Futures Point To A Flat Open
9/2/2004
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INTEREST RATES
The pattern of higher highs continues but after
the numbers yesterday, it seems that Treasury prices might be getting a little
too much mileage off the economic reports. While the readings yesterday were
“contractionary†they were not nearly as weak as the numbers in the prior
session. However, traders might have been watching the sharp rise in energy
prices and were fearful that energy prices were going to ramp up their drag on
the economy.
STOCK INDICES
We were a little surprised that the stock market
was able to mount such an impressive rally yesterday morning in the wake of soft
US numbers and soaring energy prices but that action continues to highlight a
residual bullish tilt in the market place. Since the August lows, the stock
market seems to be looking beyond near term energy prices to better times ahead.
Surprisingly the stock market has also risen in the face of Treasury market
gains, which typically indicate a worsening economic outlook is unfolding.
DOW
The Dow futures apparently realize the importance of the upcoming payroll
decision, as it has fell back and consolidated below the recent high. Critical
support in the September Dow comes in at 10,251 and then again at 10,123. We
think that a moderate break today could create the opportunity to buy September
10,200 calls but those that want to play a shorter term strategy could buy the
10,100 puts for a 24 hour hold.
S&P
While some might call the recent pattern in the S&P a rounded top pattern, one
can’t help but be impressed with the magnitude of the rally yesterday morning.
Solid support should be able to hold around 1098 for the coming two sessions,
unless the report is really bad Friday morning. However, longs should note that
a simple retracement off the August move could allow the September S&P to slide
back to 1090.85 without injuring the uptrend pattern. While we hate to be on
both sides of the market, the at-the-money puts and calls in the September S&P
look attractive.
FOREIGN EXCHANGE
US DOLLAR
The Dollar is attempting to hold against more
liquidation and with German August jobless figures rising, it would seem that
other economic regions are slowing. While weak numbers outside of the US are
hardly going to discourage selling, it is possible that weakness in the Euro
zone mitigates the downside in the Dollar. With the majority of regularly
scheduled US economic reports coming in soft, we can understand Dollar bulls
being concerned about the August jobs report. Given the down trend pattern in
effect since the May high, it is clear that the Friday morning report is an
extremely critical report. In fact, with another disappointing report we suspect
that the Dollar will easily slide to the August low of 87.73, while a very
disappointing report (similar to the last 2 reports) could justify a slide down
to the July low of 87.20. However, economists are almost uniformly expecting a
decent to slightly strong reading in the report. When one has a potential
volatility event (where prices can realistically run hard in a short period of
time) it can pay to control risk and participate with a cheap near to expiration
option. The September Dollar Index options expire tomorrow! Using futures is
risky because the pattern of numbers hints at a weak report, while the
economists are calling for the opposite.
EURO
The Euro is undermined slightly by a 24,000 gain in
the German jobless readings for August. However, the Euro isn’t going to be
driven by its own fundamentals, it is going to be driven by US fundamentals. In
fact, with the Euro sitting almost exactly in the center of the last three
months range, we could argue for a 200 point rally or a 200 point decline. Since
the trend is non existent we are not inclined to force a trade, but forced into
the market we would prefer to sell the euro on a rise above 122 but we would
prefer to buy the Sept Euro 121 puts and either be in the money tomorrow, or see
the entire premium lost to expiration.
YEN
With sentiment and economic numbers swinging wildly
in Japan, it is clear that a major decision is ahead for the Yen. We have to
favor the downside, even though the bear case only has minimally more evidence
than the bull case. In the event that US numbers come in anywhere near
expectations Friday, we suspect that resistance in the Yen will become more
formidable.
SWISS
The Swiss continues to be in a league of its own
(with the exception of the Canadian) as it has shown the ability to rise against
the Dollar without significant news. Therefore, the Swiss could see the biggest
technical backlash Friday morning in the wake of a decent US report and the
Swiss seems to have massive overhead resistance on the charts.
BRITISH POUND
Talk that the UK housing bubble is breaking and that
the UK economy is slowing, has the Pound on the verge of a downside breakout. We
are not even sure if a bad US number Friday will save the Pound from a downside
thrust. Consider buying near to expiration puts for a 24 hour play.
CANADIAN DOLLAR
The Canadian is a high beta currency for the coming
24 hours. Since the Canadian has managed an impressive rally off the recent low,
it will have to see disappointing US figures in order to continue up to the top
of the recent consolidation above 77.00. Unfortunately the Canadian could easily
fall back below critical support of 76.00. If long futures, consider buying a
Sept Canadian put 76.50 put for a 24 hour cushion.
METALS
OVERNIGHT
London Gold Fix $407.80 -$0.20 LME COPPER
STOCKS 111,175 mt tons -150 tons COMEX Gold stocks 4.880 ml +98 oz COMEX Silver
stocks 109.6 ml +362,161 oz
GOLD
Despite the sloppy to lower action this week, the
gold market has managed to forge a week of higher lows. While the extremely weak
US economic numbers provided gold an initial pulse down in the Dollar, it could
be pretty negative for gold if the numbers continue to tail off and the Dollar
doesn’t fall. In other words, too much slowing could prompt concerns of
deflation and that usually serves to undermine gold and silver.
SILVER
The silver market continues to forge a solid upward
track from the August 24th low. However, considering the consolidation action of
the last month, one might suggest that silver is sitting just a little bit above
the middle of the range. The top of the consolidation range in silver comes in
$7.00, while the top of the up trend channel in silver comes in at $7.096.
PLATINUM
Even after some negative fundamental news yesterday,
the platinum market managed to maintain bullish sentiment. Rumors yesterday of a
Russian port work slowdown wasn’t expected to affect shipments of platinum, or
copper concentrates for that matter but that situation should be watched
closely, as a temporary supply disruption, in already tight platinum shipments
condition could exert significant upward pressure on prices. The path of least
resistance is up with $880 targeted in the October contract.
COPPER
Chinese copper prices were slightly lower overnight
but with the US market maintaining a slightly bullish tilt, we suspect that the
market will find leadership in other areas. Fortunately for the bull camp, the
LME stocks resumed their general pattern of declines and the market is aware of
that port slowdown in Russia. It is a little surprising that the market hasn’t
focused more on the Peru strikes and that could be because the majority of the
economic report flow is serving to countervail the bullish tilt off the strikes.
CRUDE COMPLEX
With the pattern of weekly crude stocks declines
extended Wednesday and the energy complex sitting in an oversold position early
this week, it was not surprising that prices managed such an aggressive bounce
yesterday. With the shocking 8 million barrel API crude stocks decline, the US
crude stocks have now moved into an annual deficit condition. Countervailing the
sharp decline in crude stocks, was a slight rise in gasoline stocks and the
revelation that US gasoline stocks expanded their annual surplus standing to
15.9 million barrels.
NATURAL GAS
Natural gas prices continued to decline despite
strength in the regular energy complex and that really suggests that the market
is in the midst of a final capitulation. With weather forecasts calling for
temps to begin tapering off, it is clear that the cooling season isn’t going to
provide any late surprises. We also have to think that the market is expecting
another bearish injection reading in the weekly inventory report and the market
won’t really have a grip on the magnitude of the spec and fund positioning until
after the close Friday.