▪ It is critical that this is more pronounced in the US and UK on the failure of supports that is not occurring as heavily in Europe as yet. Below key supports at December T-note 120-00/119-16 (March contract at 118-24/-08), the markets have tested more important supports at 119-00 in the December contract and in the 117-16 area in the March. Even more radical was the failure of December Gilt 119.00-118.70 (March contract equivalent of 117.40-.10), and have also now tested important supports at 117.00 in the December contract and the major 115.35 lead contract low (from back in July) in the March contract. Below those levels each of them can drop another couple of points.

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▪ The difference now is that it has more to do with the interplay between higher interest rates and the equity markets' attempt at continued resilience. In fact, equities strength might be self-limiting insofar as it triggers any further escalation of government bond yields and further strength in the US dollar. While we will return to their consideration below, with some of the most important US reports prior to tomorrow's FOMC interest rate decision and statement to be released shortly, a brief revisit to the key technical aspects is necessary. Similar to everything except the weak sister NIKKEI, DJIA has been trapped in a 250 point range for the past several weeks at the top of a 4,000 point rally. Typically this can only go on so long before the next strong trend ensues; especially as it is up against a particularly significant trend decision area at the 10,500 Tolerance of the major 10,300-350 resistance. However, due to that trend quietude and seasonal factors, volume is so light that unless it picks up on any push above 10,500 there is the potential for a false UP Break and subsequent failure. Previous we had been comparing the current technical structure to DJIA failure into 13,100 resistance in May of last year. Yet the extent of the current rally and very quiet sideways pattern stalled against 10,500 now make it feel quite a bit more like July 2007.

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▪ While somewhat better than expected German IFO (DEC) surveys have limited the equity market slippage after yesterday's selloff, the US Dollar Index remains commensurately stronger than any of weakness in stock markets. Whatever one may think about the potential for a true Carry Trade Crisis, there has undoubtedly been no small amount of borrowing cheap in the beleaguered buck that has driven the central banks rightful program of risk asset reflation.

▪ With due respect for the long-time “received wisdom”, outdated expectations that interest rate differentials drive currency trends is almost never the case. Think about it: who’s actually going to borrow in Europe at 1.00% and bring the money to the US at 0.50% even if the Fed does bump the rates. Sustained foreign exchange trends (as opposed to sort term blips) are always driven more so by investment and (more recently) trading flows.

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The US Dollar Index remains commensurately stronger than any of weakness in stock markets. While that US dollar strength is driven by different factors against the various other currencies, strength against Europe is a major key right now. And that also raises the question of whether the strength in various asset classes can be maintained if the real-world economic activity fails to catch up with the gains in asset prices?

As noted previous, key lower interim and major supports are DJIA 10,300-350 area and 10,100-10,000 range, with the equivalent S&P 500 levels in the 1,090-85 area and down at 1,070-65, respectively. Beyond that, other multi-asset class decisions remain consistent with the influence of better US economic data, yet with weak indications elsewhere. One of the key indications will be whether recently very weak government bond markets will see March T-note hold onto to late week gains back into the 117-24/-16 area, and even more critical whether March Gilt continues to hold back above the major 115.35 lead contract low (from back in July.)

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▪ That's the only conclusion one can draw from the mutual strength in the equities and US dollar, not to mention the weakness of the bond markets, Gold and Crude Oil. Either there has not been enough US dollar carry trade borrowing put into speculative equity positions to affect markets, or there is enough portfolio manager window dressing to fully offset it. Whatever one may think about equities' prospects, even the obvious triggers for potential bad reactions do not weigh on the markets.

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