By James A. Hyerczyk
The Dollar Index is trading sharply higher as the Dollar is gaining against the European currencies following reports of problems with the Greek bailout package. Both the June Euro and June British Pound are trading sharply lower as Greece tries to amend the proposal to receive aid from the International Monetary Fund and to negotiate better interest rates on loans from other European Union members.
Traders have been nervous since last week when Greek bonds began selling off and the cost to service its debt surged. Although the first bond issue was well received, it now appears that this may have been a token gesture by Euro Zone members. Since this initial offering, interest rates have slowing risen, making it very expensive to Greece to continue to function.
U.S. stock indices are trading lower because of risk aversion. For several days, stock indices have been buoyed by good economic news, but the rallies have appeared to be labored at times. Traders looked a little tentative at times seemingly expecting a correction because of extremely overbought indicators. So far the weakness hasn't led to any major selling pressure, but conditions are ripe for the situation to escalate should the Greek fiscal problems balloon.
Traders have gotten used to buying dips in this rally so this morning's opening may be treated by some as a buying opportunity. Looking at the charts, the Dow is still toying with the 11,000 area. Technically, this price doesn't mean anything. Psychologically, breaking out above this level could trigger an acceleration to the upside as traders gain more confidence that equities are still the place to invest.
June Treasury Bonds are trading better. Weaker demand for higher risk assets and oversold conditions are helping to boost demand for safer assets. Money may be moving out of higher risk commodities and equities and into the safety of the fixed income market. In addition, following a string of bullish U.S. economic reports, yields have become very attractive, making T-Bond and T-Notes more competitive with the yields offered by equities.
June Gold is trading slightly lower. Traders are not selling gold very aggressively despite the stronger Dollar. This could be because of concerns about a possible default in Greece. Overnight, June Gold overtook a swing top at $1133.90, only to find resistance at a 50% price level at $1136.75. The key factor to watch today is whether downside pressure on the British Pound and Euro extends throughout the U.S. Forex session. If these two currencies continue to collapse, then eventually gold may feel downside pressure. There may be a point, however, where gold surges to the upside if it becomes clear that the Greek fiscal issues are worsening enough to spread across the Euro Zone. This will then lead to renewed talk of a collapse in the Euro.
Despite the stronger Dollar and weaker Euro, June Crude Oil continues to rally. It looks as if demand for crude oil because of the expanding global economy is a more important reason to be long this market. Technically, this market broke out to the upside on Monday. This matter is expected to continue as long as there is a bid under the market. A further collapse in the Euro and surge in the Dollar could give traders an excuse to take profits after this rally and to lighten up a little on their long positions.