Futures Point To A Flat Open
2/28/2005
INTEREST RATES
bond prices were able to close higher on Friday,
there are several factors that could keep the market from rallying this week.
The Dollar put in a dismal performance on Friday closing weak which sets the
market up for a resumption of the down trend and a break back to critical
support at 82. If excessive weakness in the Dollar occurs, fears of foreign
central bank diversification away from Dollar securities is likely to be
rekindled and brought back to the front burner particularly given the lackluster
foreign demand at last week’s 2 year note auction.
STOCK INDICES
Stock market sentiment looks to have shifted to a
more optimistic outlook as March S&P rose sharply last week supported by ideas
that the strength in energy prices has yet to impede economic growth. The upward
revision in the 4th quarter GDP to +3.8% while the inflation data remained at a
low 1.6% suggested the Fed will not have to become more aggressive in raising
rates. While rising oil prices could eventually dampen growth, curb consumer
spending and squeeze corporate profits, corporate earnings reports have
generally been favorable and the strong domestic growth including a revision
higher in exports improves the outlook even further.
DOW
The strong close in the March Dow puts the market within striking distance of
the contract high. Friday’s sharp up move and close at the high suggest follow
through buying this session with near-term resistance not until 10,869. However,
the COT report with options shows the funds holding a new historic net long
position of 10,862 contracts which is understated since prices have rallied
sharply since the COT report was measured on Feb 22nd. Therefore, the market is
becoming increasingly vulnerable to profit taking and long position holders
should have training stops in place. For now, the bulls still have control.
S&P
The strength in the S&P market over the last three sessions is impressive and
from the COT report with options it appears that the funds were caught short and
are now unwinding those positions. As of Feb 22nd, the funds held a net short
position of 18,808 contracts, but from the magnitude of the rally last week,
fund traders have likely reversed their position and are now likely to be net
long. A declining trend in the initial claims number could suggest a healthy
gain in non-farm payrolls which the market may be pricing in ahead of Friday’s
employment report. Some profit taking could hit the market early as energy
prices are on the rise again, but support should be found around 1208.30 then
1200 and the market could make another run higher if today’s economic news comes
in strong. Next resistance for March S&P is at 1213.30, 1216.80 then 1221.20.
FOREIGN EXCHANGE
US DOLLAR
It doesn’t seem like the Dollar can shake off the
negatives of the twin deficits despite growth and inflation numbers coming in at
surprisingly strong levels, so path of least resistance still looks to be down.
Despite an upward adjustment in 4th Qtr GDP to 3.8%, the currency market was
disappointed and maybe it was because the inflation data remained subdued
suggesting the Fed did not have to take a more aggressive rate hike stance.
Traders were probably a little surprised that high energy prices have yet to
dent growth or really fan inflation. The weak market action Friday sets the
March Dollar index up for a break back to critical support at 82. A break below
near-term support at 82.38 should begin to re-surface fears of foreign central
bank reserve diversification. With the Dollar unable to gain ground on strong US
growth, a rising interest rate environment and a strong US stock market, we fear
the Dollar is likely to come under another selling wave even if the fundamentals
do not justify lower prices. While there are several economic reports this week
which could show growth continuing strong in the 1st quarter, it may not give
the Dollar much support since the currency has not been able to react positively
to economic news.
EURO
With the March Euro rejecting a probe below 1.32,
the market looks set for attempts at the 1.3277 and 1.3313 resistance levels.
While the US has both the rate and growth advantage over the Euro-zone, it is
hard to trade against such intense negative Dollar sentiment. Therefore, the
Euro likely sees gains against the Dollar early in the week with profit taking
in the Euro likely ahead of the US employment number. Jan Euro-zone CPI -.6% on
month suggests there may be room to ease rates to stimulate growth.
YEN
Gains in the Japanese stock market have been
providing a floor under the Yen while a 2.1% rise in Industrial Output supported
sharp gains in the currency over night. This report suggests Japan may be
recovering from its recession. Also giving the Yen support were comments from
the Bank of Japan indicating monetary policy would not stay loose indefinitely.
Critical support for the March contract at 94.59 should hold with next upside
objective at 96.44.
SWISS
While the Swiss remains over bought, the market’s
ability to reject lower prices suggests the correction may be shallow and over.
But the market still has to over come resistance at 86.47 to regain upside
momentum.
BRITISH POUND
It is impressive the Pound was able to shake off a
disappointing GDP revision to close strongly higher Friday. There still seems to
be hope that the BOE will raise rates soon and that is giving the pound the
advantage over its European counterparts. UK consumer confidence fell less than
expected in Feb and provides further support to the Pound. Next upside
resistance level is at 1.9250 in the March contract.
CANADIAN DOLLAR
The March Canadian Dollar held key support at 80,
and with the currency pushing through resistance at 80.79 and 81.05 the market
is in a position to test 81.72. If weakness in the US Dollar accelerates, March
Canadian could easily top 82 this week.
METALS
OVERNIGHT
London Gold Fix $436.55 +$2.30 LME COPPER
STOCKS 53,975 metric tons +600 tons COMEX Gold stocks 5.913 ml oz unchanged
COMEX SILVER stocks 101.5 ml -292,482 oz.
GOLD
The gold market’s pattern of higher highs and higher
lows last week has left the trend pointing upward. The weaker Dollar has been a
major component of the bullish tilt, so gold’s fortunes will have a tendency to
rise and fall with it. Gold seemed to hold up pretty well in the face of the
Dollar’s modest recovery last week, and the apparent resumption of a downtend in
the dollar this week should provide some impetus for further gains by gold.
SILVER
Silver traded higher overnight in line with gold. As
we suggested last week, we were inclined to buy silver on a break, but only if
an at the money put was carried along for the remaining days of February and the
first couple sessions of March. The Commitment of Traders report with options
showed the large specs to be net buyers of 5,340 contracts last week for a total
42,314 net long.
PLATINUM
While platinum appears to be benefiting from the
week dollar and strong gold market, we continue to be concerned that the massive
consolidation of the last 4 months is beginning to seem like a broadening top.
We are in favor of selling rallies above the $875 level, as the world economy
just isn’t strong enough to rationalize new a contract high run in April
platinum.
COPPER
Overnight, copper prices in Shanghai and London
gained on further dollar weakness and residual strength in other metals, but
London came short of testing the 16-year high that was made in January. Last
week Shanghai Copper stocks increased by a significant 9,795 tons, and while
some might suggest that is a residual of the long holiday, we are not willing to
discount two weeks of big stocks increases because of 1 week of holiday. Also,
recent reports that Anglo American copper output from Chile increased by over
10% in 2004 indicates a potential for increased supply.
CRUDE COMPLEX
We are amazed that April crude oil was able to
hold its ground despite a sharp sell off in the product sector Friday which
suggest to us that crude prices still have the capacity to move much higher. The
energy markets had become over bought and gasoline, which was hit the hardest
Friday but closed off the lows, may have had a delayed reaction to the sharp
rise in API gasoline stocks which were up 5.7 million barrels and left stocks
25.2 million barrels above year ago levels. But despite the cushion coming into
the spring driving season, expectations for strong global oil demand this year
with OPEC pumping near capacity has made the trade anxious that surplus supplies
could easily disappear even if minor production problems surface.
NATURAL GAS
The natural gas market spiked higher Friday mostly
due to bullish technical signals, but also supported by forecasts for below
normal temperatures in the Northeast over the next two weeks. Once April natural
gas prices made a solid break above 6.50, fund traders who were net short 38,458
contracts as of Feb 22nd likely began to cover positions aggressively and could
have more buying to do early this week. Despite the improved technical posture
of the market, we think gains in natural gas prices should be temporary since
the cold snap is coming at the end of the winter season which is unlikely to put
much of a dent in burgeoning supplies.