Futures Point To A Higher Open
10/26/2004
INTEREST RATES
The Treasury market backed off from the recent
high as more primary Dealers suggest that the Fed might break normal patterns
and move to hike interest rates in December. In our opinion, seeing the Fed hike
interest rates in the coming 2-3 months could be the second biggest mistake made
under the Greenspan leadership. Certainly there are growing signs of inflation,
but we have to wonder if the economy is in fact sliding back toward recession.
STOCK INDICES
While some Index measures have managed to bounce
sharply away from the Monday lows, it would not seem like the outlook for the
economy has brightened. However, a short term respite is possible from soaring
energy prices, as the strike in Norway might end within the coming 24 hours.
Unfortunately the energy situation only looks to be temporarily appeased,
instead of permanently resolved.
DOW
Overnight the Dow futures managed to bounce and fill the gap left by the sharply
lower open on Monday. Technically the big range down reversal pattern on Monday
qualifies as a significant bottom, but not all technicals are bullish and in
general a bullish technical call would seem to be very much in conflict with the
fundamentals. Therefore, expect a bounce but don’t expect a trend change. Near
term corrective targeting comes in at 9,790.
S&P
The S&P also managed a classical bottoming formation, with a big range down and
strong reversal into the close on Monday. Therefore, a 2-3 day bounce wouldn’t
be surprising but there would seem to be plenty of long term barriers to a
sustained rally. Near term upside corrective targeting is seen at 1115.50 but
that would certainly be a tall order for a market in an undermined state. We
still think that the 1080 level will be tested into the coming election, unless
the energy market does something extremely helpful in the coming 9 sessions.
FOREIGN EXCHANGE
US DOLLAR
The Dollar is oversold and potentially capable of a
near term bounce. However, the fundamentals are pretty bearish and would seem to
be extremely difficult to alter quickly. We have to think that a large amount of
the pressure in the Dollar is coming from soaring oil prices and the concern
that the US Fed is still in a rate hike posture. Therefore, under some slightly
weaker oil prices, it is possible that the Dollar manages to short cover. In the
end, the growing trade and budget deficit concerns will remain and unless the US
growth rate jumps up and surprises the market, we just don’t see anything but
periodic and temporary bounces in the Dollar. Traders should be aware that the
Fed will release its Beige Book on Wednesday afternoon and from that, the trade
will get a fresh look into the thought process of the Fed. It is our opinion,
that the market is downgrading the Dollar because of the Fed’s insistence on
higher rates, regardless of the softening in the US numbers. In other words,
without headline change in something, expect that the downtrend in the Dollar is
set to continue. Resistance today is 85.45 and support is seen at the old low of
84.85.
EURO
The Euro doesn’t appear to be significantly
overbought, as it managed to forge a higher high in the overnight action. An
improvement in Spanish Unemployment levels is supportive of the Euro, but we
have to think that the news of a possible end to the Norway strike is an
undermining situation for the Euro, as it rose consistently off the recent
pattern of new energy market highs. Near term support in the Euro comes in at
127.70.
YEN
The Yen is certainly overbought and without the
consistent decline in the Dollar, it might be extremely difficult for the Yen to
hold so high in the last 5 months trading range. Near term corrective support in
the December Yen comes in at 93.57.
SWISS
As would be expected, the Swiss is seeing slightly
lower flight to quality concerns into the opening this morning and that should
prompt some profit taking. Unfortunately for the bull camp, the Swiss rallied so
fast that it doesn’t have solid support until 83.00. As long energy prices are
weak, we suspect that the Swiss will also be weak.
BRITISH POUND
The Pound would appear to have a double top and
would also appear to have gotten significantly overbought in the late October
rally. Therefore a normal retracement would seem to project a slide back down to
181.03.
CANADIAN DOLLAR
We doubt that the inflation readings will serve to
jostle the Canadian permanently, as all items rose only.1%, with the core
inflation at 1.5%. However, the Canadian is overbought and due for a correction
and given the magnitude of the October rally, little firm support is seen until
81.10 basis the December contract.
METALS
OVERNIGHT
London Gold Fix $427.15 -$1.85 LME COPPER
STOCKS 80,450 metric tons -1,675 tons COMEX Gold stocks 5.315 ml +11,461 oz
COMEX Silver stocks 105.0 ml +10,944 oz
GOLD
Seeing gold reach up to within striking distance of
the highest level since the late 80’s would certainly seem to suggest that
something significant is underway. The Dollar hasn’t forged a lower low
overnight and that probably leaves gold in a slightly undermined position to
start the session today. So far, the Gold Fields buyout/merger situation hasn’t
really yielded an increase in speculative interest in gold, partially because
the situation hasn’t been resolved and partly because we haven’t seen any sign
that a bidding war will ensue.
SILVER
After a major thrust higher left silver moderately
overbought in the short term, it is logical to see a corrective setback. Near
term critical support in December silver comes in at $7.31 and then again at
$7.19. Silver is being carried largely by gold but unfortunately the silver
market is also being undermined by the deterioration in the macro economic case
and the fear that demand might suffer.
PLATINUM
Similar to silver, the platinum market will lead
gold on the downside and lag gold on the upside. According to Anglo Platinum the
company lost up to 50,000 ounces of production due to the recent strike and
therefore the 2004 production is expected to come in at 2.4 million ounces. In
short, the platinum market sees its fundamental condition shored up but the
market will still need consistent support from gold in order to climb above
consolidation resistance of $860.
COPPER
Copper prices remain mired in the mid October
consolidation and it would seem that the market is being undermined by a
slightly less bullish forward looking view. With forecasts for a balanced supply
and demand condition in 2005, traders have to become concerned about the
absolute level of copper prices and therefore it would seem that prices
moderately above 133 are now considered relatively expensive. Furthermore, if
the market is thought to be in balance next year and the outlook for demand is
suspect, the market will have trouble forging near term gains.
CRUDE COMPLEX
The energy complex flared into the opening Monday
off the weekend concerns of a shipping strike in Norway. Even in the face of
private estimates that OPEC production in October increased by 200,000 barrels
per day and concerns that the world economy was going to be derailed by high oil
prices, the energy market managed the early probe to new all time highs.
However, the market was unable to hold the gains and seemed to soften even
further on news that Russian officials were working to expand export facilities
to meet that countries rising flow of oil.
NATURAL GAS
With the crude oil rally reversing and the ultra
bullish setup in the energy complex tempered slightly, we suspect that natural
gas prices will chop a little lower. Near term support on the charts comes in at
9.22 in the January contract, while even lower support is pegged at even number
9.00. With much warmer than normal temps starting to deflate the early cold
forecasts and the macro economic outlook deteriorating by the day, one has to
wonder if recent high prices are justified and sustainable.