Futures Point To A Flat Open
3/22/2005
INTEREST RATES
The Treasury market seemed to be supported by the ongoing rise in the US Dollar yesterday, as that could that could be seen as a reason to temporarily diffuse the international diversification threat. However, while we recognize the moderately oversold condition of the Treasury market, we also think that the Fed dialogue will generally keep a cap on Treasury prices. While the majority of the market thinks that the Fed will raise rates by 25 basis points, there is a small fringe group that thinks a 50 basis point hike is possible.
STOCK INDICES
The stock market was lucky to avoid a full washout on Monday but after a mid morning attempt to rally yesterday, the bear camp seemed to lose its aggressive resolve. However, we are not sure that macro economic conditions are set to improve dramatically, as the constant threat of even higher oil prices sits on top of a rather muted economic outlook. In fact, in addition to slack economics and high oil prices concerns, the equity market might see the inflation threat tossed onto the pile later today.
DOW
The early action in the June Dow seems to leave the trend pointing down. While we don’t get the sense that the market is poised for a panic style liquidation, it would seem like the market has the ability to post moderately large declines. In fact, the June Dow has little in the way of technical chart support until the 10,500 level is encountered and shows the ability to hold up prices. The double threat of ongoing high energy prices and rising interest rates is simply too much for the large cap stocks and prices should be adjusting downward. Trend line support in the June Dow comes in at 10,485 today and at 10,492 on Wednesday.
S&P
While it seemed like the June S&P was poised to forge a spike down reversal move around mid session yesterday, the market failed to hold the critical pivot point, which should leave the short term trend pointing downward. We continue to point to a gap down at 1181.50 to 1179.00 basis the June, while trend line support in the June S&P comes in down at 1175.00. For the stock market to rally later today would probably require an aggressive sell the rumor buy the fact pattern in the early action. However, even if the Fed takes a pass on hiking rates more aggressively in the future, that would not seem to be a reason to jump back into the market aggressively on the long side. In short, we continue to look for a big range down washout.
FOREIGN EXCHANGE
US DOLLAR
While the Dollar is giving back some of the gains forged on Monday, it would seem like a large portion of the recent gains will remain in place through the afternoon FOMC meeting statement. However, with the PPI report due out early in the action today there might be an opening salvo of volatility. In our opinion, the Dollar will have to see a hot PPI report just to facilitate the idea that US yields will be high enough to offset the potential risk of ongoing international investment diversification. In other words, the US Dollar really needs help in order to sustain the sharp pattern of gains off the March lows. While we suspect that the PPI has the ability to post a hot reading, we are not as convinced that the CPI report has the capacity to foster inflation concerns. In our opinion, the Dollar has come a long way and will now have to prove that it can sustain the recent gains. In fact, those that are long the Dollar should consider banking profits, purchasing some puts or putting in tight profit stops as the Dollar hasn’t seen some landmark change that would seem to signal an end to the long held down trend pattern. Traders might consider buying an April Dollar Index 82 put this morning for 28 ticks, looking for a double or tripling of that premium in the coming sessions.
EURO
We suspect that the Euro has corrected its overbought status and that the bigger picture theme of international rotation will now step up to support the currency. Despite the massive slide off the March highs, the Euro was able to maintain the pattern of higher lows. While the hope for sharply higher US rates of return has undermined the Euro, we now suspect that the Euro is poised for a recovery bounce unless the PPI report this morning comes in at +.4% or +.5%. Therefore, aggressive traders might consider getting long the June Euro at 132.05 but using tight stops on the position at 131.50. However, limiting the upside potential in the Euro are comments overnight from the Bundesbank suggesting that German manufacturing orders were actually lower than originally posted (-3.5%).
YEN
While comments out of Hong Kong suggested that the migration away from the Dollar and toward the Euro will continue, the article also suggested that the pace of rotation would be measured and that seems to give the Yen a measure of support well above the recent lows. However, considering the potential tightening of US interest rates, the ongoing limit of high oil prices, we suspect that the Yen will lag behind the Euro and the Swiss on any near term recovery move. While the threat of rising Chinese interest rates hasn’t been given as much attention in the financial markets (that view was apparently spawned by Chinese grain market dialogue) we suspect that the fear of change in China is a little limiting for the Yen. However, the June Yen still probably has the ability to rise toward the middle of the current consolidation up at 96.38.
SWISS
The 85.10 low should be pretty solid in the Swiss, especially if the inflation view is fostered by the US PPI report this morning. It should also be noted that the Swiss was able to maintain the pattern of higher lows on the recent correction and now might be poised to return to the mid March consolidation up around 86.37 to 87.21. Aggressive traders should be long but players should not tolerate a slide back below 85.15.
BRITISH POUND
The Pound really hasn’t recoiling very far away from the recent lows and that leaves the Pound suspect into the critical US information today. While the UK CPI was up +.3% it would not seem like the trade is overly concerned about sharply rising UK interest rates and that could be limiting the Pound’s ability to bounce. The risk to longs in the Pound seems to be pretty high and those that are long should secure long put and short call coverage against those positions into the action this morning.
CANADIAN DOLLAR
The Canadian has certainly forged an impressive bounce off the recent low and it would seem like the June Canadian has the ability to return to the March highs in the coming hours. However, as in the Pound, players should not tolerate a trade back below 82.85 in the early going today. Be long a June Canadian futures and long two April Canadian 81.50 puts for 24 ticks today.
METALS
OVERNIGHT
London Gold Fix $430.65 -$5.60 LME COPPER STOCKS 47,325 metric tons -950 tons COMEX Gold stocks 5.929 ml oz Unchanged COMEX SILVER stocks 102.4 ml +588,814 oz
GOLD
The combination of a massive rise in the Dollar and an overextended spec and fund long position facilitated the massive stop loss selling washout on Monday. The rise in the Dollar was so compelling that many traders are now thinking that something sustainable is taking place in the Greenback. While we suspect that the anticipation of a more aggressive US interest rate hike pace is behind part of the recent rise in the US Dollar, it is also possible that talk of rising Chinese interest rates is indirectly benefiting the Dollar.
SILVER
The silver market has also rejected some of the losses forged into the lows on Monday but the market remains in a partially negative posture. Not only is the outlook on the economy soft but the market is concerned about the threat of oil and potentially even more aggressive rate hikes. Like gold, we suspect that silver could see some additional downside action into the FOMC meeting decision this afternoon.
PLATINUM
Given the magnitude of the damage on the charts, we suspect that platinum is likely to see even more stop loss selling in the sessions ahead. As we have been suggesting for some time, the platinum market is way too expensive when compared to the alternative use palladium market and it is also simply too expensive on an outright historical basis. Lastly it would not seem like the hope for strong ongoing Asian physical demand is a theme capable of supporting prices.
COPPER
While the copper market managed to recoil away from the lows Monday, we are not sure that the market is totally out of the woods. In fact, with the market anxiously waiting for the PPI report this morning and in a position to anticipate more aggressive US Fed dialogue this afternoon, we think that the bull camp in copper should be fearful of more selling. However, the copper market isn’t nearly as vulnerable as other metals markets, partly because the ongoing tightness in copper and partly because of the significantly more balanced technical condition in copper.
CRUDE COMPLEX
The energy complex showed some divergence between the crude oil and product markets yesterday and that would seem to give the overall energy market a chance of discounting the bearish crude oil implications of another OPEC production ceiling increase. With the crude oil market also undermined by comments from the OPEC President, the odds of some corrective action are on the rise. In fact, the OPEC President was supposedly in negotiations with other members of OPEC, on how some additional oil might be brought to the market.
NATURAL GAS
In the afternoon action Monday, the May natural gas managed to climb to even higher levels than were posted in the regular pit action and that would suggest an ongoing bull tilt. We also think that physical buying is underpinning prices but the market is still looking to the crude oil market for its direction. Certainly the weather is generally supporting prices, as the cold weather continues to linger and might actually be serving to lift up, what was here to fore expected to be rather weak winter 2005 heating demand.