Futures Point To A Lower Open

8/19/2004
 

INTEREST RATES

Yesterday the macro economic setup was bearish to Treasuries, as the stock market managed to rally for the 3rd session in a row and energy prices showed only moderate gains despite a sharp drop in US crude and gasoline inventories. Today it seems that the macro economic equation has turned completely around, with energy bordering on new highs and equity prices showing some weakness. However, the Treasury market will have a string of economic reports today, that it didn’t have yesterday.

STOCK INDICES

The stock market sits at a very important inflection point this morning. After forging an extremely impressive short covering bounce, the market seems to have added some of the gains Wednesday with fresh buying. While it seemed like the market initially vaulted higher on news of the potential Iraqi Peace deal, the market seemed to be lifted by a secondary buying wave in the early afternoon.

DOW
The action this week has been really impressive and it has the bears questioning their stance. However, fundamentally conditions are bearish and the bulls are “hoping” that things change. In other words, buyers are making a speculative leap of faith. One might consider buying August Dow in the money puts or calls, in order to make a bet on the Al-Sadr decision. Those options have 1 more day until expiration but these options appear to be a risk controlled way to be long or short, into what appears to be a major inflection point!

S&P
9 times out of 10 we would not buy this market following the type of rally already in place, especially since many of the classic fundamental issues are not bullish. In fact, we have to think that fading the recent rally is the mostly likely path to success. However, for stock market bears to prevail the energy complex will need to get a fresh reload on bullish factors, as the old factors have been dealt with! August S&P 1100 call options are only 250 points and the August 1090 puts are only 250 points and either of those options could be deep in the money before the close Friday! We favor the odds and the fundamentals and would lean toward the Aug 1090 puts.

FOREIGN EXCHANGE

US DOLLAR
So much for the Dollar strength, as it comes into the session today back down near a downside chart breakout. It seemed like the Dollar was coming back into favor yesterday but without fresh economic news and a Peace deal in Iraq the trade just won’t step into the long side of the Dollar in an aggressive fashion. Unfortunately we are not sure that the trade will step into an aggressive short position in the Dollar, unless the US economic numbers are really soft or the Iraqi situation explodes beyond Sadr City. Also helping to support the Dollar is a steady flow of soft international economic numbers. This morning the UK posted some disappointing retail sales readings. In our opinion, recent gains in the stock market are misguided, unless energy prices turn away from the upside. If energy prices don’t turn away from the upside, the US stock market should fall back and the US Dollar should track down to the July lows.

EURO
While the Euro has failed to extend the upward bias seen since the August low, it would seem that it is poised to at least retest the recent highs. However, the Euro continues to win by default and will have to have the Dollar stumble, in order to rise up to the July highs above 124.00 While we don’t feel comfortable being long the Euro from current levels, the path of least resistance is up and pushed into the market, one should probably be long as opposed to being short.

YEN
The bias in the Yen is up and with the Nikkei posting an impressive follow through rally overnight, there doesn’t seem to be a macro economic drag on the Yen. Therefore, we suspect that the yen is going to attempt to make the 92.00 level support instead of resistance.

SWISS
We suspect that the path of least resistance is up and until the Swiss gets to the triple top of 80.87, there wouldn’t seem to be much resistance.

BRITISH POUND
So far the Pound isn’t suffering much under the weight of the 0.4 decline in July retail sales. However, with the reading coming from July, it is clear that the UK economy continues to slow and that is a serious challenge to the uptrend pattern in the Pound. Fortunately for Pound bulls there is little competition in the currency markets and the market might simply discount the retail sales reading and leave the Pound in a slow uptrend pattern.

CANADIAN DOLLAR
The only trend in the currency markets continues to be the Canadian and as long as the US economic outlook doesn’t come under serious concern, we suspect that the Canadian will manage to grind out more gains ahead.

METALS

OVERNIGHT
London Gold Fix $406.30, +$3.10 LME COPPER STOCKS 110,675 mt tons -425 tonnes COMEX Gold stocks 4.71 ml +7,788 COMEX Silver stocks 111.9 ml -204,128

GOLD
Despite a lack of economic new and a steady to firmer Dollar, the gold market was able to carve out gains as early weakness once again failed to develop any substantial selling interest. The fear factor from the heightened terrorist threat and crude oil topping $47 continues to attract investor demand to precious metals. Persistently high energy prices will be damaging to world growth while also fanning inflation concerns.

SILVER
The silver market may have had a delayed reaction to Tuesday's positive economic data with Wednesday’s strong move, but there also looks to be more interest in trading silver against gold. December silver has much less upside resistance than gold and if the market can close over $7, a rally to $7.27 can not be ruled out. Support for Dec silver comes in at $6.765, $6.66 then $6.60 with close in resistance at $6.945.

PLATINUM
October platinum continued to break hard on Wednesday, but the one saving grace is that the metal did manage to hold above support at $850. However, that support seems tenuous since cash business was reported to be slow and fund traders look to be taking profits. Over night, a weaker Dollar looks to have attracted some buying to the metal.

COPPER
Copper prices firmed in London on relief that LME warehouse stocks actually fell slightly and did not see another huge rise. Therefore, Wednesday’s sell off looks to be a bit over done if LME stocks resume their declining trend. However, if Wednesday’s stock increase was not an anomaly and LME copper stocks continue to see a sustained rise in levels, the bulls loose a key bullish element that has been a major factor supporting higher copper prices.

CRUDE COMPLEX

While the crude oil market did manage to carve out another new contract high on Wednesday, we think that the performance was disappointing for the bull camp. In addition to the early upward tilt the market should have been able to roar higher in the wake of the weekly inventory reports, but instead the market mostly posted anemic gains. Certainly the news of a possible Peace plan in Iraq deflates the bull cause, but in looking at the big picture the bull case has taken a number of significant blows since Sunday's election in Venezuela.

NATURAL GAS
The down trend in natural gas continues and with the regular energy complex seeing many of the pillars of the bull case being taken away and cold weather returning to the Midwest we have to think that more losses are ahead. In fact, we suspect that natural gas is now primed to push the small spec long out of position. In our mind, the fundamentals are shifting so aggressively against the longs in natural gas that it might take another hurricane threat to avert more near term losses.