Futures Point To A Gap Lower
INTEREST RATES
More new lows in the overnight action shows that
the Treasury market has indeed adopted an inflation tilt. In other words, the
fact that US economic numbers yesterday were a little softer than expected was
almost completely ignored, as the PPI report came in much hotter than expected.
Typically the PPI has shown hotter readings than the CPI but we suspect that the
market will at least see a little inflation concern from the report this
morning.
STOCK INDICES
The market is simply locked into a negative
posture. In addition to the fear of higher interest rates, the market now
appears to be voicing concerns over inflation. With the market whipping up
inflation fears, the bears can argue that the Fed might be forced to hike rates,
even more than the slow and measured approach that the Fed promised in the last
Congressional testimony.
DOW
Apparently prices haven’t reached a point of maximum bearishness and given the
fundamental outlook, it is pretty difficult to construct a scenario where most
investors concerns are removed quickly. With the Dow peaking out below
consolidation support of 9,952, it is possible that prices are headed down to
9,900. Buying this market sharply lower is still a blind speculation that
something significant is going to change in the near term.
S&P
While the classical bottom signal suggests a bottom has formed, the June
contract could still setback significantly and not countervail the recent
bottoming signal. Given the potential for inflation mongering, even higher
energy prices and concerns that the weekend will bring negative geopolitical
developments, one has to continue favoring the downside. Near term critical
support in the June S&P comes in at 1087.50 and then again down at 1085 and
finally at 1083.40.
FOREIGN EXCHANGE
US DOLLAR
With the expectation of inflation, there is the
expectation of even higher US interest rates. In other words, the Dollar has
been moving higher off the idea that the US Fed would move slowly in raising
rates. However, the ultra hot PPI report released yesterday, changes the outlook
and creates the idea that the Fed might be forced to raise rates more than
initially projected. Seeing the interest rate differential shifts aggressively
in favor the US, is serving to ramp up the money flow toward the US currency.
Near term up trend channel resistance comes in today at 92.50 and then not until
92.90. The biggest threat to the bull camp in the Dollar is that the market
becomes overbought.
EURO
We think the path in the Euro is down, but that the
rate of decline is set to slow somewhat. In fact, with the Euro zone GDP coming
in with only minimal positive growth of +0.6%, maybe the economy has turned the
corner. However, the rate of growth is so anemic and the ECB has recently warned
that soaring energy prices are endangering the recovery. In the US, economist
think that rising energy prices are set to pull down the GDP by.5% and that
would leave the Euro zone with almost no growth from current levels. Therefore,
expect a continued erosion of prices with an ultimate target of 116.
YEN
There would appear to be no respite from the selling
on the charts in the Yen. We have to think that the Chinese slowdown fear is
contributing to the decline in the Yen and that the ultimate downside targeting
in the Yen is 86.00. In order to alter the downtrend in the Yen, the Dollar will
have to show a massive and sustained reversal.
^next^
SWISS
The Swiss is poised to make a new low for the move
but has decent support around 76.44. We continue to stand by a short view in the
Swiss but would alter than view in the event that the Swiss manages to regain
77.25 today.
BRITISH POUND
More new lows on the charts would seem to foster
some follow through selling. With UK stocks opening lower and the UK economic
outlook not expected to change anytime soon, we suspect that the Pound is headed
down to an ultimate target of 172.60.
CANADIAN DOLLAR
The rise in the Dollar is just too strong for the
Canadian to pull out of the slide. While we think the Canadian might be the
first to bottom against the Dollar, the time for a bottom is not yet at hand.
Expect fresh contract lows soon.
METALS
OVERNIGHT
London A.M. Gold Fix $373.50 -$2.00 LME
COPPER STOCKS 145,625 mt tons -875 tns COMEX Gold stocks 4.32 ml unchanged Comex
Silver stocks 121.5 ml -647,763 OZ
GOLD
From the action this week it is clear that currency
action and not the prospect of inflation is driving gold prices. In other words,
the gold market is not yet in a position to benefit from the inflation
potential, as the PPI report yesterday sparked talk of rising inflation. This
morning the Press is also focusing on sharply rising milk, butter and cheese
prices in addition to soaring energy prices and one would think that would be a
favorable environment for gold.
SILVER
The silver chart looks vulnerable and with gold
pointing down, it would not be surprising for July silver to violate
consolidation support of $5.50 and head toward the next lower support zone of
$5.25. It is possible that the silver market thinks the Fed is poised to act and
therefore the near term inflation threat isn’t something that can be counted on
to drive silver prices over the long term. In order to turn our opinion of the
market up, we would have to see a rise back above $5.83 and we would have to see
an increase in trading volume.
PLATINUM
Use a breakout range of 800 and 779 in July platinum
but we will assume a slightly negative bias until something new surfaces in the
headlines. Declining volume and open interest suggests to us, that traders are
moving away from platinum and that could mean that more liquidation selling is
ahead.
COPPER
Aggressive traders might want to lower the short
entry point in copper as the market probably won’t manage a rise 120.00. With
reports overnight suggesting that China’s State Reserves Bureau is contemplating
a sale of 60,000 metric tons of copper, we suspect that a negative bias will
dominate futures action. Supposedly the Chinese Bureau can effectively arbitrage
their holdings by selling the physical and buying the futures.
CRUDE COMPLEX
In the afternoon session yesterday the crude oil
market managed to post yet another new high and it is clear that the market
doesn’t need much in the way of supportive information to launch into an upward
trek. Certainly there was a short covering impetus in the action Thursday and
when prices failed to weaken Thursday, it seemed that the shorts rushed to cover
positions. However, since the market added to the gains the “after marketâ€, it
is clear that something besides technical short covering was behind the move.
NATURAL GAS
The natural gas market closed at the highest level
since January and the market would appear to be poised to return to $739 on the
weekly charts. While the weekly injection report came in at roughly the same
level as the two prior weeks, the annual surplus is pegged at 403 bcf and that
is supposedly tempers the bull tilt in the market. However, the BTU conversion
pull from crude oil, increasing cooling needs and the need for a supply risk
premium, is apparently enough to push natural gas higher.