The Bigger Picture and Some Intermarket Analysis

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The Bigger Picture and Some Intermarket Analysis

Post  harpal1980 on Mon Aug 17, 2009 2:37 am

Economic data was the talk of the town last week, as the Fed released its widely watched interest rate decision and Europe showed surprisingly good GDP results. The week continued on Last Friday’s momentum and dropped despite improving employment data. Even though the first two trading days were characterized by profit taking, prior to the Fed’s rate decision, the market managed to hold above critical support levels.

On Wednesday the Fed released its awaited decision, leaving its fund rate at a low of 0.25%. Even though a “no change” release, was expected by investors, eyes focused on the Fed’s comments, regarding their future monetary policy. According to recent economic data the U.S economy is now showing signs of improvement, but consumer spending is still in dire straits. Analysts now fear that the amount of money in the system, together with such a high deficit could spark inflationary pressures. This has caused the Fed to purchase assets at the longer end of the curve to bring down market expectations. According to the recent comments the Fed intends to keep its rates at low levels for an extended period of time and hinted that monetary easing through interest rates might have now come to an end. Bernanke touched on inflation in his comments stating that while oil prices have climbed, inflation should be countered by the current slowdown, which should ease the pressure.

“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

From a technical point of view crude oil has increased dramatically due to a low Dollar, but has now encountered strong resistance at its 200 weekly moving average. Despite the strong increase over the last couple of months, dying momentum could spark equity buying, especially as futures are pricing in only a minor change in the near future.

Light Crude Oil

As stated above, the Fed eased up on its asset program and mentioned that it is going to continue purchasing only $1.25 trillion in mortgage-backed securities and other debts from housing giants. Even though the Fed’s decision sparked an intraday rally on Wednesday, Friday’s CPI result depressed investor’s confidence, driving the indices back lower.

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