Futures Point To A Flat Open
10/27/2004
INTEREST RATES
Treasury prices remained in a weakened posture
because of rate hike concerns and because of the recent short covering burst in
the equity market. While many might question the argument that rate hike
concerns are reigning in Treasury prices, that issue is at least important into
the release of the Fed Beige book this afternoon. Personally we see the
deterioration in the economy as a major underpin for Treasury prices, with the
market simply pausing for the next shoe to drop in the energy complex.
STOCK INDICES
As we suspected the stock market managed a
corrective bounce, but the surprising strength in recently beleaguered insurance
stocks gave the short covering a huge added lift. However, it would not seem
like the market is poised for an aggressive continuation of gains. In fact, we
continue to see the potential for higher energy prices, a weaker Dollar and
rather suspect economic readings.
DOW
In the absence of a fundamental shift in the news, we doubt that the December
Dow will manage a rise above 9,881 or in the best case scenario 9,890. Since the
down trend line is so steep and concern for the future is so dominate, the longs
appear to be taking a huge risk, for only limited reward. In our opinion, a
failure to hold above 9,840 could mean that prices are headed sharply lower into
the end of the week.
S&P
While we still stand by our corrective bounce target of 1115.50 it wouldn’t be
surprising if the high is already in on the bounce. However, one must watch the
weekly oil inventory readings closely and also be aware that ongoing earnings
reports could give the market an initial lift. It is also possible that the oil
inventory readings simply rekindle concerns of even higher oil prices and that
could combine with rate hike dialogue from the Fed (around mid session) for an
extremely negative setup. In fact, without any warning the December S&P could
easily fall back down to 1102.00 and could be significantly lower by the end of
the week. In short, we respect the bull case for another couple hours and then
we think the downtrend will resume. To buck the trend, the equity market needs
help from the oil market.
FOREIGN EXCHANGE
US DOLLAR
The Dollar could have managed a stronger short
covering bounce Tuesday off a slight downward revision in expectations for Euro
zone growth but its own numbers were disappointing and that took the power out
of the bull case. Certainly the Dollar could have been cheered by the stronger
than expected US equity market action and the temporary early weakness in energy
prices on Tuesday morning, but it was painfully clear that the buyers were not
being pulled into the Dollar easily. In fact, it seems as if the trade is simply
waiting for the next shoe to drop in the Dollar and that any rally to 85.44
should be sold, looking for a return to the recent lows. The Fed Beige book
release this afternoon might be significant to the Dollar, but at this point we
are not sure that the report has the capacity to benefit the Dollar. Therefore,
assume that the trend is down.
EURO
The Euro has effectively corrected an overbought
condition with the correction Tuesday and once again looks to be poised to take
advantage of the travails facing the US Dollar. It is pretty clear that the main
flow of money into the Euro is not being fostered because of the expectation of
good returns in the Euro, especially with the Euro zone itself downgrading its
2005 economic outlook and even that development didn’t weaken the Euro at all.
In short, the flight to quality tilt is the main catalyst in the Euro and unless
energy prices fall back aggressively and bail out the US economy, one should
expect the Euro to resume its upward track.
YEN
Apparently the market doesn’t expect the BOJ to stop
the rise in the Yen or step in to support the Dollar. Therefore, the 94.00 level
shouldn’t be seen as resistance it should be seen as support. However, the risk
and reward of being long the Yen above 94.20 is rather significant.
SWISS
While the trend is up, we are not sure that the
Swiss is ready to thrust to an even higher level, as the anxiety level doesn’t
appear to be as extreme as it was early this week. However, that could easily
change in the coming sessions, as Nigerian oil workers are threatening to begin
a strike Sunday and the US weekly energy inventory readings are due out this
morning. Be long, but realize that the Swiss could chop back to 83.12 and not
ruin the bullish technical setup.
BRITISH POUND
As in other currencies, the Pound needs to see the
Dollar stumble in order to rise to new highs. However, also like the other
currencies, the Pound has corrected its overbought technical condition and
appears to be poised for another pulse up. Critical support in the Pound comes
in at 182.63 and resistance is seen at 183.80.
CANADIAN DOLLAR
Two days of corrective action should leave the
Canadian with a decent amount of support on the charts down at 81.37. The BOC
recently suggested that the Canadian economy isn’t set to overheat and that is a
far cry from the US question, of whether or not the economy will maintain
growth. In short, the trend is up and traders should buy 20-30 point
corrections.
METALS
OVERNIGHT
London Gold Fix $425.85 -$1.30 LME COPPER
STOCKS 80,150 metric tons -300 tons COMEX Gold stocks 5.315 ml Unchanged COMEX
Silver stocks 105.0 ml Unchanged
GOLD
The gold market is currently without a clear driving
force as the Dollar is quiet and the trade is at least temporarily uninterested
in restarting the recent upward thrust. Chinese spot gold was unchanged
overnight suggesting that any new theme is likely to come from the US market.
There continues to be a moderate amount of activity in the gold stock sector, as
the Gold Fields/Harmony dance will possibly be joined by a take-over bid for
Australian miner Newcrest.
SILVER
The silver market is holding up quite well
considering the lack of direction being thrown off by the gold market. Maybe the
silver market was cheered on by the fact that the US equity market managed an
impressive bounce on Tuesday, as that would seem to foster a better demand
outlook. In the near term, critical support would seem to come in at $7.25 and
then again down at $7.19 but silver will need to see positive leadership from
gold to resume the uptrend.
PLATINUM
The platinum market made an overnight slide below
consolidation support and would seem to be on the verge of a downside washout.
We suspect that platinum will find a series of support zones on the charts and
will not fail in a concentrated thrust. We do think that the $820 level could be
tested in the event that the outlook toward the Asian economy is downgraded.
COPPER
The copper market is having trouble holding high in
the October consolidation, as the outlook for Asian demand is being called into
question at the same time that concern for US demand is rising. Chinese copper
futures overnight were largely unchanged, but prices might be generally
supported by overnight news of a possible strike in Peru. The workers have
evidently given a deadline of November 3rd, unless a fired worker is rehired and
therefore the initial demands wouldn’t appear to be that difficult to meet.
CRUDE COMPLEX
The energy complex started the session out weak
on Tuesday but in the end the market managed to muster a higher close.
Apparently the IEA statements gave the market a lift around mid session when
they indicated that demand from China, US and India is generally serving to
increase the chances of a major oil shock. The IEA also warned of an impending
oil crisis due to inaccurate data and that certainly served to pull in some
speculative buying.
NATURAL GAS
Natural gas exploded to the highest level since the
fantastic rally seen back in February of 2003 when prices rallied to within
striking distance of 12.00. The IEA gave the natural gas market a big upward
push off comments that the world wide trade in natural gas was set to triple by
2030. While 2030 is a long way off, the energy complex hardly needs any prodding
from long term projections when the market is already on edge about tightness.