Traders will be watching New Home Sales today. Pre-report estimates are for an increase of 352K. This is up from 342K last month. If traders get the increase they are looking for then this will be yet another sign that the housing slump may begin stabilizing. Many traders feel that a recovery in the housing market is needed to jump-start the economy. While better-than-expected earnings have been driving the rally this month, a better-than-expected New Home Sales Report will be a much stronger sign that better times may be ahead.
Some feel that falling home prices and low mortgage rates have been attracting buyers, but others are concerned that rising unemployment may trigger more foreclosures and slow down buying.
Later in the week, U.S. Secondary Preliminary GDP will be released. Guesses are for the U.S. economy to show a decline of 1.5%. This will be down from the 5.5% contraction reported in the first three months of the year. There is some debate as to how much weight this report carries because of the changing nature of the U.S. economy. Nonetheless, a substantial deviation from the estimate is most likely to move equities.
China and the U.S. will meet this week to discuss the direction of the U.S. Dollar and the U.S. economy. China is expected to pressure Treasury Secretary Geithner on how the U.S. will protect the value of the U.S. Dollar given the size of the U.S. fiscal deficit. China is the largest holder of U.S. government debt, and it wants to protect the value of these investments. Fed Chairman Bernanke is also expected to chime in at the meeting with his explanation on how the Fed is prepared to keep inflation at bay. The meeting is not expected to be one-sided as the U.S. wants answers on what China expects to do to maintain a flexible Yuan. Discussions this week could have effects on Treasury markets and the Dollar especially if talk of a new super-currency gets introduced.
Treasuries are feeling pressure overnight. Sellers are moving money into equities in an effort to capture a better return on their investments. The biggest factor for the decline, however, is traders taking protection ahead of the Treasuries $115 billion government debt auction this week. Today will feature the initial offering of $6 billion of 20-year TIPS.
Stock Index futures are indicating a higher opening this morning. Better-than-expected earnings have been the most influential factor driving equity prices higher. Today’s key earnings reports will be Honeywell and Verizon. Much of the rally has been led by the NASDAQ as technology stocks have been on fire despite poor reports from Microsoft and Amazon last week.
Although equity indices have reached their highest levels of the year, they have hit technically overbought levels. In addition, some traders feel that under invested portfolio managers have been chasing this market higher which makes it vulnerable to a correction if the continuous flow of new money begins to subside. This could make the markets vulnerable to a sizeable correction this week.
Overall, stronger stocks, higher crude oil and the weaker Dollar are all signs that the global recession may be abating. Stocks and commodities are up on increased demand for risk and the U.S. Dollar is down on less demand for safety.
Last week it was reported that German Consumer Confidence rose for the third month while climbing to a 14 month high. This news is helping the September Euro gain on the Dollar. There are also signs coming out of Europe that credit quality may be improving.
The bullish move in the equity markets last week may be signaling a global economic recovery that will lead to increased demand for crude oil. This is helping to boost prices this morning despite the fear that increased gasoline inventories will limit these gains.
Another sign of an impending economic recovery is the sharp rise in industrial metals. Last week September Copper hit a new high for the year and is expected to open higher this morning. The weaker Dollar is also leading to increased demand for precious metals. August Gold is up over $5.00 this morning.
Improving weather conditions are expected to continue to limit gains in November Soybeans and December Corn and may even lead to additional selling pressure this morning. Soybeans in particular may feel pressure if China decides to lower prices at its planned auction. December Wheat traders not only have to worry about the increasing size of inventory but also about the possibility of new Federal regulations limiting the size of speculative positions.
The weaker Dollar is helping to boost the prices of commodities in the softs complex. September Cocoa and Coffee are benefitting from the falling Dollar. Cocoa is also attracting buyers because of the possibility of lower production. October Sugar is up on decreased production and increased demand from India. December Cotton fell sharply last week and could fall further because of a bearish technical formation and decreased demand.
