Pre-open eMini SP 500 Morning Report 2.19.10

This is a guest post from Precision Capital Management

The Precise Take – Volatility overnight on Fed news and ahead of opex

Leaders Analysis:  As we noted intraday yesterday, the leaders have been giving conflicting signals, which should be resolved after opex today and with the big news from the Fed behind us.  The US Dollar Index rallied, as would be expected on the news overnight, to its next major long term pivot resistance area, from 81.11 to 81.42, with the 50% retracement of the entire down leg that commenced March 4, just above at 81.90.  We expect it post an interim top if and when it can get to this level.  As we write, CPI came in deflationary, and it could be we already have an interim top.  The other leaders are not confirming Dollar strength, with gold hanging on, 30 Year T-Bond futures only marginally up and the EuroYen the strongest, having only barely budged since yesterday.  All in all, the leaders are equities neutral.

Medium Term Analysis:  The topic dujour is the Fed announcement regarding changes to its primary credit facility, namely a 25 bp rate hike and minimization of the term of the facility from 28 days to overnight.  The former was expected as it was explicitly referenced in the last FOMC minutes, though the timing was not mentioned, and the latter should have been expected.  The facility was designed to be for emergency purposes only, but has come to be used for carry purposes instead.  Accordingly, we can expect the $14.3 billion in current borrowings to be wound down over the coming month, which is not a critical amount, but still a material liquidity drain.  The real drain has been the wind down of QE and, should the Fed raise the interest on excess reserves (IOER), we can expect a much more sustained equities-bearish reaction.  So, is this the end of the February rally?  A maxim that has served us well is that…

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