Futures Scare Off Weak GDP Numbers

INTEREST RATES

OVERNIGHT CHANGE to 4:15 AM: BONDS +1 — Asian stock markets were lower overnight
because they feared weak US third quarter preliminary GDP figures. Furthermore,
from the press coverage it would seem that the trade is forecasting a strong number
from GDP, but is in the hunt to “discover” weakening trends within that growth!
In other words, the trade is either taking the significant decline in confidence
readings as a sign that growth trends are deteriorating, or is simply unwilling
to consider a recovery trend. Therefore, it is possible that a +3.5% GDP number
doesn’t bury bonds, especially with the promise of supportive readings from the
US payroll report Friday morning.

STOCK INDICES

OVERNIGHT CHANGE to 4:15 AM: S&P +370,
NIKKEI -116, FTSE +58
— The stock market is
showing positive direction in early European and US action after posting some
weakness in Asia. We get the sense that many economists are looking for strong
readings from the GDP, but they seem to want to discount those readings. We have
to think that some light corrective action early in the week was attributed to
the massive decline in confidence readings and an overbought status in the stock
market.

FOREIGN EXCHANGE

DOLLAR: The dollar has gapped down overnight and that is not a good sign. As we
suggested yesterday, the current setup is the first real threat that the dollar
will move out of the three-month-old consolidation pattern. Some traders might
actually allow the dollar to decline to 106.86 before they consider it in a
downside breakout. It is a strange setup that a +3.5% GDP growth isn’t good
enough to support the dollar even though no other G7 country could hope to
match that reading. It is also possible that seeing such a strong reading
reduces the potential to see a US rate cut and that is really what the trade
wants. In other words, the market is looking for a strong favorite in the
recovery race and seeing the US without a direct rate cut threat leaves the US
economy no better off than the rest of the G7. If the dollar can’t rally on GDP,
then it might get a return lift off the US payrolls Friday morning. We would be
willing to buy the dollar down at 106.80, but those that got long at 107.10
might want to exit on an early rally today and reset at the lower 106.80 level.

EURO: The euro might slide slightly following the US GDP reading, with support
solid at 98.00 and resistance at 99.01. Overnight, the euro zone inflation
figures came out above target and are a slight barrier to lower rates. A Euro-12
October business climate survey showed a contraction and that could serve to
exaggerate the early response to the US GDP. Traders should look to be a seller
of a rally to 99.00.

YEN: We are actually surprised that the yen managed to remain higher overnight
given that the government seemed to step back a little in their commitment to
the bad loan bailout. However, we have to think that the yen will look beyond
their own issues to the US GDP and Chicago purchasing managers readings. If the
trade does look at the Japanese numbers today, they will see weakness in
construction spending (-5.8%) and housing starts (-5.1%). We think the yen can
be sold on a rally today to 81.91.

SWISS: The Swiss only manages to charge to the top of the
four-month consolidation
if the US GDP numbers disappoint and the December S&P falls below 873. We would
be an interested buying the Swiss if it declines to 67.25.

POUND: From the overnight reading on housing prices in the UK, it would seem
that the torrid pace of price gains is beginning to subside. If the trade takes
that as a sign that growth is leveling out in the UK, that could take away some
of the recent long interest flowing toward the pound. We are just not sure that
pound is set to come out of the consolidation, with near-term resistance coming
in at 154.50.

CANADIAN: We continue to think that the Canadian is vulnerable,
but it could see an initial benefit from the US numbers this morning. We
continue to suggest that longs exit looking to reset, or purchase some put
coverage. The big test of the Canadian comes Friday morning as the Canadian has
had a negative correlation to the US payroll reports in the last several months.

METALS

OVERNIGHT CHANGE to 4:15 AM: GLD +0.10, SLV
-0.5, PLAT -8.90;
London Gold Fix $316.35,
-$.45; LME Copper Warehouse stks 863,325 tons, -475 tons;
Comex Gold stocks 1.99,
Unchanged; COMEX Silver stocks 107.8 ml oz, -100,090 oz; OVERNIGHT: Higher trade in
Asia off weak dollar, Europe gold was down slightly.

GOLD: The gold market will remain inversely correlated to the stock market and
probably needs to see the GDP come in at the low end of expectations to regain
strength seen early in the week. We suspect that the rally off the October low
shifted gold back into the technically overbought category in the COT report,
but not so overbought that it is without upside capacity. We get the sense that
today’s numbers will be negative to gold, but that Friday’s numbers will be
supportive.

SILVER: Unfortunately, trend line support in silver is all the way down to $4.37,
but we would suspect that closer support comes in at $4.41. After a couple
of significant increases in Comex silver stocks, they appear to have calmed down
again with a 100,000 ounce decline overnight. Until finding evidence to the
contrary, we will assume that silver is tracking higher off the prospect of
economic recovery and that gold gains are somewhat a coincidence.

PLATINUM: A very poor overnight technical trade in platinum seems to suggest
that US stock prices are set to decline today even though the early stock market
action is higher. Trend line support in January platinum comes in down at $573
and we would have to think that a GDP reading above 3.5% would provide support
to platinum unless the stock market ends up being disappointed with lower odds
for interest rate cuts.

COPPER: Asian metals prices were mostly unchanged as the base metals are
extremely interested in the US GDP reading and were unwilling to make bets ahead
of the release. It would seem that the stock market has high bar for the
readings, even though the estimates call for a very impressive growth of around
3%. In other words, the stock market appears to be in need of an impressive
number, probably because recent consumer confidence numbers were very poor.

CRUDE COMPLEX

OVERNIGHT CHG to 4:15 AM: CRUDE +15, HEAT
+29, UNGA +14 — While some in the trade
think it is premature to count on the peace discount, some further weakness
might be seen into the anticipated passage of the UN resolution late next week.
There is still a chance that a stalemate could be seen as the US Sec of State
suggested that the only impasse is on the issue of what happens in the event of
noncompliance.

NATURAL GAS

The trade continues to expect injections in the weekly report, with a range of
injections settling on 15 to 30 bcf. We have to think that natural gas has
already factored the cold weather sitting on the Midwest today, but the cold
weather is at least discouraging a tighter correlation with the weakness in the
regular energy complex.