Tuesday’s Futures Outlook: Euro And British Pound Surging To The Upside

Soaring Ten-Year Treasury Note Yields are indicating that traders are once again dumping government debt instruments in favor of higher yielding assets. With equity markets rallying while Treasuries are falling, money is clearly leaving “safer” investments and chasing yields elsewhere. The break in the June T-Notes and June T-Bonds is likely to accelerate following the release of housing data this morning which should indicate that the U.S. housing market is bottoming.

Pay close attention to the government debt yields as they will indicate the direction of investor sentiment. Falling yields indicate risk aversion while rising yields will show that investor appetite for risk is increasing. As trader appetite for risk grows, look for higher risk assets such as equities and most foreign currencies to rally.

This assessment could not be more evident than with the June British Pound this morning. News that the U.K. inflation rate dropped to a 15-month low in April under normal circumstances would have triggered a sell-off, however, traders chose to ignore this report overnight and instead decided to focus on the long side because of strength in the global stock markets in particular financial sector stocks.

Last week when traders preferred less risky assets, the British Pound felt downside pressure after Bank of England Governor Mervyn King said the economy would continue to remain sluggish and that the U.K. economic recovery would be labored. This week, traders have chosen to follow the lead of the equity markets and support the British Pound. Some traders are buying the Pound because of the strength in the banking sector. This comes as no surprise since the U.K. economy derives a substantial amount of its revenue from the financial sector.

Overnight the British Pound made a new high for the year despite a dismal outlook for the economy. Continue to trade the long side as long as the trend remains up and trader demand for more risky assets continues to grow.

The June Euro is also surging to the upside, driven mainly by expectations of a global economic recovery. Euro investors have all but forgotten about the bearish report from last Friday which showed a huge contraction in the Euro Zone economy. At this time it seems investors are taking a more forward looking approach to the market rather than dwelling on the negative reports based on dated economic conditions. The question that is being raised is are investors being too optimistic or are the analysts just bad at forecasting current economic conditions?

Overnight, the ZEW indicator of German economic sentiment was reported at 31. This number was up from 13 in April, but well above guesses of 20. This news helped send the June Euro sharply higher but still below last week’s closing price reversal top.

Traders are going to have to decide whether to sell against the trend because of the developing topping pattern or go with the trend in anticipation of better times ahead. This way of thinking is essentially what is going on in the market. The key is to follow the money rather than the news or a chart pattern. The money flow is going to dictate the market direction.

U.S. housing numbers just came out worse than expected. Not only did the economists miss on the number, but they also missed on the direction of the report. Just looking at the data it’s hard to believe that the equity markets will not turn bearish at some time today. Once again though, the clues will be scene in the yields. If June Bonds and June Notes start to rally then this would be a sign that investors are seeking safety again. This would mean money is going to leave higher risk assets just like it did last week.

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