Futures Point To A Higher Open
3/1/2005
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INTEREST RATES
over rising inflation, a pick up in the Chicago
manufacturing activity index, and mortgage related hedge selling drove bond
prices below key support levels Monday which sets the stage for further weakness
ahead of Friday’s employment data. The sharp gain in the core price index for
personal consumption expenditures, up 1.6% annual rate, an indicator which the
Fed is now watching closely has the market nervous that the pace of rate hikes
could accelerate. Also the jump in the Chicago PMI and in particular the rise in
the employment component has traders increasingly nervous that the February
payroll will show a big increase (over 220,000) especially since the initial
claims have seen a significant decline this year.
STOCK INDICES
Stocks took it on the chin Monday as negative
drug company and auto sector news drove stock indexes lower across the board
while rising bond yields also encourage selling. Two drug companies were forced
to take products off the market due to adverse affects of the drugs. Also, the
car industry was downgraded by a major brokerage firm.
DOW
The March Dow is having problems getting through resistance at 10,875, but even
though prices weakened Monday, the market is still in a neutral position.
However, we would not want to see prices fall below 10,690 as that could open
the downside for a break to 10,660 and below there 10,610. We still think there
is a good chance the market will test the January high at 10,875 before 10,610
is seen. However, some caution for profit taking is warranted since the fund
trader is holding a record high net long position.
S&P
The outside day down is a short-term negative setup for the March S&P and a
break below 1197.20 could accelerate a downside move. If the ISM Index shows a
solid jump today and market focus returns to the macro economic outlook, we
think the March S&P still has a good chance of testing 1216.80 and possibly
1221.20 this week.
FOREIGN EXCHANGE
US DOLLAR
While the Dollar was able to cut losses by the close
of Monday’s session and trade higher over night, the currency remains vulnerable
to further weakness especially since sentiment against the Yen looks to be
improving. We think the Dollar will see a volatile trade with a break back to
critical support at 82 very possible for the March contract. Traders should be
cautioned however, that while sentiment is decidedly bearish towards the Dollar,
the sharp decline in daily technical indicators suggest the risk to short
position holders is growing. The economic numbers have not been having a lasting
impact on the Dollar, but if the ISM Index shows a big jump, the Dollar could
gain ground on short covering. Upside price action is likely limited to the 83
level. With the twin deficits and foreign central bank diversification still a
threat, even a surprisingly strong Feb payroll report will likely not reverse
the Dollar’s major down trend.
EURO
With the Japanese economy suddenly showing signs of
life and Germany showing a sharp rise in Feb unemployment, the Euro is having a
hard time gaining ground. In fact, German unemployment at 5.216 million is a
post-war record! While there was a slight up tick in Feb Euro-zone inflation to
a 2% annual rate, it is not enough of a concern change ECB interest rate policy
meaning no rate hike is likely given the zone’s weak growth. Unless there is an
assault on the Dollar, resistance at 1.3313 may hold the March Euro while
support comes in around 1.3180 and 1.3148.
YEN
While profit taking trimmed the yen’s gains Monday,
the solid gains in retail sales and industrial output suggest the economy may be
back on a positive footing. The Yen continued to gain over night as statistics
showed Japan’s unemployment rate stayed low while consumer spending jumped.
Despite Monday’s price action, the Yen is still trading in a range and will need
to close back over 96.44 to re-establish the market’s uptrend, which may be
difficult if US economic data is strong for the rest of the week.
SWISS
As with the Euro, gains in the Swiss were stalled by
a rebound in the Dollar with the Swiss moving back into the middle of its recent
86.50 to 85.23 trading range. The Mar Swiss may need to see broad based selling
of Dollars in order to make a solid move over 86.50. Close Support comes in at
86.00 then 85.78.
BRITISH POUND
While the Pound touched the highest price level so
far this year on ideas that rates may be hiked soon, comments from a BOE member
raise doubts as to when the next rate hike will be. While data showed a rise in
British housing prices, the BOE appears to be focused on consumer spending,
which has slowed recently, as the determinant for the next rate move. Also, a
decline in consumer confidence during February may bring about more profit
taking unless the Dollar again sees broad based selling. Support for March Pound
is at 1.9124 then 1.9049 with resistance at 1.9250.
CANADIAN DOLLAR
Mar Canadian was able to shrug off a disappointing
4th qtr GDP (+1.7% annual rate) and focus on general weakness in the Dollar.
However, economic reports this week do have the chance to give some support to
the US currency and unless the Dollar comes under more selling pressure, the
Canadian may see more of a sideways than up trade. The Bank of Canada’s decision
on rates will be announced later this morning (approx 8 am central) and the Mar
Canadian may come under pressure if the BOC as expected leaves rates unchanged.
Mar Canadian has support at 80.65 then 80.00 with tough resistance at 81.72 then
82.00.
METALS
OVERNIGHT
London Gold Fix $434.65 -$0.80 LME COPPER
STOCKS 52,550 metric tons -1425 tons COMEX Gold stocks 5.913 ml oz unchanged
COMEX SILVER stocks 101.5 ml -997 oz.
GOLD
With the precious metals basically trading off of
dollar weakness and inflationary prospects, a potential short term bottom in the
dollar could set gold up for at least a minor correction. Gold traded higher
yesterday on dollar weakness and higher oil prices and general concerns about
inflation, but a firmer dollar has put pressure on the gold market this morning.
Concerns over interest rate increases in the US contributed to ideas that the
dollar has gotten overdone.
SILVER
Like gold, silver is hurt by a recovering dollar, so
we would prefer to buy breaks. Mexico produced 240,208 kilograms in December,
which was 11.1% below year earlier figures. It is notable that the world’s
largest copper producer (Chile) is seeing its output increase (sparked by a
4-year bull market), the world’s largest silver producer, Mexico is seeing
output decline.
PLATINUM
Platinum has not been seeing the flight to quality
benefits that gold has and the world’s economy doesn’t appear to be strong
enough to justify a new run to contract highs. A two month consolidation has
left this market without any direction, and we are concerned about a broadening
top formation. We are in favor of selling rallies above the $875 level in April
platinum.
COPPER
May copper’s gap higher yesterday and test of the
contract high was essentially follow through from the strong close last Friday.
The market may have gotten a lift from the weaker Dollar, but strong economic
numbers out of Japan could have supported the move as well, as Asian demand has
been one of the key components to the copper rally over the past four years.
Chile, the world’s largest copper miner, reported that their January production
totaled 431,072 metric tons in January, which is an 11.9% gain over year-ago
figures.
CRUDE COMPLEX
Expiration of the March product contracts
resulted in another volatile day in the energy markets Monday. While the
back-and-forth price action is a symptom of a technically overbought market, we
still think the risk of being outright short outweighs the potential reward at
this point. April crude oil is having trouble sustaining prices above $52, but
the blast of cold weather in the Northeast is pushing heating oil prices sharply
higher and providing a floor under both the crude and unleaded gas markets.
NATURAL GAS
Profit taking is a limiting factor in the natural
gas market as the April contract is running into resistance above 6.75. Despite
sharp gains in heating oil prices on forecasts for frigid temps in the Northeast
and Midwest through March 11th, the natural gas market looks to be pausing after
sharp price gains were realized last week. We think this could be the last
hurrah for natural gas since stocks are 406 bcf above year ago levels.