such an anxious state that an over-reaction to any potentially out-of-control development from Europe is very much on the cards. As investors are struggling to evaluate the risks involved with Greek and Spanish uncertainties, a real danger now exists that a new market crash could be eminent.
Fear ran amok yesterday as frantic investors threw their assets into low-risk German and U.S. government debt. The USD also strengthened against most other currencies because of its status as a safe-haven sanctuary. As such, the EURUSD plunged by nearly 130 pips hitting its lowest levels since July 2010 at 1.2555. The following trading pattern that developed late in the session suggests that the Euro is still under intense pressure. Basically, the Dow Jones Index rallied strongly towards market close yesterday by recovering almost 190 pips following a headline print advising that positive progress had been made with Greece. In contrast, the EURUSD, which is heavily correlated to the Dow, could only muster a 25 pip recovery. This break-down in correlation is indicative that the Euro is under excessive selling pressure and is very likely to weaken further. As such, look to sell the EURUSD if price can achieve a sustain break below 1.2528.
The British pound also had great difficulty competing against the ever-strengthening USD yesterday as the pair plummeted by almost 90 pips to hit a two month low at 1.5673. Today could be very significant as the results of the overnight European Summit become evident. Any negative developments will be GBP bearish as the USD will benefit from them as a safe-haven asset. The British premier and Bank of England chairman have both recently stated their serious concerns about the size of threat posed by the European debt crisis on the fragile UK economic recovery. As the problems of the Spanish banking sector and the Greek political uncertainties have never been encountered before in recent history, assessing the risks that they present is a difficult task. Consequently, sell the pair if price plunges below 1.5658.
The contagion concerns of the European debt crisis and a promising release of new U.S. home sales caused the US dollar to appreciate strongly against most major currencies on Wednesday. The dollar index climbed to its highest level since September 2010 at 82.22 before retracting to a closing value at 82.11. The AUD fared better than most other currencies against the USD by closing with just a 10 pip loss for the day. This was after the pair plunged to its lowest level since November 2011 at 1.5673 before rallying later in the session. However, despite this welcome breather from its constant downward spiral, the AUDUSD is still subjected to an intense bearish sentiment at present caused by European uncertainties. Consequently, consider selling the pair if price drops below 0.9656.
This pair continued its relentless march higher yesterday by climbing almost 100 pips and achieving its highest level since mid-January at 0.9571. As the chaos in Europe simmers to a boiling point, the CHF has fared badly against the safe-haven USD. In particular, the pair has been trading a very sharp bullish channel since the start of May. As the risks associated with a Greek exit from the Eurozone are very difficult to quantify, the bullish sentiment hovering over this pair will most likely dominate its directional movements for quite some time to come. As such, look to activate a new PUT option using the USDCHF as its underlying asset, if price can achieve a sustained break above 0.9573.
Gold successfully rallied late in the session yesterday following an earlier intense sell-off which was primarily caused by worries centered about the European debt crisis. The precious metal bounced off a key support after commodities, the euro and equities were subjected to a wave of heavy selling. Anxious traders rushed to transfer their assets into low-risk safe-havens, such as the USD and bonds, ahead of the European Summit held last night. The fear, that debt-laden Greece could exit the euro have been intensifying ahead of its June 17 elections, is generating a strong bearish sentiment over commodities, especially gold. Consequently, look to sell this commodity if its price is able to plummet below $1,545.93 per oz.
The improving prospects that an agreement will be forthcoming between the U.N.’s International Atomic Energy Agency and Iran that will alleviate tensions over the production of Iranian nuclear products caused oil to drop below $90 per barrel for the first time since last November. As oil is still subjected to a strong bearish sentiment, consider selling it if its price falls below $89.17 per barrel.
After, Hewlett Packard informed the markets yesterday that it was planning to stimulate its growth by laying-off about 8% of its workforce, its shares surged by 11%. The redundancies are expected to save the company about $3 billion per year. The firm also announced that its Q2 profits had fallen by 30% compared to those of a year ago.
In contrast, Dell released a very disappointing financial report on Wednesday that caused its shares to plummet by 17% as investors’ fears immediately grew about whether the global technological giant was losing control of its spending budgets more quickly than originally expected. The stock drop wiped off almost $4 billion from the company’s valuation and has certainly raised concerns in the markets about the validity of PC producer’s overall strategies.
The shares of both Apple and Google performed well yesterday managing to rise by 2.44% and 1.44% respectively. However, even though both companies possess good buy recommendations, the risks and uncertainties over the European debt situation are still dominant. With a strong bearish sentiment hanging over the markets, still look to sell Apple if its share price drops below $564.03 and Google if its price falls beneath $606.00.