Futures Point To A Higher Open
9/21/2004
INTEREST RATES
The Treasury appeared to change its tune on the
expectation for the outcome of the FOMC meeting. While a majority of analysts
still expect the Fed to hike interest rates, we are seeing a number of players
temper their conviction on the hike. With the NAHB Index showing a 3 point
decline yesterday, prior housing readings weak and expectations for the housing
starts report this morning calling for a decline, there is some evidence of
softening in the stalwart housing sector of the US economy.
STOCK INDICES
While the market comes into the session today
fretting an interest rate hike and suffering under high energy prices, it is
clear that the market had the capacity on Monday to respect chart support and
overnight has even managed to rise back toward resistance. It is clear that the
stock market will have to look for a silver lining in the events today, as many
economists and Fed watchers are convinced that the Fed is poised to act today
with a 25 basis point rate hike. Some think that the negative impact of a rate
hike on stock prices will be diffused slightly by the argument that a move today
while premature is necessary to head off the inflation that could be fostered by
high energy prices.
DOW
The Dow chart appears to have violated some critical support temporarily
overnight, but as long as prices hold above 10,200 we doubt that the market will
suffer a major technical setback. On the other hand, failure to hold above
10,200 early could result in a slide all the way down to 10,100. We are a little
concerned that the Dow might take a rate hike move harder than any other stock
sector given that big caps typically have a larger interest expense!
S&P
While the December S&P managed to hold critical support of 1120 against
yesterday, we would really be surprised to see the market manage a breakout
above consolidation resistance today, unless the Fed surprises by holding
steady. However, holding steady might suggest that the economy is in much worse
shape than the market realizes.
FOREIGN EXCHANGE
US DOLLAR
The Dollar is heading lower as if the coming rate
move is a negative to the currency. In other words, the currency markets seem to
be suggesting that a rate hike will discourage investment flow into the US. We
have to agree with the markets overnight response, as the US economy is not
showing any sign of inflation and continues to be mired in a slow cycle. We have
to wonder how the Fed can justify anticipating inflation and at the same time
potentially snuffing out the recovery that was so hard to come by. In the end,
the December Dollar would seem to be headed down to critical support of 88.53
but we would be extremely careful being short down at that level into the
decision, as a decision to leave rates on hold might result in a concentrated
bounce back above 90.20. From the economic report flow alone, the Dollar seems
justified in further losses.
EURO
At least for now, the Euro looks to get the windfall
of a lower US Dollar. We are still not convinced that the Euro is capable of
anything more than a rise to resistance of 123.00 but in the wake of the FOMC
meeting today it is possible that the Euro manages a temporary rise to 123.40.
Trend line resistance off the July and August highs comes in at 123.22.
YEN
The coiling in the Yen continues to give off a
negative connotation, as the pattern of lower highs continues. With the Japanese
already concerned about slowing exports to the US, we have to think that higher
US interest rates are a negative for the Japanese economy and a negative for the
Japanese Yen. However, we are not sure that the Yen is primed for a slide below
consolidation support down at 90.93.
SWISS
The Swiss is getting indirect support from the
travails in the US Dollar and looks to continue to win by default, especially if
the US moves to hike rates. In the event that the Fed holds steady, that could
surprise the trade and result in a sharp setback in the Swiss to 78.87. The path
of least resistance early is up in the Swiss.
BRITISH POUND
While the Pound might rise today because of the lack
of alternatives we think that the charts offer too much in the way of overhead
resistance to see a strong upward pulse. However, it would not be surprising to
see the Pound temporarily rise to 179.20 in the wake of the US FOMC decision.
Critical down trend channel resistance lines in the December Pound come in today
at 179.42.
CANADIAN DOLLAR
If the Canadian is in fact a leadership currency,
then it should manage to dominate today. Traders should be long but protected
with a volatility play: Sell December Canadian futures at 77.40 and buy 3
December 78.50 calls for 56 each. In the event that the Canadian slides back to
support of 76.50, the futures will have financed almost half of the longer term
call position!
METALS
OVERNIGHT
London Gold Fix $405.45 +$.95 LME COPPER
STOCKS 102,275 mt tons +425 tons COMEX Gold stocks 4.934 ml +51,231 oz COMEX
Silver stocks 109.9 ml Unchanged
GOLD
While the Asian gold market refused to move prices
ahead of the FOMC rate decision today, it is clear that the Dollar will come
into the session under pressure and that should be supportive of the gold
market. In our opinion, a rate hike could serve to undermine the Dollar, as the
US economy doesn’t appear to be strong enough to weather a rate hike without
further slowing. However, the currency markets might attempt to bid the Dollar
up, in the face of higher US yields but we think the biggest reason behind the
weakness in the Dollar since early this spring, is the fact that the US economy
is sputtering.
SILVER
While it would not be surprising to see silver slide
off a US Fed rate hike, the market has come into the session this morning with a
slight upward bias. In order to attract fund buying, December silver will have
to manage a rise above $6.325. To really kick in technical buy signals, December
silver will have to manage a rise above the moving average at $6.475.
PLATINUM
Despite a fire at an African platinum facility, the
platinum market is lacking a critical driving force. Since the August high, the
platinum has been in a negative posture and we suspect that is mostly the result
of the slack macro economic outlook. Critical support in January platinum comes
in at $829, with near term resistance not seen until $845.
COPPER
There is no confusion in the overnight action as
copper has managed to rise to the highest level since March. Apparently CTA fund
buying is fueling the rise and with more confirmation overnight of the strong
pace of Chinese copper concentrate imports, (+34% in August over year ago
levels) it is understandable why buyers are so willing to step into the market.
However, it could get a little dicey for the bulls following the FOMC meeting
this afternoon.
CRUDE COMPLEX
It’s clear that the energy complex won’t give up
bull control easily, as the market shrugged off predictions that OPEC August
production increased by 1.1%. In other words, the market took the extra 338,000
barrel per day month over month production increase and mostly discounted it in
favor of talk that Russian production was being crimped due to the Yukos
travails. Apparently the Yukos situation has already reduced Russian export flow
by up to 92,000 barrels per day.
NATURAL GAS
The natural gas market traded around the lows of the
prior session, suggesting that the bear camp has seized control over prices
again. With forecasts calling for continued warm temps well into the fall, it is
possible that some cooling demand forecasts will have to be revised upward.
However, we doubt that prices will manage to be supported by the hope for
ongoing cooling demand.