Futures Point To A Flat Open
12/8/2004
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INTEREST RATES
The Treasury market certainly managed to shake
off potentially bearish projections of international rotation away from the
Dollar early this week and now with the currency markets overnight showing a
moderate rebound in the Dollar, and intervention talk surfacing, we have to
think that gives support to Treasuries. Some traders think that central banks
prefer to intervene when the market is going in their direction and that could
give the intervention tilt a new angle. We also think that the recent economic
reports were seen as supportive developments, as the Challenger Layoff report
showed an increase in layoffs and US productivity softened a bit.
STOCK INDICES
In the early overnight action it seemed like
stocks were weakening, but apparently a higher close in Japan and late buying
interest in Europe managed to push sentiment back into positive territory.
Therefore, despite the fact that the technical damage incurred Tuesday was
discouraging, we have to think that US stock prices will attempt to come into
the action today on a positive footing. It should also be noted that the market
will come into the action today just above what should be seen as a fairly solid
technical support zone.
DOW
Really solid support in the December Dow isn’t seen until 10,429 and therefore
we can’t rule out a continuation of the recent weakness. In fact, looking at the
report slate we see little to turn sentiment back up, unless US energy
inventories manage a massive rise and that sends crude oil prices skidding down
to 4 month lows. As mentioned before, Merck is set to quantify its legal risks
today and that probably won’t be a real positive development.
S&P
Near term downside targeting in the December S&P comes in at 1172.50, with even
lower support pegged at 1166.50. Also mentioned before, we think that the S&P
will tend to respect the 2-3 day down pattern, unless there is a big range down
reversal today. Fortunately we don’t see near term weakness, as anything other
than minor selling and profit taking. In general this market is not very far
away from conditions that could reignite the buyers.
FOREIGN EXCHANGE
US DOLLAR
The US Dollar has made a significant upward thrust
overnight and the rise seems to be coming primarily off the idea that
intervention was in the offing. While intervention has been threatened a number
of times over the last month, the current situation was given added credence by
comments from the BOJ and possibly because of the suspected change at the US
Treasury. We also see significant declines in the Canadian Dollar and
significant declines in energy prices as elements that give the Dollar the
ability to rally. In other words, there are outside and unrelated developments
that seem to suggest that change is afoot. We also think that “everyone and his
brother” were so negative toward the Dollar that something had to give even if
the reversal is only temporary. We might also suggest that some central banks
are acknowledging that fundamentals don’t justify a continued slide in the
Dollar and that means that the economic differential is at least being
considered. However, in order to really get the technical reversal going, the
Dollar will have to manage a climb above near term resistance of 82.15, and
maybe even manage a move above a more critical down trend channel resistance
line at 82.26.
EURO
While the comments from the ECB on intervention
weren’t anything specific, we have to think that the overbought status of the
Euro is playing a role in the current weakness. However, the fundamentals in the
euro zone were never really the reason why money was flowing to the Euro, as the
moving was flowing away from the Dollar and had to pick somewhere to go.
Therefore, we suspect that more near term profit taking will be seen and that
the December Euro is set to slide to critical consolidation support down at
132.26. However, the 132.26 level will continue to be a critical line in the
sand and a decline below that level could spark a massive decline as the Euro
bullish consensus, spec and fund long positioning and the generally entrenched
bullish psychology is quite significant.
YEN
Dialogue from the BOJ has had a big influence on the
failure in the Yen and with the 0.1% decline in GDP from Japan, it is clear that
the fundamentals don’t support current exchange rates. In fact what specifically
sunk the Yen, were suggestions from the BOJ that current growth rates in Japan
pale in comparison to the US. In other words, the market has at least begun to
consider the significant macro economic differential. US GDP growth nearly 4%,
Japan GDP contraction -0.1%!
SWISS
Already the Swiss has fallen below consolidation
support and would now appear to be headed down to 86.00. Fortunately the Swiss
didn’t have as much wildly bullish speculative sentiment in place as was present
in the Euro and that could mitigate some of the downside. If 86.00 fails that
could mean a slide to 85.63.
BRITISH POUND
While most of the speculative buying frenzy came
only lately to the Pound, it did post huge volume on the recent action and has a
very large open interest and that means that the technicals are very conducive
to a massive slide, especially if critical support is violated at 192.16. We
suspect that the Pound will benefit from some cross spreads, as traders might
consider selling the Yen, Swiss or Euro and holding a long Pound for the coming
sessions.
CANADIAN DOLLAR
As we began to suggest last week, when we
recommended buying 2 June Canadian 79 puts for 48, we think that the Canadian
has forged a major top. The comments from the BOC yesterday simply confirmed the
topping potential and now we suspect that the technical condition is going to
take over and send the Canadian down to at least 81.40.
METALS
OVERNIGHT
London Gold Fix $445.75 -$7.30 LME COPPER
STOCKS 57,225 metric tons -375 tons COMEX Gold stocks 5.374 ml Unchanged COMEX
SILVER stocks 102.8 ml Unchanged
GOLD
The gold market was at least partially disappointed
by the recovery in the US Dollar off the lows Tuesday and that sentiment
extended into a significant overnight washout. We also think that action in the
Canadian Dollar recently is indicative of the beginning of a change in the
Dollar down trend. While it is possible that the Dollar could continue to
decline, even in the face of a Canadian Dollar decline, that should at least
begin to dampen the downside momentum in the Dollar.
SILVER
As we suspected the silver market was the most
vulnerable to profit taking and with the gold market under aggressive selling
pressure, we suspect that March silver will be headed down to the $7.55
consolidation. In addition to the massive spec and fund long in silver, it
should also be noted that open interest is also rather extreme at 125,020
contracts. Therefore, the technical picture could become quite negative in the
near term.
PLATINUM
As we suggested last week, the platinum market was
begrudgingly following the gold and silver higher and because of that restricted
correlation, the platinum market is seeing slightly less selling pressure than
gold and silver. However, we doubt that January platinum will be able to avoid a
slide down to $845 and maybe even $842. It should also be noted that platinum
has an extremely high open interest and also maintained a rather extension small
spec and fund long in the latest COT report.
COPPER
The copper market is also under liquidation pressure
but the selling is only partially the result of precious metals weakness and the
Dollar. On the other hand, we suspect that the copper market is disappointed
with the developments in China, where the Chinese government might remove an 8%
rebate on aluminum exports, as that will possibly help correct the domestic
tightness in aluminum. In other words, moves to dampen domestic metals prices
inside China could be seen as a short term negative, but in the long run that is
a positive development.
CRUDE COMPLEX
The energy complex continued to weaken Tuesday,
with most traders thinking that the inventory report this morning would bring
about another inventory build. However, we see a slow tide change coming, with
the UAE Oil Minister suggesting Tuesday that the decline in prices this week
should result in a response by OPEC. In fact during the session Tuesday, the
Press was already reporting comments from a Senior OPEC delegate, who apparently
suggested that OPEC was set to discuss and react to the current price decline.
NATURAL GAS
The EIA predicted that natural gas demand would rise
3.7% in 2005 and that should be supportive, as that is a little larger than
prior expectations. As we expected over the several sessions, the bears retained
control over the market as the regular energy complex was being dominated by a
bearish tone. Once the market gets beyond the regular energy complex weekly
inventory reaction, we suspect that natural gas will then be in a position to
forge a bottom.