Tuesday’s Futures Outlook

After taking a one day breather, traders have aggressively returned to the markets with a strong appetite for higher yielding assets. Yesterday (Monday) was marked by light volume and profit-taking as investors seemed to “take a little off the top” of recently bullish markets.

Overnight action indicates that taking a break following a stressful two-week time period may have actually been beneficial as traders have returned this morning with a vengeance to drive stocks and commodities higher.

Some of today’s bullishness is coming from overseas as three major reports from the U.K. are indicating that the worst of the recession in that country may be over. U.K. manufacturing fell by less than economists forecast while house prices declined at a slower pace than estimated. The best news however was that U.K. retail sales rose.

The rise in U.K. retail sales is a welcomed sign as it indicates that the consumer may be loosening up their purse strings after several months of declines. The strong rise in the equity markets and the availability of credit is most likely causing consumers to become more optimistic over the prospects of a recovery in the economy.

The June British Pound rose sharply higher following the release of these three reports indicating more confidence in the U.K. economy. Investors as recently as yesterday were painting a gloomy picture for the economy as recent stepped-up quantitative easing activity by the Bank of England was sending a message that the economy had not yet bottomed. Today’s reports may send a message to the BoE that the economy may not be as bad after all.

Increased demand for more risky assets seems to be the developing theme for today. Although equity markets are only showing modest gains overnight, the inability to break these markets sharply lower yesterday is an indication that investors are buying on the dips.

If today’s equity markets can gain legs then we could be looking at a strong rally which could challenge last week’s highs. In other words, equity investors do not look like they are willing to give up this current rally despite calls for a top because of overbought conditions.

The return of demand for more risky assets is also reviving chatter of inflation returning. This is putting pressure on the Treasury markets this morning. Yesterday traders felt that T-bonds and T-notes were the places to be after two weeks of Treasury auctions flooded the financial markets with supply. In addition, news that the Fed would buy-back assets also drove traders to the long side of the Treasuries.

This morning however it looks as if longer-term investors took advantage of yesterday’s rally to add more shorts to their trading accounts.

Talk of the possibility of inflation is not only hurting June Bonds and June T-Notes this morning but also driving up demand for commodity futures contracts. The weaker Dollar is also adding to the bullishness in commodities as traders are beginning to anticipate an improvement in the economy will lead to greater demand for industrial metals, crude oil and food.

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