Keystone's Nightcap 4-4-11 Markets Await Trichet Decision

Beads of sweat form on Trichet’s head.  The stagnant nature of today’s trade hints that markets are stumbling sideways waiting for Trichet’s appearance and potential rate hike on Thursday, or not.  The impact of Trichet’s decision is big.  If he moves forward with a hike, the euro will maintain buoyancy and the US equities rally will continue up thru SPX 1340.

If, however, Trichet balks, and perhaps this will manifest itself thru an orchestrated leak tomorrow or Wednesday, then the euro will sell off, dollar index will rise, and commodities and US equities will sell off.

No wonder we are stumbling sideways.  Trichet holds all the cards and when he hinted at a rate hike a month ago he had no idea how important the move would become.

China rate hike must be considered at any time as well.  If it does not occur over the next day or so then it may not occur until the week of 4/18/11.  The last hike was 2/8/11, 56 days ago.  Prior hikes occurred in October, December (Christmas), February (China New Years), so the pattern is…..April?  PBOC officials are committed to two more hikes by June so that creates a deadline and thus, a hike in April, now, and June, would keep their monthly pattern in place and satisfy their goals set in 2010.  Since no one is expecting or talking about a China rate hike, it would have a larger impact and a 50 basis point hike will be much more dramatic than 25.

So markets idle waiting for the above rate hike clarifications.  Even the absence of leaks from Trichet’s henchmen would be clear indication that he plans on going thru with the hike.  The big move would be to the downside if Trichet does not hike; if he hikes, most of that is already priced into the euro.

Semiconductors fell further today but the afternoon supplied a bounce and after hours, TXN announces a takeover of NSM so a big chip party is on tap for tomorrow’s session.

Copper remains weak and it is a leader. If semi’s feel the love tomorrow, copper is the only leg remaining for the bears to continue to stand on.

Complacency and lack of fear continues.  Also, light volume up sessions. Market bulls are in control but markets remain unstable.

SPX 1340 tiny gap needs a fill to close up the loose ends up top.  SPX now at 1333 resistance.  1337 tomorrow and the bulls will thrust upward; break 1329 and the bears will slash downward. 

Trichet reaches for another hankerchief as he wipes a few more beads of sweat from his brow.  He has to make a decision and the markets are waiting.

Two Outcomes:

Trichet balks=no rate hike=euro down=dollar index up=commodities down=equities down regardless of whether the SPX 1340 gap fill occurs or not.

Trichet raises rates as he said he would=euro maintains buoyancy although much of upside was priced in=dollar index flat and loses some more ground=commodities stay buoyant=equities fill that SPX 1340 gap and continue higher to test 1344 high.