Overall Negative Market Tone On Issues With North Korea, OPEC

The tone of the markets is negative this morning as geopolitical events dominate the news. The major geopolitical events helping to drive equity and commodity markets lower are the North Korean underground nuclear bomb and missile tests. These events have been condemned worldwide and are the major focus of a United Nations emergency meeting. Greater trade sanctions on North Korea are expected. In a lesser event compared to nuclear tests, OPEC is meeting. Traders are reacting to the news that OPEC may leave production cuts unchanged despite the global recession.

Equity markets are called lower this morning as nervous investors are pulling money from equities because of geopolitical issues regarding North Korea and OPEC. Traders are more risk averse this morning and seeking shelter in lower yielding assets such as the Yen and U.S. Dollar. The global sell-off began in Japan which faces the greatest threat from North Korea. Investor uncertainty is expected to exist until the market receives direction from a new United Nation resolution condemning North Korea or until prices hit a level attractive to investors.

Despite closing flat to slightly better last week, stock indices have been acting top heavy and threatening to break through support. It looks as if the 875.00 area in the June S&P 500 has to be breeched to trigger sell stops.

The equity futures charts indicate the start of a possible double-top formation. Stocks have been forming a top since the release of the stress test results. Since this time, banks have been raising massive amounts of capital by selling stocks. This action seems to have removed tremendous amounts of capital which could have gone to the broader based markets. The lack of fresh money being invested into the equities seems to be the catalyst of the current weakness.

Treasuries are trading slightly better this morning in a weak asset allocation play. Some money has been leaving equities and moving into the safety of the Treasuries. The main issues this week for the Treasuries will be the increase in supply from another Treasury auction and the possibility of an increase in the Fed asset buy-back program.

Yields have been rising because of the huge amount of supply that has been injected into the market and the thought of more to come later this year. Also weighing on trader’s minds is the possibility of a reduction in the credit rating of U.S. Treasury debt. This action would force the Treasury to raise yields in an effort to attract new investment.

The U.S. Dollar which was tanked last week on speculation the credit rating for the U.S. would be lowered because of its increasing debt is surging this morning. Traders are seeking the safety of the Dollar following the geopolitical events in North Korea. The Dollar is gaining against all major currencies this morning as traders take profits from last week’s huge rise and take a wait-and-see attitude until conditions return to normal.

June Gold and July Silver are under pressure this morning because of the stronger Dollar. This represents profit-taking after the strong month-long rally and does not seem to be a threat to the developing uptrend at this time.

July Crude oil is facing pressure this morning and could break $60 this week. OPEC ministers are expected to keep production levels unchanged as they face supply and demand issues during the current worldwide recession.

The stronger Dollar is also having an impact on crude oil prices this morning. The main concern with OPEC is keeping prices stable at this time. If they cut production and prices skyrocket then any improvements in the global economy may be lost. OPEC has to be careful at this time not to set off more economic turmoil.

July Soybeans and July Corn are under pressure today because of the weaker Dollar. The supply and demand picture remains positive for July Soybeans. July Corn on the other hand remains “iffy”. Dry weather last week may have helped corn farmers get more crop into the ground and the broad-based rain may have helped the already planted crops improve. Corn will remain the most speculative market in the complex as traders still are not sure how much corn has been planted.

Overall the markets are nervous at this time because of the issues with North Korea and OPEC. This may just be an excuse for equity traders because the stock markets have not been behaving like a bull market at all this month. The movement to buy the Dollar this morning may be an excuse to take profits after last week’s huge break. It’s hard to believe that traders would shift their sentiment from Dollar bearish to Dollar bullish in just one weekend. The move in favor of the Dollar may only be a short-term event while the break in equities appears to be the start of an intermediate term break.

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