Futures Point To A Flat Open
1/5/2005
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INTEREST RATES
The Treasury market initially didn’t really
respond bearishly to the much better than expected US factory order report.
However, in the wake of the FOMC minutes release, the market saw a rush of
selling off the concern that US growth was entrenched and that employment should
continue to improve. While some suggest that the selling came off the Fed’s call
for a pattern of interest rate hikes and the increased chance of inflationary
pressures, we suspect that the growth statements were almost as big of an impact
as the inflation dialogue.
STOCK INDICES
The stock market certainly appeared to overreact
to the higher interest rate talk from the Fed. In fact, when it comes right down
to it, the Fed FOMC meeting minutes really didn’t offer anything significantly
new to the existing setup, but apparently some players took the inflation
dialogue as a new wrinkle. The Fed didn’t warn of impending inflation, but
suggested that step wise rate hikes were probably needed to keep the risk of
inflation from increasing.
DOW
Certainly the Dow has been the most vulnerable on the charts and with
international economic views slumping and energy prices rising yesterday we can
understand the big cap stocks seeing the most aggressive washout. However, on a
slide down to 10,600 we suspect that the market will begin to see bargain
hunting buying. A normal retracement off the December rally suggests that the
correction will hold above 10,606.
S&P
As we suggested Monday, the S&P appeared to be into one of those 2-3 day
corrective breaks and today would be the 3rd day down! We might also add that
the last COT report showed the funds to be net short already, and with the S&P
down significantly from the level where the COT report was measured, we have to
think that the fund short is becoming excessive. However, we would still like to
see a classic bottom formation, defined as a big range down reversal, compacted
within a single session. Our pick for a critical bottom today is 1186.30, but it
is possible that the market will manage to bottom without an additional
aggressive pulse down. In conclusion, because we can’t nail down a bottoming
price, and think the timing for a low is near, buy March calls.
FOREIGN EXCHANGE
US DOLLAR
The Dollar continues to rise against most currencies
in the early going today and most in the market think that the gains in the
Dollar are still being mostly supplied by pure technical considerations.
However, it is becoming quite clear that both the economic and interest rate
differential is shifting even more significantly in favor of the US Dollar and
that might be prompting part of the short covering in the Dollar. We still
aren’t sure that fresh buyers are flowing into the Dollar for a major turn, but
it is possible that major change comes against the current back drop. In other
words, with a significant short covering rally being seen off the technical
front, it would not be a surprise for the Dollar to actually make a major bottom
off the coming US payroll report. On the other hand, because of the prevailing
negative international attitude toward the Dollar, we suspect that a true
fundamental turn will have to be forced into position by a headline improvement
in the monthly payroll report. Longs should continue to ride positions but one
should also be prepared to protect long Dollar futures positions, with a long
put through the coming US employment report. Those that are long March Dollar 83
call options should consider selling the 85 calls for 60 to reduce the risk of
the trade.
EURO
With news yesterday that German unemployment had
climbed near a 7 year high and France floating similarly negative information
last week, there is certainly fundamental cause for weakness in the Euro. Many
traders think that the March Euro will be able to hold above consolidation
support of 132.06 but we are not so sure. However, as suggested in the Dollar
comment, it will probably take a clear cut and impressive US non farm payroll
gain to “end the long term uptrend pattern” in the Euro. In short, one should
not rule out a slide to 132.00 but that is where the real decision on trend will
have to be made. In our mind, the trend of fundamental news suggests that the
Euro is being confronted with the most likely trend change, since the July high!
Those that are short the Euro should buy calls against that position on a
further decline and then hold through the US reports on Friday.
YEN
While the yen has managed a couple negative chart
trades, we are still not inclined to attack the Yen, especially at consolidation
support of 96.00. Like US Treasuries, the Yen just doesn’t have a “trend” and
could easily swing around in a wide range of trade bound by 95.00 and 97.30
before the close Friday!
SWISS
The Swiss would appear to have the most negative
chart setup of all the major currencies, as it has failed to hold the November
and December consolidation lows. Therefore, it is possible that the Swiss
continues to slide until it tests lower support down at 84.90.
BRITISH POUND
The UK has now seen a series of downward revisions
in key retail chain store sales and that rekindles concern for the UK economy.
The Pound is also seeing a major chart violation that seems to project a return
to a gap area left down at 186.54 to 186.00. The best thing going for the bull
camp in the Pound, is the extreme oversold short term technical condition, as
the fundamentals continue to favor more downside.
CANADIAN DOLLAR
The big picture trend in the Canadian is down, but
traders might not have confirmation of that trend until the March contract falls
back below 80.93. One might consider selling 1 Canadian futures at 81.37 and
buying 2 February Canadian 83 calls against that position.
METALS
OVERNIGHT
London Gold Fix $425.50 -$9.65 LME COPPER
STOCKS 48,550 metric tons -325 tons COMEX Gold stocks 5.795 ml Unchanged COMEX
SILVER stocks 103.6 ml +7,254 oz
GOLD
We are really impressed with the gold market action
over the last 24 hours in the face of a massive Dollar rise. In fact, with the
Dollar another 33 ticks higher today and at the highest level since the early
December spike high, the gold market could easily be under more significant
pressure this morning. However, even though the gold market is fighting against
the pressure being created by the rising Dollar, the market won’t be immune to
weakness ahead.
SILVER
While the silver market has managed to recoil from
the Tuesday low, the structure of the market remains weak and the outside
influence from the demand sector is also somewhat bearish. We suspect that
silver will continue to take direction from gold, which is also in a bearish
posture off the continued rise in the Dollar. With the silver market now down 57
cents from the most recent COT report reading, we suspect that the spec long is
being pared down rather aggressively, but we doubt that a more balanced
technical condition is going to end the downside action on its own.
PLATINUM
Platinum prices certainly felt the pressure seen in
most metals markets yesterday, as it seems that the market fears slowing Chinese
economic activity and more increases in US interest rates. While April platinum
failed at the $430 pivot point, it did manage to recover back above that
critical pivot point into the close and holds that bounce this morning. We can’t
rule out a return to the bottom of the mid December consolidation zone down
around $837.
COPPER
With the market forging another massive and
compacted single day washout, we suspect that a number of longs are prepared to
stay on the sidelines. With the promise of perpetually higher US interest rates,
some concern over slowing in China and even more gains in the US Dollar, we
suspect that the bears retain control over copper prices. Chinese copper futures
were limit down overnight and most of that is catch up to the big losses Tuesday
in the US but that also applies fresh pressure to the US market.
CRUDE COMPLEX
The energy complex apparently saw some fresh
speculative interest move into position Tuesday afternoon after a couple weather
services dropped temperature forecasts for the Northeast. It is also possible
that the trade was speculating on a change in the weekly inventory figures,
which in our opinion have been patently bearish for the last several weeks.
However, unless the mid December cold weather shows a delayed reaction in the
inventories of heating oil, we doubt that prices will have cause to extend the
rise sharply without some fresh concern toward Middle East supplies.
NATURAL GAS
While natural gas has managed to consolidate above
the recent spike down low, the bearish tone in the market has hardly dissipated.
In fact, without the slight cooling of temps and the uncertainty of the coming
weekly inventory report, we suspect that the bears would have continued to press
prices. On the other hand, with March natural gas now sitting 36 cents below the
level where the last COT report was measured, we have to think that the small
spec long position has been pared down significantly.