Markets Poised For a Weaker Open

INTEREST RATES

OVERNIGHT CHANGE to 4:15 AM: BONDS +6 — We seriously doubt that the economic
information is going to come in any better this week than it was last week. We
also think that equity market action will provide even more support to bond
prices than was seen last week. With bond prices basically standing at mid-range in a very well-defined up trend channel, the bias has to be considered
very bullish, especially on any correction to 113-20.

STOCK INDICES

OVERNIGHT CHANGE to 4:15 AM: S&P -280, NIKKEI -147,
FTSE -112 — The trade is certainly
poised for a Black Monday-type reaction, as the early sentiment is almost
exclusively bearish. Some forecasts for the high-tech and communication this
morning suggested that the sector would never recover to its former state.
Typically, when sentiment gets this negative, we are near a bottom, but in the
current case it would seem that time is a friend of the bear camp.

FOREIGN EXCHANGE

DOLLAR: The dollar has gapped down overnight setting the stage for what could be
a rout. While economic conditions outside the US are equally unimpressive, it
would not seem like the dollar is getting the benefit of the doubt like it has
over the last three weeks. There would not seem to be anything specific
undermining the dollar, but with an extremely active report slate and a diving US
equity market, few traders are willing to hold the dollar in the near term. We also
get the sense that the press has teed up the US economy and will play the
“recession or worse” scenario until everyone accepts the forecast. A critical
pivot point comes in today at 107.30 and then again at 106.90. Right now it
would be very surprising for the dollar to be able to forge a recovery back
above 108.39.

EURO: The euro zone saw calls for lower interest rates at the G7 meeting and
that could vault the euro higher against the dollar. To this point, the odds of
an ECB rate cut were extremely low, but with the Greek Finance Minister calling
for a rate cut, the pendulum might have shifted back toward center. With key
Finance Ministers suggesting that the ECB has significant room to cut rates,
maybe a reevaluation of position is possible. Given the direction of early
sentiment, the rate talk and the heavy US report slate this week, the euro is
primed for an upside breakout and retest of the September highs of 99.46.

YEN: Evidently, things are disconcerting enough that some Japanese money is
going to pull back from the US in a repatriation effort. Even with construction
orders falling for the third straight month and Japanese housing figures
declining, the Japanese economy was able to post a 1.6% increase in August
Industrial output. Even though the industrial output figures were much softer
than expected, the trade might be looking for any positive growth, instead of
strong growth. Given the tie to the US economy, we can’t suggest that traders be
long the yen even with the upside breakout overnight.

SWISS: Given the propensity for debacle in global equity markets, we can suggest
that traders buy the Swiss on any setback of 15 ticks off the overnight high. A
return to the September highs in the Swiss at 68.63 is very possible in the week
ahead.

POUND: The mid September correction in the Pound leaves the currency poised to
breakout up, with significant upside potential. August lending patterns in the
UK were better than expectations and with the UK calling for rate cuts at the
G7, the Pound should get a distinct lift. The September highs in the Pound are a
near term target up at 156.50.

CANADIAN: Once again the proximity of the Canadian economy, to the US economy
could mean that the Canadian comes under moderate pressure in the days ahead.
With the Canadian significantly up from the recent lows, the currency looks very
vulnerable to a liquidation washout.

METALS

OVERNIGHT CHANGE to 4:15 AM: GLD +2.50, SLV
+3.5, PLAT +9.50; London Gold Fix $322.40,
+$2.25; LME Copper Warehouse stks 872,075 tns, -2,375 tns;
Comex Gold stocks 1.892,
-11,128 oz; COMEX Silver stocks 107.4 ml oz, Unchanged. OVERNIGHT: Anticipation of
steep equity market losses sparked buying in Asia.

GOLD: The COT report certainly came in every bit as overbought as we expected,
but seeing the net fund and small spec long at 96,000 contracts, means that we
are now approaching historically large, long levels. However, if the equity
market collapses this week or the US were to launch into an attack on Iraq, we
could easily add another 15,000 to 20,000 gold longs. Since gold did correct $5
off the level seen when the COT report was measured, maybe the long was narrowed
to 90,000 contracts.

SILVER: The COT long in silver isn’t nearly as burdensome as in gold, but with
the silver correction last week pretty steep, the technical considerations
should not restrain the bull camp. However, silver does have the tendency to be
impacted by deflationary fears, and therefore gold will have to provide
consistent support to silver. A $457 trade in the December silver could spark
stop loss buying by those that pressed silver last week on the downside.

PLATINUM: We suspect that the platinum market will succumb to the concerns over
the economy. After all, platinum is almost $50 an ounce above the July lows, so it
could certainly see some value extracted if the general consensus is that the
global economy is falling back into recession. We don’t get the feeling that
platinum is a prime candidate for flight to quality buying, especially after the
gains of the last three months.

COPPER: New contract lows could become a regular pattern in the days ahead,
especially with the equity markets diving and industrial recovery forecasts
pushed off well into the future. While the copper might be getting close to
having both the small specs and funds net short there would appear to be little
reason to think that the selling will abate in the near term. Looking at
long-term charts in copper, the next downside targeting is 150 points lower
than the overnight low.

CRUDE COMPLEX

OVERNIGHT CHG to 4:15 AM: CRUDE +23, HEAT
+52, UNGA +83 — Depending on how the
market takes the discovery of weapons grade uranium within 150 miles of the
Iraqi border (in Turkey) will govern whether or not the war threat escalates or
declines in the early going this week. Supposedly, the Chief UN weapons
inspector is suggesting that they will no accept anything less that total access,
and at the same time the Russian President is calling for inspections as quickly
as possible.

NATURAL GAS

Hurricane Lilly has already been factored into prices for two straight sessions
and maybe even three sessions if one counts the reversal action last Wednesday.
The coming storm is on nearly an identical track as Isadore, which did result in
some platform closing and some shipping delays.