Market Insider

Published: Tuesday, 10 Nov 2009 | 1:49 AM ET

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It's "risk on" in global markets, a trend traders say could help keep stocks heading higher for now.

Henny Ray Abrams / AP PHOTOS

The Dow Monday jumped to a 13-month high, as stocks and commodities rallied and the dollar skidded. The rally was prompted by a pledge from G-20 finance ministers over the weekend to continue stimulus programs, a signal to markets that rates will stay low and funds flow freely for some time. This follows the Fed's reaffirmation last week that it will keep rates low for an "extended" time.

"It's like the G-20 put out a communiqué that says 'sell the dollar,'" said Marc Chandler, chief currency strategist at Brown Brothers Harriman. The dollar has slumped in the low rate environment, and at the same time investors have run into riskier assets, like stocks and commodities.

"I think it does go for a little longer. The pull backs have been very shallow. I think there's a green light to do what the markets wanted to do -- not just in the dollar but by stocks, by commodities, by emerging markets, and gold is at a new record high," Chandler said.

The Dow jumped 203 points to 10,226, while the S&P 500 was up 23 at 1093. The stocks that did best were those that thrive in the risk trade --- the financials, up 3.6 percent; the materials, up 3.2 percent and the industrials, up 2.5 percent.

"It's a very thin day, and that leads to greater volatility," said Pete McCorry, a trader with Keefe Bruyette. McCorry said stocks Monday got a lift from the idea that rates will be kept low for some time. But he said the market could trade back and forth in a range as investors attempt to judge the sustainability of the recovery in each economic headline.

There is not much data of note until Thursday's weekly jobless claims. On Tuesday, there is a small business NFIB survey at 7:30 a.m. There is also an auction of  $25 billion in 10-year notes at 1 p.m. Five Fed officials are also speaking Tuesday, as is FDIC chair Sheila Bair.

Jordan Kotick, Barclays Capital global head of technical strategy, said the recent selling in the market was a typical month-end move, like those seen in the past five months. He expects the S&P to reach 1200 by year end.

"You've seen a counter trend move. Stocks go lower the dollar catches a bid. It's just month end corrective positioning."

"We still think stocks will get a bid in to the end of the year, and risk is doing ok," he said. "November and December are two of the best months for the stock market, and you've just come through September and October, two of the hardest months. You don't get a countertrend move at the end of the year."

He expects the market to peak and then correct in the first quarter. "We ideally would see a 10 to 15 percent correction," he said.

Dollar Dilemma

Traders, in the stock and bond markets, were watching the dollar Monday and for the most part, they expect it to continue to fall for now.

The greenback Monday lost 0.9 percent against the euro, to a level of $1.4988. It had crossed the $1.50 level during the trading day.

"We had our correction on the downside in the euro last week. We bottomed on Nov. 3 at about $1.4625," said Chandler. "...We're looking at $1.51 this week. I'm thinking $1.53 is the next interesting point on the upside." Chandler said while government officials have set the stage for further decline, he doubts the dollar will return to its all time low against the euro of $1.60.

"Last week messages from the Fed, European Central Bank and Bank of England and this weekend the G-20 was that they're still playing the music and we'll continue to dance," he said.

The IMF, echoing what traders have been saying for months, said in a report Nov. 7 that low U.S. interest rates may have turned the dollar into a "carry trade" currency, and that it is contributing to upward pressure on the euro and emerging economy currencies.

The IMF also said the dollar was still on the "strong side."

"Those that say it is weak should think about that idea more closely," said Tony Crescenzi, senior market strategist at Pimco. "If it's such a weak currency, how are we able to purchase $2 trillion of goods in a year? It's not so weak that it is impeding our ability to purchase goods aboard. Some would argue the dollar is undervalued against the euro but overvalued against Asian currencies."

Crescenzi said that the dollar's role in a "carry trade," however, comes with potential problems longer term. "The trades become more entrenched and embedded and it creates more danger to the stability of the system," he said.

Treasurys on Tap

Traders expect the 10-year auction Tuesday to go smoothly but Crescenzi said it is not likely to be mirror Monday's 3-year auction. The 3-year drew a record number of indirect bidders, a bidding group that includes foreign central banks.

"The bid to cover ratio was the best since November, 1990. The size of the auction was large so when we look at total bids and the dollar amounts, it's very large. The short end is still the favorite sector with the market, so it's telling us more of what we already know," said Crescenzi.

"The 10-year will include periods where the Fed will be raising interest rates so the 10-year has to include the exit," he said. "There is more competition for capital of late. Equities are performing better. It seems the Fed has green lighted the risk asset rally so that entails more risk for Treasurys as an asset class and for longer dated maturities in the near term," he said.

Inflation Fear

The sharp move in gold, which set another record Monday, has helped fire up inflation concerns. Investors Monday were also watching the spread between 10-year inflation protected securities and Treasurys move to the widest level in more than a year.

Crescenzi said there are some technical reasons behind the move but it still bears watching. "I think when the three factors move together -- gold, TIPS and he dollar and also, risk asset prices are rising, it gets a little bit more difficult to ignore the embedded message that might be there,"  he said.

Gold rose a half percent to finish at $1100.80, a new Comex high. Kotick said he would not be surprised to see the metal climb to $1500 per troy ounce.

"We've been bullish forever. We're still bullish. Gold does price something in, but you tend not to know until after the fact. It prices in chaos, and it prices in inflation. Gold has been rallying for nine years in a row. Inflation, deflation, lower stocks, higher stocks. This is the most dominant trend in the last decade and people are still fighting it," said Kotick.

What Else to Watch

Fed Gov. Daniel Tarullo speaks in New York City at 3:30 p.m. at the Institute of International Bankers. Bair speaks at the same event at 1 p.m.

San Francisco Fed President Janet Yellen speaks on the economy at 10 a.m., while Atlanta Fed President Dennis Lockhart speaks on emerging trends in real estate at 9:15 a.m. Boston Fed President Eric Rosengren speaks on the economy in London at 11:15 a.m. Dallas Fed President Richard Fisher speaks on the economy in Austin at 7:30 p.m.

Activision Blizzard's "Call of Duty: Modern Warfare 2" is released Tuesday and is expected to be the most popular game of the year .

There are also a few earnings, including Tyco

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