Futures Point To A Higher Open
5/2/2005
Â
INTEREST RATES
While the Treasury market starts out the week
well below last week’s highs, the market is fresh off a sharp rally last week
and deserving of a minor technical setback. However, the macro economic
condition seems to generally support the bull case and with the Fed expected to
raise rates again early this week, we suspect that the bulls will generally
continue to control. While some economic numbers have shown strength, the
majority of the scheduled readings have pointed to a pattern of slowing.
STOCK INDICES
One has to be impressed with the action in the
stock market over the last two weeks, as the market took a wave of negative
developments in stride. In fact, the stock market has actually managed to
confront periodic bouts of aggressive selling and repeatedly bounce back. While
the market might be concerned about the coming FOMC meeting and the pattern of
slowing in the US economy, the fact that crude oil prices come into the session
this morning, $10.00 below the April highs might be the key catalyst in the
market today.
DOW
The big cap stocks should be seeing some benefit from perpetually lower energy
prices. We also think that the prospect of a Chinese currency change is slightly
supportive to many large cap stocks that depend on exports. However, the track
to higher levels is fraught with potential volatility, with the coming Fed
meeting possibly denting optimism temporarily. The June Dow sees initial
resistance at 10,226 and then again at 10,256. The April 26th Commitment of
Traders with Options report showed the Dow futures Non-Commercial position to be
net short 1,901, with the Non-reportable position net long a minimal 2,842
contracts. Considering that the market dipped shortly after the COT report was
measured, we have to think that the market is favorably balanced coming into the
action this morning. The path of least resistance is up but the setup isn’t a
dominatingly bullish setup. In short, this market continues to find out that
things aren’t as bad as feared, but the question is, can the US economy get back
into forward motion?
S&P
While the market is showing signs of coming out of the last two weeks
consolidation to the upside, there would seem to be significant technical
resistance above the market and only partially favorable fundamental arguments
present in the news flow. Some suggest that the run up to the top of the
consolidation is merely the result of a tempering of the recent extremely
negative tilt and that seeing an upside breakout will require an “on-hold” from
the Fed with respect to coming interest rate actions, or a favorable US non farm
payroll reading this coming Friday. The April 26th Commitment of Traders with
Options report showed the S&P 500 Stock Index Non-Commercial position to be net
short 10,132 contracts, with the Non-reportable position net long only 28,615
contracts. Therefore, the S&P combined spec long position is generally positive,
as the specs are minimally long. Critical resistance comes in at 1163.50 and
then again at 1164.10.
FOREIGN EXCHANGE
US DOLLAR
The fears of a change in the Chinese currency have
apparently declined at the start of this week, but that could be a function of
Asian holidays or it could be a function of the coming FOMC meeting. We suspect
that the Fed will maintain the pattern of hiking interest rates by 25 basis
points and we also think that the Fed will maintain the mantra that the US
economy is entrenched in growth. In fact, we suspect that the Fed will point to
the recent slide in energy prices as a positive for the US economy going
forward. Since the Dollar has suffered repeatedly at the hands of soaring energy
prices, it is fitting that the Dollar sees some lift in the wake of a $10.00
slide in crude oil prices off the April highs. We suspect that the June Dollar
is capable of returning to the early April highs but that gains early in the
week might be reversed into the week ending US payroll report. The April 26th
Commitment of Traders with Options report showed the US Dollar spec position to
be minimally long and that could make it easier for the Dollar to rally early
this week.
EURO
Just as we suspect that the Dollar is set to return
to the April highs, we also suspect that the Euro is set to slide toward the
April lows. The flurry of Euro zone economic information this morning seems to
confirm a slight slowing pattern and that probably adds minimally to the
downward tilt in the Euro this morning. However, the trade will be watching the
Chinese currency issue closely, because that issue appears to have given the
Euro indirect or spillover support in the recent past. The April 26th Commitment
of Traders with Options report showed the Euro combined spec position to be on
minimally long and that should mean that minor breaks are capable of leveling
the market rather quickly. In short, minor declines are expected but later in
the week, aggressive traders might be presented with a spot to get long.
YEN
While the Yen is seen as a substitute for the Yuan,
we suspect that last weeks highs in the Yen were found to be rather expensive.
In other words, renewed talk about a re-peg of the Chinese currency will
certainly support the Yen, but as the Yen approached 96.00 it seemed like more
traders balked at the long side of the Yen. On the other hand, seeing April
Japanese domestic auto sales rise by 10% would seem to underpin the Yen and with
sharply lower oil prices also a benefit to the Yen, we suspect that a slide to
94.95 will be met with some fresh buying interest. Wait for a break to 94.80 to
get long the June Yen.
SWISS
The Swiss would not seem to have much in the way of
close in support on the charts. Furthermore, with economic anxiety toward the US
falling along with energy prices, we suspect that the Swiss is set to fall back
toward the early April consolidation down around 83.29. Later in the week, the
Swiss might forge a critical low but in the near term the bears seem to have
control.
BRITISH POUND
The Pound comes into the action this morning right
on a critical up trend channel line at 189.93. Apparently the MPC is thought to
be on hold with respect to rates and the political setup is partially negative
to the Pound to start the week out. While we can’t rule out a slide in the Pound
we would certainly not want to be short the Pound for a position, as the trend
is still pointing up and Dollar strength has been fleeting at best.
CANADIAN DOLLAR
The Canadian continues to slide in the face of gains
and losses in the US Dollar. In other words, the track in the Canadian is down
and we are not sure if that is because of the Chinese currency speculation, or
simply because of the revived attitude toward the US Dollar and possibly the
soon to be revived view toward the US economy.
METALS
OVERNIGHT
London Gold Fix $433.25 N.A. LME COPPER
STOCKS 59,975 metric tons N.A. tons COMEX Gold stocks 6.156 ml oz +119,803 oz
COMEX SILVER stocks 103.9 ml
-6,344 oz
GOLD
The big range last Friday failed to hold but the
trade is beginning to assume that eventually the Chinese will re-peg their
currency. We continue to think that the Chinese are set to fight any change in
their currency and that when the change takes place, we doubt that they will
allow a full float, as that gives up too much control by a government that is
used to total control. In the near term, we suspect that inflation talk will
continue to be squashed by the upcoming Fed actions and dialogue.
SILVER
The silver market comes into the week under a
negative technical cloud and can hardly muster much support from the fundamental
picture. In addition to failing at the 100 day moving average, the silver market
has already tested the critical March spike low at $6.87. From the fundamental
perspective the industrial metals are having trouble keeping a positive forward
demand view, partly because of the US numbers and partly because of sluggish
European data.
PLATINUM
Despite a partial global holiday and specifically an
Asian holiday, platinum has printed a price up around the Friday highs. In other
words, the platinum market seems to have held the reversal action seen off the
lows last week. While the market might be getting strength from a long term Bank
forecast this morning, we have to think that this market is being supported by
long held bull themes that no longer hold.
COPPER
While copper prices have bounced off the lows forged
last week and the Wall Street Journal commodity section suggests that copper
remains in a bull market posture, we are not sure that this market is set to
resume an aggressive upward march. Certainly the copper market is impacted by
the Chinese currency talk but for the time being, a change in the Chinese
currency could initially be supportive but perhaps a negative longer term. In
other words, seeing a stronger Yuan could make copper imports cheaper, but if
the Chinese economy is slowed by a cut back in exports, then domestic copper
demand might decline.
CRUDE COMPLEX
While it appeared that the energy complex had
forged a technical bottom last week, the market apparently lacked the
fundamental capacity to bottom, as Friday’s action put the market back on the
defensive. With the pits pointing to critical psychological support around the
$50.00 level in June crude oil and to the 1.50 level in June unleaded last week,
it is possible that some additional stop loss selling pressure is seen in the
coming sessions. While the break seems to be largely the result of falling
demand expectations, (driven by a downgrade of the US economy) the market has
certainly seen a consistent pattern of stock rebuilding in US crude oil stocks
and very little in the way of the supportive international supply dialogue.
NATURAL GAS
As we expected, the natural gas market was
completely dominated by the direction in crude oil. With the market falling
through a series of support levels on the charts, we suspect that the
Non-reportable or small spec long position is in the process of being forced
down to the lowest level since late 2004. The April 26th Commitment of Traders
with Options report showed the Natural Gas Non-reportable position to still be
net long 40,493 contracts, which means that more small spec selling is possible.