Forex

Daily Forex Analysis (August 18, 2010)

Contributed by Finexo

By Finexo

Today saw the largest rally in over two weeks with US and European equities taking a sharp climb. Amid reports of negative sentiments in Germany, European indexed closed at highs, and after rising earlier in the session over 1.7%, US stocks closed up 1%. The boost in equity markets was in part due the rejected buyout of Potash Corp by BHP Billton for $38.6 billion. Following the news, shares of the largest producer of fertilizer rallied above BHP’s valuation bid. As stocks have been under pressure recently, today’s rallying may have been a relief rally.

Despite a report tomorrow that is expected to show a four week low in crude oil, the commodity rallied in tandem with Wall Street rising from $75 to $76.60, up 2%, and falling back to its current price of $75.60. Tomorrow’s report may show nervous sentiments among oil traders resulting from weak worldwide economic data.

Agricultural commodities remained stable today with wheat around $650, while corn and soybean were for the most part unchanged.

Gold held its position today at 1226.50 from $1227.5 yesterday. Its relative stability is a sign that traders are watching the market for new developments before taking more positions on gold.

The global economic forecast has become increasingly gloomy as US bond yields indicate very weak growth in the short- and medium-term. This suggests that we are entering a period which could have serious outcomes on the direction of equities. Reports of market sentiments and growth projections will take their toll on the health of stocks and commodities. If growth is weaker than the most pessimistic estimates, we could be in for an extremely weak period in the stock and commodities markets. On the other hand, if economic data takes a turn for the better, traders may dump the low yield bond trade and take their chances with riskier assets such as equities, commodities and higher yielding currencies. If either extreme should come to be, prepare for a highly volatile market.