Forex Signals: Financial markets began the week with healthy risk appetite

S&P 500 (Sep 11) INTRADAY

Review Financial markets began the week with healthy risk appetite as global equity markets posted substantial and broad based gains yesterday. However, volumes were light due to a UK bank holiday and a low key New York session in the wake of hurricane Irene. The financial sector lead the gains with news of the merger of two Greek banks and that BoA are selling a large stake in China Construction Bank. Personal Spending data from the US helped fuel the upside with a better than expected +0.8% growth in July suggesting that economic activity in the US may be back on the rise and positive comments from Merkel on enhancing the EFSF spurred the E-Mini S&P to close on their highs up 2.81% at 1208.75. Crucially, this was above the key resistance at 1206.75 and was the highest close since the 4th August.

Strategy Equities have drifted lower this morning mainly due to an FT article slightly eroding yesterday?s positive sentiment. There is concern that some of the French banks have been unrealistic in the amount they have written down the value of their Greek debt holdings and the financial sector has retraced some of yesterday?s steep upside. However, we feel that generally news flow is light and naturally markets are drifting off the highs from yesterday. We feel the underlying positive sentiment is still present and we look towards this afternoon?s US Consumer Confidence number to instigate more pronounced market activity. We remain with a long bias and have an entry point at the pivot level support at 1196.50

Alternative Scenario Worse than expected US Consumer Confidence may accelerate the profit talking further. A break below Thursday?s high at 1188.50 may lead to a test of support at 1176.75

EUR/USD INTRADAY

Review EURUSD touched onto an eight week high yesterday breaking the 27th July high at 1.4536 to top out at 1.4549 as risk appetite lead to general USD weakness. News of the merger of two Greek banks, positive comments from Merkel on the expansion of the ESFS and better than expected Personal Spending data from the US helped fuel the bid tone, however volumes were light due to a UK bank holiday and New York still recovering from hurricane Irene. Despite strong risk appetite, EURUSD failed to make strong gains and fell short of reaching technical resistance provided by the 4th July high at 1.4578 but nevertheless still posted its highest close since the 5th July at 1.4549.

Strategy We have been too bullish on the Euro so far this morning. We overestimated the influence that general positive market sentiment can have on this currency pair in these conditions. EURUSD has sold off 150 pips since 07.00BST despite there being a lack of fresh news flow. An FT article as lead to concern that some of the French banks have been unrealistic in the amount they have written down the value of their Greek debt holdings and the financial sector has retraced some of yesterday?s steep upside as a result. Generally, EURUSD has been in a large range for that last four months and the currency pair reached some important long term resistance in yesterday?s session. We feel that investors are a long way from getting bullish on the Euro and therefore profit taking has ensued from these lofty levels this morning even though we have seen subdued activity in most other markets. The ECB has been active in buying further 10yr Italian debt this morning and this couple with general risk appetite should contain the downside. We have a more conservative long entry at 1.4328 for this afternoon.

Alternative Scenario Worse than expected US Consumer Confidence may erode investor sentiment further which may lead to further downside for EURUSD to test support at 19th August low at 1.4259

US 10Y T-Note (Sep 11) INTRADAY

Review Bernanke failed to commit to much at Jackson Hole on Friday as initially the Treasuries rallied in a flight to quality on the absence of easing measures being mentioned. However, as time passes his non-commitment satisfied parties on both sides of the EU argument. In effect Bernanke pulled a Greenspan, who was quoted in 1987 in the WSJ saying ??Since I?ve become a central banker, I?ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said?? .

Strategy Since the aggressive sell off last Wednesday Treasuries have oscillated an now trade in the middle of the range set since August 10th. Now Bernanke is out the way we expect on the negative angle eyes to look back to Europe where there is concern that some of the French banks have been unrealistic in the amount they have written down the value of their Greek debt holdings. We do expect volumes to be light however and in respect to the recent rally in risk we continue to have a short bias on treasuries which still trade close to the recent record highs. We look for a short at the support seen on August 22nd, 130.080 with a tight stop. US consumer confidence this afternoon may provide initial support (recently all confidence figures have missed the mark) which could allow our entry to be reached.

Alternative Scenario Should negative sentiment return to the markets, most likely to emanate from Europe, we may see T-Notes once again become the asset of choice despite the low yields. Expect Friday?s high of 130.260 to be tested.

NB - CQG has rolled to December but volume for now remains greater on the September contract.

Crude Oil (Oct 11) INTRADAY

Review Crude prices made solid gains yesterday as improved investor appetite lead to further asset re-allocation fuelling the upside for riskier assets. The main move for crude came following the better than expected US Personal Spending data at 13.30BST which came in at +0.8% compared to the +0.3% that was expected. This lead to investors to be more optimistic about the health of the US economy and whilst the US is the second largest consumer of oil, this in turn lead to a strong rally in crude prices to reflect the increased demand outlook. Crude broke above key resistance at $86.58 which was last week?s double top and rallied into the close to finish up 2.23% at $87.72

Strategy Crude prices have drifted off their overnight highs this morning as the US dollar has regained some of its losses against the riskier currencies. There hasn?t been any significant new information on the news wires and our main focus is now on the US Consumer Confidence data due at 15.00BST. We continue with a positive outlook for this afternoon and expect the risk appetite to continue to support commodity prices. We have a long entry which has already worked well once in the last hour at last week?s double top at $86.56 looking for a push back to the overnight highs.

Alternative Scenario Worse than expected US Consumer Confidence numbers may lead to a further retracement of yesterday?s gains and a break below support at $85.96 may lead to a test of support at $84.55.