Futures Point To A Flat Open
1/28/2005
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INTEREST RATES
The Bond market in retrospect really displayed
some dubious action following a new high in late January. Not only has the bond
market been confronted with slightly better economic information than was
expected since the January 25th high, but it would also seem like the world is
becoming concerned again about the disinvestment threat. In fact, the DAVOS
conference seemed to hammer the US on its twin deficit problem, while at the
same time the Chinese Central bank suggested that they would probably begin
diversifying away from US currency reserve holdings.
STOCK INDICES
While recent US economic information was better
than expected, we still don’t get the sense that the economic outlook is bright
enough to expect stocks to decisively throw off the down trend pattern that has
been in effect since January 3rd. However, it is possible that a temporary knee
jerk reaction to the passing of the Iraqi election, allows a fleeting rally
early next week. In other words, we would not be surprised to see a relief rally
in the days after the Iraqi election, but if it becomes clear again that the
insurgents haven’t given up and that the battle will wage on, we suspect that
stock prices will resume the January slide.
DOW
We assume that the overall direction of prices is down, even though the market
managed a weak rally off this week’s lows. We suspect that prices could slide
later today, as more profit taking action is joined by selling from weak handed
longs that are simply afraid of the coming weekend. However, those wanting to
make a play on a potential knee jerk reaction rally Monday morning, following
the Iraqi election, could consider buying the March Dow 10,700 calls for 690
looking for an objective of 1200. Critical resistance today is 10,506, with near
term support seen at 10,442.
S&P
As mentioned before, we are discouraged that very favorable bellwether earnings
readings from Microsoft haven’t been able to shift the market into a bull
posture. Therefore, traders should wait for a big range down washout that is
rejected within a single session, as that could be a signal that the selling has
finally exhausted itself. Buy the March S&P down at 1163.10, with an objective
of 1176.90. Risk the position trade to a close below 1158.
FOREIGN EXCHANGE
US DOLLAR
We think the Dollar is headed into a significant
decision window and it is possible that the Iraqi election stimulates that
process into a result. Recent US economic information has been slightly
supportive of the bull case in the Dollar, but the threat of international
disinvestment by foreign central banks continues to be something that is
preventing the Dollar from managing a sustained upside breakout. Therefore, one
has to think that the Iraqi election will be a major crossroads for the Dollar,
as a legitimate election could be just enough news to send the March Dollar back
up to the recent breakout point on the charts. On the other hand, with the next
FOMC meeting directly ahead and the Fed still talking up the improvement in the
US employment area, we suspect that a favorable election outcome and continued
good numbers from the US should be enough result in an upside breakout in the
Dollar and a downside breakout in the Euro. On the other hand, the Dollar has
many times failed to respond to obviously bullish information and the risk of a
long Dollar futures position could be quite significant, considering the massive
run up off the late December low. Given the potential excessive volatility in
the US Dollar, traders should consider buying March Dollar futures at 83.15 but
should also purchase a March Dollar Index 82 put for 36 ticks. The long put
should remain in place until the full ramification of the Iraqi election is
known.
EURO
The Euro appears to be caught in a sideways
consolidation bound by 129.52 and 131.28 and with economic information hardly
lending anything concrete, we suspect that the Euro will remain a market that
follows outside developments. In other words, what happens to the Dollar remains
the key driving force behind the Euro. With Spain posting a minor decline in 4th
quarter unemployment figures and German inflation readings contracting somewhat
aggressively, the macro economic tilt is mostly offsetting. In order for the
Euro to fall below solid support of 129.52 in the coming 3 sessions, the Dollar
will have to be able to rally off the Iraqi election! As suggested in the Dollar
comment, traders should expect volatility and should also utilize options to
control risk!
YEN
The Japanese stock market was down overnight despite
favorable high tech news and that would seem to point out vulnerability in the
Yen. There seemed to be more dialogue about the Chinese changing the currency
peg and that certainly puts a significant underpin under the Yen. Therefore, we
doubt that the Yen will fall far from the recent upside pivot point of 97.67. In
fact, on a decline to 96.56 we would suggest that aggressive traders get long
the March Yen.
SWISS
While the Swiss did manage a higher high yesterday,
unless the Swiss can regain 85.03 we are not inclined to shift our bearish
opinion on the currency. We do suspect that the Swiss could temporarily rise to
85.20 but we would see any spike up action in the coming two sessions as a
chance to get short.
BRITISH POUND
The Pound has certainly managed an upside breakout
and given the daily action of the last three days, we concede that the Pound
will continue to get the most benefit from US Dollar weakness. However, we are
also not totally convinced that the Pound can effectively manage an upside
breakout above solid resistance up at 188.69. To manage risk in a short side
play in the Pound, consider buying the March Pound 188 puts for 150.
CANADIAN DOLLAR
The chart action in the Canadian is pretty negative
and with the fundamental story apparently deteriorating, we can’t argue against
additional downside. On the other hand, the risk and reward of being short is
really unattractive. In our opinion, being short the Canadian from current
levels is really making a bet that the US Dollar is going to come out of the
next 2 sessions with a major upside breakout!
METALS
OVERNIGHT
London Gold Fix $426.40 +$.10 LME COPPER
STOCKS 45,550 metric tons +850 tons COMEX Gold stocks 5.962 ml +49,923 oz COMEX
SILVER stocks 102.3 ml Unchanged
GOLD
The gold market continues to garner the majority of
its near term direction from the direction of the US Dollar. Dollar activity was
quiet overnight and kept April gold locked in a $430 to $425 range. While the
gold market showed some flight to quality interest ahead of the Iraqi election,
it is pretty clear that flight to quality just isn’t a dominating factor for
gold.
SILVER
The coiling price action in March silver suggest the
market will make a direction decision soon. Technical indicators are approaching
over bought levels so silver will need to see a break in the Dollar or prices
could be heading back to $6.60. Top of the range comes in at $6.90.
PLATINUM
The market appears to be losing upside momentum as
technical indicators have become over bought. The upside is also limited by
expectations for rising platinum supplies this year. We think the path of least
resistance is down.
COPPER
With LME copper stocks rising and shanghai stocks
falling, copper prices made little headway in overnight trade with market
direction likely keying off the Dollar this session. The copper market continues
to see strength in the Chinese cash market, but recent daily LME copper
inventory readings are no longer showing consistent daily declines and that
could be a warning signal for the bull camp. Even the Shanghai copper stocks
figures have drifted away from the consistent pattern of declines and that also
seems to call the continuation of the bull camp into question.
CRUDE COMPLEX
The energy complex saw a little bit of a reversal
in the recent trend of stock rebuilding with this week’s readings. However,
while the recent API report did in fact show a marked decline in weekly gasoline
stocks, it should also be noted that the annual surplus in US gasoline stocks
actually expanded from 10.7 million barrels to 12.6 million barrels. We also
think that North American weather has been mild enough this winter to allow for
a resumption of the inventory rebuilding in crude oil after the mixed result
this week.
NATURAL GAS
The weekly natural gas storage figures showed a
bigger than expected draw of 230 bcf, but offsetting the bullish draw reading
was the realization that the annual surplus reading contracted. With the market
gapping down in the afternoon session Thursday, it would seem like the path of
least resistance is pointing downward. Certainly a shift in the mostly mild
weather forecast would alter the bearish tilt and certainly a sharp run up in
crude oil prices off the coming Iraqi election window could also alter the
downside tilt.