Futures Point To A Lower Open

4/28/2005
 

INTEREST RATES

While the Treasury market saw some minor liquidation pressure in the wake of an auction yesterday, it is impressive that prices have managed to remain within striking distance of the recent highs, in the wake of steep declines in energy prices. Apparently players think that lower oil prices are not an instant stimulus to the economy, or the market was simply captivated by the much weaker than expected US durable goods report. We also think that the market was looking ahead to a sharp increase in US initial claims today or a GDP number that shows a slower US growth pattern.

STOCK INDICES

The bulls have to wonder what it will take to improve sentiment, as sharply lower oil prices were overshadowed by a much softer than expected US durable goods report. While the market did see some buying and a higher close yesterday, the rally wasn't the type that hints at an ongoing wave of buying is ahead. While a number of earnings reports were positive yesterday, the market did see some disappointing action from some consumer cyclical issues and that underscores ongoing economic anxiety.

DOW
While the June Dow did manage to rise above the prior days close in the action yesterday, the market still appears to be fighting a tide of overhead resistance. It would almost seem like the market needs to be convinced that oil prices are indeed going to stay down long enough for the lower prices to trickle through to the ultimate consumer. In fact, until the benefit from lower oil is dominating the headlines it would seem that stocks are hesitant to factor the windfall into stock prices. We also think that the slack durable goods reading yesterday, hits right at the heart of the bull case in the Dow stocks and therefore, the market will need to see a countervailing GDP reading this morning to claw out more minor gains. For the action today, we expect to see hard fought but limited gains. However, if the June Dow fails to hold above 10,161 in the first hour of trade today, that could derail the positive attitude present yesterday afternoon.

S&P
One might classify the action yesterday in the S&P as a classic reversal, as the market made an aggressive downward bid but then rejected the weakness and roared back into the close. Therefore, the market could be expected to continue on an upward track, in the event that oil prices slide further and the US GDP comes in at or above expectations. In general the market seems to have decided that the April lows were too cheap and that the dismal macro economic outlook factored into prices around this month's lows, was unwarranted. However, in order to maintain a positive tilt, the June S&P will have to avoid a slide back below the critical pivot point of 1152.70 in the first hour of trade today.

FOREIGN EXCHANGE

US DOLLAR
The Dollar continues to maintain a slightly positive track on the charts and we suspect that the Greenback is being supported by sharp declines in oil prices. In fact, it would seem that the sharp slide in oil prices helped the Dollar get past a potentially undermining durable goods reading. Over the last year, the trade seems to generally accept the view that the US economy is at greater risk under high oil prices than other economies and therefore it is not surprising that the Dollar was supported by the energy market action Wednesday. Overnight the Press floated a prediction from a Harvard Professor that the Chinese currency was undervalued by as much as 35% and that could actually be an undermine of the US Dollar. However, even with the expectation for the US 1st quarter GDP figures to be below the prior quarter's growth, the world still has to give the US economy credit for a "comparatively" strong US growth rate! In other words, even if the US growth rate is slowing from levels seen in 2004, the US still seems to hold a macro economic edge, especially if the drag of high oil prices is reduced. In short, the Dollar ignores Chinese currency talk and continues to grind upward off a slight improvement in US macro conditions. More gains are possible but the underside of the early April consolidation should present the Dollar with significant resistance up around 84.38.

EURO
While the June Euro has a double bottom support point at 129.20, the pattern of prices is down and the market has little in the way of solid support until 128.93. In order for the Euro to throw off weak selling pressure, the US GDP will have to come in below +3.4%. In the event that oil prices continue to slide and the US numbers are at or above expectations, it might be possible for the Euro to fall to even lower support down around 128.41. Cushioning the Euro this morning are reports of a slightly better than expected German jobless reading but the trade thinks that the better results were mostly derived because of seasonal influences. With the German government expecting even more seasonal improvements in the coming two months, we would expect the Euro to be able to hold up above the February and April lows. In the near term, the path of least resistance is for slightly lower action ahead.

YEN
Apparently the BOJ has floated some slightly upbeat assessments overnight and with the previously discussed view, that the Yuan is 35% undervalued, we can understand the slight upward probe in the early action. However, we are not sure that the Yuan influence, the upbeat dialogue and lower oil prices are enough to force an upside breakout above the recent 95.20 high. Overall we suspect that the trend in the yen is up, and that over the coming two weeks, the Yen will see an upside breakout and a return to the February and March trading range of 95.00 to 97.00.

SWISS
The pattern of lower highs and lower lows continues and without a patently disappointing US GDP reading this morning, we suspect that the Swiss will continue to slide back toward the early April consolidation lows around 83.00. To turn the trend around in the Swiss, the June contract would have to manage a rally back above the 84.60 pivot point.

BRITISH POUND
The Pound appears to have rejected the spike low attempts of the last two sessions, but a track below channel support of 189.20 could signal a failure. While we remain mostly positive toward the Pound, we get the sense that the market needs to probe lower levels, before a distinct trend is manifest. Some traders think that the short term trend is down until the June Pound manages a rise above 190.53.

CANADIAN DOLLAR
The Canadian has made yet another negative trade on the charts overnight and we are getting the sense that the fear of an adjustment in the Yuan is serving to push the Canadian lower. Certainly renewed strength in the US Dollar is contributing to the weakness in the Canadian, but we don't get the sense that a punishing washout is ahead in the Canadian. However, a close below 80.00 could mean a retest of the February lows.

METALS

OVERNIGHT
London Gold Fix $432.75 -1.45 LME COPPER STOCKS 59,825 metric tons -200 tons COMEX Gold stocks 6.046 ml oz +62 oz COMEX SILVER stocks 103.5 ml Unchanged

GOLD
Concentrated selling was seen across the board in the metals on Wednesday, with the selling partly fostered by a higher Dollar, but there also seemed to be a negative or deflationary tone thrown off by the weak US numbers. We also suspect that profit taking by the funds caught the market in a vulnerable position and that escalated the slide. Some traders correlated the decline in gold, with the decline in energy prices but we suspect that the steep energy price slide might have actually diffused the deflationary selling in the metals, as sharply lower oil prices should remove some of the drag on the world economy.

SILVER
The silver market fell in sync with gold and also seemed to come under selling pressure from the industrial metals sector. While July silver managed to respect the pattern of higher lows on the charts, it was clear that soft US economic numbers, combined with fund selling to push silver back to the lowest level in seven sessions. In our opinion, the funds moved out of silver and possibly moved into soft commodities.

PLATINUM
The platinum market extended the downside extension overnight but has managed to regain the prior day's low. Talk of a new pollution control system in Europe that uses palladium instead of platinum, certainly undermined platinum and with the overall metals liquidation also underway, the selling pressure in platinum became rather intense. Furthermore, as we recently pointed out, the platinum market might have had the largest spec and fund long positioning in 4-5 years around the highs this week.

COPPER
While the copper market forged an aggressive washout move yesterday, the market did manage to forge a modest recovery bounce and has basically held around the prior days closing levels into the US opening today. Chinese copper futures were down overnight showing that Asian copper players are following US action, instead of leading the market. If demand remains strong in Asian, one would expected to see stepped up buying interest on the recent price decline but so far none has been documented.

CRUDE COMPLEX

The idea that oil inventories were rebuilding, was already at work yesterday morning prior to the weekly inventory report, as the market opened on a soft note on Wednesday morning. However, in the wake of moderately large increases in both API and EIA crude-oil stocks, the market saw intensified selling pressure and eventually saw a rout of the bull camp. In fact, because the gasoline stock declines were minimal, the crude stock information dominated the trade.

NATURAL GAS
With weather only mildly supportive, crude oil temporarily removing any support from comparative BTU pricing and critical support levels violated on the charts, we can't argue against a continuation of the downside. In fact, under another wholesale spec washout in crude oil, June natural gas could easily slide down to the $6.50 level. We sometimes forget how fast natural gas prices can rally and therefore it is also easy to forget how fast prices can decline.