How Bank “Stress Test Day” Is Affecting Futures

Today is “Stress Test Day”. The 19 major banks analyzed by the Fed will receive the preliminary results of the recent stress tests performed by the top bank. These results will let the banks know what they need to do to achieve stability and where they are at risk. Some will be told they need capital now. Others will be informed of future situations where they would need to shore up capital requirements.

Today only preliminary results will be released with the actual results coming out on May 4. Of utmost importance is secrecy at this time. The Obama Administration does not want the release of these preliminary reports leaked in order to prevent excessive speculation or a run on a bank.

This 10-day period before the release of the actual numbers is to prevent a shock to the banking system. Of course speculation over who is sound and who is in trouble may plague the markets from now until May 4, but that is why we have markets. There seems to always be someone willing to take the risk.

If the numbers are too good then no one will believe the Fed. If the numbers come out bad then investors may head for the hills. Either way the next 10 days are likely to be some of the most volatile we’ve seen since the fall of 2008. There is likely to be speculation on both sides of the market. At times the herd will chase the good bank stocks and repel the bad bank stocks. The only thing that is certain is that no one will know the exact results from the stress tests until May 4. Any moves that take place before then will be all speculation.

In pre-market trading, good results from Ford (NYSE:F) helped spike the stock indices higher. Whether they are able to hold gains is the question as the release of the stress test preliminary results may trigger choppy, two-sided trading. The S&P 500 is range bound with support at 823.00 and resistance at 875.00.

The June Treasury Bonds and Notes are indicating that interest rates are continuing to creep a little higher. Yields on 10-year Notes and 30-year Bonds are at their highest levels since the Fed announced its buyback program on March 18. Treasuries are falling as investors await news from the Fed on how much money it intends to raise through its next multi-year auction. It looks as if investors will be asking for higher yields at these auctions.

The U.S. Dollar is trading mixed. All major currency futures are trading higher with the exception of the June British Pound.

June Euro futures are up on the news that German business confidence rose from 26 year lows. This is a sign that government stimulus and interest rate cuts are working. Even with the better numbers the European Central Bank is still expected to cut interest rates to 1% and announce a plan to purchase assets. Speculators are now betting on an economic recovery by late 2009 on the belief that the worst may be over.

June British Pounds are feeling pressure today following the release of a report showing that the economy had contracted 1.9%. This negative news comes two days after the government announced a budget deficit of close to 90 billion pounds. Both pieces of news indicate that the Bank of England may have to get more aggressive in its efforts to prevent the recession from worsening.

The June Canadian Dollar is trading higher. Yesterday the Bank of Canada backed off from implementing an aggressive plan to stimulate the economy. The BoC wants to wait until it can see the effect of the last interest rate cut on the economy. On April 21 the BoC cut its benchmark interest rate to 25 basis points. The new plan which involves quantitative easing or the printing of money is considered risky because if applied incorrectly can trigger inflation.

June Gold broke out to the upside over 902.10 and has quietly rallied almost $50 from the recent lows at 865.00. The news that China has been hoarding gold for several years helped boost prices on Thursday. Prices could remain relatively high because of the release of the preliminary stress test results. Speculators may be buying gold in anticipation of major banking problems. A break in the equity markets may also be sending money to precious metals in reallocation plays.

June Crude Oil is in a downtrend but moving slightly higher this morning along with equities. U.S. crude supplies are at their highest level in 19 years. The recession continues to keep demand low. Speculators are supporting this market because the fundamentals are showing no reason to be long.

Longer-term traders have to be excited about the prospects of a bull market in soybeans this growing season. Prior to the beginning of the planting season supplies were low. Recently China has been using stimulus money to stockpile U.S. soybeans. This has led to a sharp decline in U.S. inventory. Any weather problems this growing season could send prices sharply higher.

Cotton is likely to piggy-back the soybean market. China has been a light buyer of U.S. cotton and inventories are still high but there are going to be fewer acres planted this season. This means that any crop damaging weather problems will be bullish for cotton prices.

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