Futures Point To A Flat Open
4/13/2005
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INTEREST RATES
One has to characterize the rally in Treasuries
yesterday as a relief rally, as the FOMC minutes still contained some hawkish
dialogue but apparently didn’t reach the level feared by the trade. In other
words, the market spun the dialogue into a bullish tilt and did so even in the
face of continued declines in energy prices and an impressive recovery in stock
prices. In retrospect, the rally in Treasuries seems significantly overdone,
especially with the Wall Street Journal front page this morning suggesting that
the Fed might now be expecting to push interest rates up higher than they
initially anticipated.
STOCK INDICES
As we suggested in the comment yesterday, the
stock markets main focal point remains oil prices. With the added benefit of a
partial confirmation of the Fed’s slow and steady approach to raising interest
rates, the stock market managed a relief rally, similar to the rally that was
seen in the Treasury markets. In other words, economic conditions didn’t
necessarily improve yesterday, they were simply found to be less damaging than
expectations.
DOW
The Dow certainly has significant baggage from a number of large cap stocks that
continue to suffer under high benefits costs and high energy costs. However, the
bias in the broad market has shifted toward the upside and that could help to
downplay the negatives, at least for a few sessions. It would certainly help
extend the bull case, if the market were to get on to a clean start this morning
following the retail sales report, especially since some economists are fretting
that high oil prices might have hurt sales at the lower end of the economic
ladder. The bias is up but the retail sales report must come in with a gain of
at least +0.6% and the report must not provide direct proof that high oil prices
are cutting spending. Fortunately, crude oil prices continue to slide and that
means that buyers can probably overcome a partially disappointing retail sales
result. We see little resistance in the June Dow until 10,558 and 10,573.
S&P
As mentioned before, the S&P did manage a classical reversal with the action
Tuesday and that should clear the decks for at least a two day bounce. However,
the market will run into critical pivot point resistance up at 1195.50 and will
also see some hesitation at the 40 day moving average of 1198.20, if the rally
manages to extend that far. The bias is up and a slide below $52.27 in June
crude oil could accelerate the rally and in a sense make it something other than
a relief rally. In order to avoid disappointment, the June S&P needs to hold
above critical support of 1187.20, in the first hour of trade today and that in
a sense means, that the market needs to hold up through the retail sales
reaction.
FOREIGN EXCHANGE
US DOLLAR
While some saw the FOMC meeting minutes as
supportive, the fact of the matter is that the inflation expectation didn’t live
up to what the trade had been expecting and that could leave the Dollar in hot
water. The Dollar even managed to discount the potentially damaging record US
trade deficit early in the session Tuesday, then it rallied off dialogue that
could be seen as confusing. In other words, the Dollar could collapse at any
time and one would not be surprised. In fact, without ongoing declines in oil
prices, sharp gains in US equity prices and a decent US retail sales report, we
suspect that Dollar bulls will become extremely nervous. Some suggest that the
narrowing of the trade surplus with China was the main factor in the markets
reaction to the Trade number yesterday and that is even more telling under the
revelation that China isn’t sending top officials to this weekends G7 meeting.
Therefore, some traders are about ready to throw out classic fundamental rules
for the Dollar but with the upcoming G7 meeting few players are willing to make
an aggressive bet in either direction. In short, we really see the bulls having
more risk than the bears but we also don’t think that the market can sustain a
probe outside of 85.10 and 83.90 in the June Dollar. The US economy is
disappointing, but oil prices are softening and that simply locks the Dollar in
a range.
EURO
It is clear from the tight ranges in the Euro that
it really doesn’t have the economic wherewithal to forge a breakout of the
range, unless of course the Dollar does something to prompt a breakout. We
suspect that the June Euro is locked with an even tighter range of 129.85 and
128.97, but if we were forced into the market we would look to be a seller of a
rally to 129.85. Economic news from the EU remains muted with Italy posting a
miniscule rise in February Industrial production of +0.1%. In other words, the
Euro doesn’t have an economic differential advantage but it also doesn’t have a
clear cut interest rate differential disadvantage! In short, expect the currency
to mark some time on the charts.
YEN
A big range up extension in the Yen clearly throws
off the bearish tilt in place since the March highs. We suspect that the large
rally comes compliments off the BOJ comments that suggest little need to discuss
a Yuan revaluation. In other words, the US trade figures with China take the
heat of the floating currency issue, the Chinese aren’t sending top officials to
the G7 meeting and that all means the pressure on the Yen is seriously reduced.
In short, the Yen rally is about the Yuan and not because of the Japanese
economy. We also suspect that a slightly less hawkish US Fed policy is
contributing to the Yen rally. Near term resistance in the Yen doesn’t come in
until 94.00.
SWISS
The Swiss remains mired in the recent consolidation
and would seem to have little fresh impetus to alter the sideways action. In
fact, most of the action in the currency markets is taking place in the Pacific
Rim and that takes the attention of the trade away from the Swiss.
BRITISH POUND
UK payrolls and jobless figures were somewhat
disappointing, but we don’t get the sense that the macro economic outlook it
playing too big of a role in current situation. Therefore, we have to leave the
path of least resistance pointing upward, especially if the June Pound manages
to climb above a critical pivot point of 189.10. In the near term, we can’t rule
out a rally back to 190.00 as the Dollar lacks strength and the Euro is simply
waffling.
CANADIAN DOLLAR
We suspect that the revelations on the Chinese Yuan,
provide a measure of support to the Canadian but little seems to throw off the
patently negative bias present in the Canadian. In fact, if the Canadian were
set to recover we would have expected to see some type of bullish tilt in the
last 24 hours, but little has presented itself. Therefore, remain bearish until
the June Canadian manages a rise back above 81.20.
METALS
OVERNIGHT
London Gold Fix $428.85 -$0.30 LME COPPER
STOCKS 49,850 metric tons +950 tons COMEX Gold stocks 6.109 ml oz Unchanged
COMEX SILVER stocks 102.1 ml -583,710 oz
GOLD
Apparently the gold market has managed to shake the
weakness seen yesterday and has righted the ship. In fact, the pattern of higher
lows seems to have remained in place and we suspect that comes largely because
of the recovery in stock prices, which in turn came from sharply lower oil
prices. While the gold market could be held back from the fears of weekend
discussions on IMF gold sales, the general consensus is that the US can
effectively prevent the sales with its opposition.
SILVER
The silver market did manage a new high for the move
yesterday but didn’t really manage that impressive of a close. However, we
suspect that silver is underpinned by the potential improvement in the macro
economic outlook that is being fostered by the consistent weakness in energy
prices. Unfortunately the silver market didn’t exactly show signs of
concentrated buying interest yesterday and also seemed to recoil after running
up to the 40 day moving average.
PLATINUM
The platinum market continues to coil into a tight
consolidation that would seem to preclude a breakout. Like silver, the platinum
market is certainly benefited by the recent slide in oil prices and the recovery
in stock prices. Also like silver, the platinum market isn’t seeing that much
change in the supply function but apparently the supply function remains
relatively tight in platinum and that is why the market maintains a bullish
bias.
COPPER
The copper market ran up to new contract highs and
then failed in an impressive fashion. Overnight the market saw another increase
in LME stocks and with the overbought condition and the violations of chart
support a decline to the bottom of the recent consolidation is possible.
However, in the event that energy prices continue to decline and the equity
market rises the selling impetus in copper might be restricted.
CRUDE COMPLEX
The energy complex extended the downside slide
and did so mostly off the idea that demand was set to sag and also that supply
continues to rebuild. In addition to the obvious rise in US crude oil
inventories, the energy complex is also reacting to the expectation that supply
flow from OPEC is on the rise. However, it is pretty clear that the brunt of the
selling in the market came from the lower IEA demand projections, which seem to
be in direct conflict with the EIA projections released over the last week.
NATURAL GAS
Considering the slide in crude oil prices, the
natural gas market continues to be pulled down by BTU arbitrage selling and by
simple stop loss selling. Like the June crude, the natural gas market failed to
hold at the bottom of the March consolidation and might now be headed down to
the next support zone of $7.11. In the short term, the natural gas market
probably has little capacity to track its own fundamentals and given this
markets propensity to overreact, it would not be surprising to see a washout to
$7.00 into the Thursday morning storage data.