Futures Point To A Lower Open
10/25/2004
Â
INTEREST RATES
The Treasury market isn’t confused about the
current economic condition and with energy prices ramping up to an even higher
level, it would seem that the odds of an energy shock are increasing steadily.
Certainly the market expects the Fed to hold off on the next rate hike,
especially since crude oil prices have managed a $5-$6 rally since the last Fed
meeting. Greenspan indicated that moderately higher energy prices could create a
significant problem for the US economy and therefore Treasury prices might be
forced to factor in a return to recession.
STOCK INDICES
In addition to the weekend surge in energy
prices, the equity market is also confronted with news of a bad earthquake in
Japan. Apparently a shipping strike in Norway has served to crimp some oil
supply flow and with a more significant shipping strike threatened in that
country, the energy complex is fearful that a 3 million barrel per day OPEC
producer might see major export reductions ahead. The outlook for the US economy
was already undermined even without oil prices rising to a more extreme level.
DOW
One can look for the silver lining in the current condition but we doubt that
bullish developments will be given that much attention. With the Dow chart under
massive gap and go pressure, and the August lows now resistance, we suspect that
the market is headed down to 9,500. Initial support might be seen at 9,627 but
we suspect that 9,500 might be seen by the middle of the week. Even lower
support might be tested at 9,250 but only if panic really seizes control.
S&P
Only fleeting support will be found at last weeks low of 1093.80 and the
ultimate downside target is seen at 1082. Even though the funds were already net
short 13,000 contracts, the small specs were still net long 21,600 contracts and
therefore, the December S&P contract has considerable selling potential before
the technicals are even considered oversold. Right now, the market has to prove
it isn’t about to recreate another October debacle.
FOREIGN EXCHANGE
US DOLLAR
The good news is that US exports are becoming more
attractive, while the bad news is that the US trade and budget deficits look to
explode in the near term. We have to think that the US economy is poised to be
thrown back toward recession and that a massive exodus of capital could make
things significantly worse. So far, Washington has moved to give big oil another
pass on failing to provide adequate refining capacity in the US and at the same
time moved to provide funding for the extension of the Alaskan pipeline and both
of those measures might serve to lower energy prices a decade from now. In the
mean time, the US Fed continues to suggest that even higher interest rates are
needed, but the Fed did manage to temper their stance a little last week. With
the US election directly ahead and concerns of terrorism also rising into the
election, we can understand investors fleeing the Dollar aggressively. Near term
downside targeting in the Dollar is now seen at 83.05 and potentially 80.00 if
we see an overall debacle.
EURO
The Euro continues to get support from money fleeing
the Dollar, but it should also be noted that a much stronger than expected
German economic survey puts the Euro zone economy on a higher perch than the US
economy. Sources are now saying that ultra high Euro exchange rates are allowing
the euro zone to discount some of the rise in energy prices. Therefore, there
would seem to be a fundamental reason behind the euro rally. Near term upside
targeting in the Euro comes in off the weekly chart at 128.46.
YEN
Even in the face of a severe earthquake and serious
concerns for the rising cost of fuel in Japan, the Yen has managed to stay
strong. We suspect that some repatriation is helping the Yen and until
resistance at 93.78 is encountered, we see little to stop the rally.
SWISS
There should be plenty of flight to quality in store
for the Swiss and given the gap higher action overnight, one might expect an
aggressive run toward the 1994/1995 high consolidation up around 85 to 88!
BRITISH POUND
If it isn’t the Dollar, it is going to rally today
and the Pound fits that category. Near term targeting in the Pound is seen off
the weekly chart up at 184.30 and then again at 186.64. In fact, numbers don’t
even matter in the near term, as the current run is mostly emotion.
CANADIAN DOLLAR
So far, growing economic concerns toward the US
haven’t undermined the Canadian. Next upside targeting in the Canadian comes in
at 82.55 on the weekly chart, but we wouldn’t be surprised to see a run to 84.39
in the coming weeks.
METALS
OVERNIGHT
London Gold Fix $429.00 +$6.60 LME COPPER
STOCKS 82,125 metric tons -850 tons COMEX Gold stocks 5.303 ml -482 oz COMEX
Silver stocks 105.0 ml Unchanged
GOLD
The combination of flight to quality and weak Dollar
buying joined together overnight to send gold rocketing higher. In addition to
concerns that the US economy was going to flounder off ultra high oil prices,
the gold market is also being fed higher off concerns that a Norwegian shipping
strike might shut down some badly needed oil supply flow. So far, the market
isn’t concerned with a deflationary condition arising out of the energy price
shock.
SILVER
The silver market reached the highest level since
April 13th and with the gold providing solid flight to quality direction, we
suspect that silver will nearly match the rise seen in gold. However, the silver
market will eventually be more vulnerable than gold, if the outlook for the
economy really deteriorates. The weekly COT report showed silver to have 83,000
contracts of spec and fund longs and that is only moderately below the record
spec and fund long of 97,000 contracts.
PLATINUM
The platinum market is poised to follow gold and
silver but is probably being held back because of the fear that extreme economic
conditions could serve to damped physical demand for platinum. As mentioned a
number of times last week, the platinum market is at a historically high price
and might be a little more susceptible to soft demand concerns. Furthermore, the
platinum market was also net spec long 2,600 contracts, which is overbought for
a thinly traded market.
COPPER
So far the copper market isn’t overly concerned
about the deteriorating macro economic outlook. It is possible that the
earthquake in Japan is seen as a potential source of demand but net/net we have
to think that the macro economic case is a slight negative. However, Chinese
copper prices were a little higher overnight off ideas of tight supply and that
should give the market enough bullish news to hold near the recent consolidation
highs.
CRUDE COMPLEX
Throughout last week the market saw a series of
minor production increases from OPEC but with concerns of a Norwegian shipping
strike surfacing over the weekend, the bias of the market continues to point
upward. While one might expect to see even more concern of global slowing and in
turn falling demand expectations, the market doesn’t seem to be ready to deflate
prices off slower demand. In fact, overnight crude prices rallied sharply
despite the economic uncertainty being thrown off by sharply lower equity prices
and a major earthquake in Japan.
NATURAL GAS
The natural gas market virtually exploded last week
and did so off indirect buying support from heating oil. The weekly COT report
showed natural gas to have a net spec long of 44,000 contracts and that is
significantly below the record posted in 1999, of slightly less than 80,000
contracts. According to recent calculations, the BTU price of natural gas is
pulling in close to crude oil, but as long as crude oil prices continue to rise
sharply, we doubt that cross over buyers will be discouraged from paying up for
natural gas.