Futures Point To A Higher Open
5/18/2005
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INTEREST RATES
While the PPI report was a slight negative to the
Treasury market yesterday, the ultimate impact off rising inflation fears
appears to have had little impact on the bull camp in Treasuries. Recent
historical action suggests that the CPI report today will be less incendiary
than the PPI report and therefore we doubt that the Treasury market will see as
much downside action, as was present on Tuesday. We also think that the
disappointing Industrial Production result yesterday, adds in a fresh measure of
support to Treasuries, as last week the trade was literally fretting a series of
better than expected US readings.
STOCK INDICES
Apparently some players bought the market
yesterday afternoon on a US government report that indicated China had not
manipulated its currency. However, with the US Treasury Secretary overnight
prodding the Chinese to take an intermediate step to change the value of the
Yuan, it is clear that the potential for an ugly trade war remains in place. On
the other hand, the Chinese PM overnight suggested that his country would handle
“all issues with seriousness” and he also acknowledged that a number of world
leaders are concerned with the Yuan situation and that seems to be conciliatory
stance! We doubt that the stock market has been consistently pressured off fears
of a US/China trade war, but getting beyond the Yuan issue would certainly be
supportive to stock prices.
DOW
One should have expected the Dow to come under pressure in the wake of a setback
in the very broad based Industrial Production reading yesterday, but instead the
market firmed. It is possible that the Dow is looking beyond the current
uncertainty on the Chinese currency issue, to conditions that could favor US
exporters in the long run. We also think that the sharp decline in commodity
prices is beginning hint at lower forward cost structures for many large
companies and that is almost as good as more active economic activity. We can’t
argue against a rise to the May consolidation high of 10,374, but to turn the
big picture trend up, the June Dow will have to manage a rise above a key trend
line at 10,337 on a close basis. Fundamentals are becoming more balanced, but we
are not sure the market has a dominating bull issue to evoke an aggressive
upside breakout.
S&P
While it remains to be seen just how China will respond to recent US prodding on
the Yuan issue (The US Congress yesterday afternoon seemed to threaten action
against Chinese manufacturing exporters) it would seem like China is willing to
interact positively with the international community and that is a potential
long term bull potentiality. In order to turn the trend up in the S&P it could
take a close above 1183 in the June S&P, but the bullish path of least
resistance is hardly dominating. After a slight initial negative reaction to the
CPI report this morning, the stock market probably attempts to rise to the 1180
level and in the event that CPI is lower than expected, the market might manage
a new high for the move!
FOREIGN EXCHANGE
US DOLLAR
While the Dollar did manage to forge another new
high for the move overnight, we get the sense that the markets are beginning to
expect a gratuitous move by the Chinese. While in retrospect it would appear
that the Dollar did benefit from the Tuesday PPI reading, we don’t get the sense
that the Dollar is deriving a direct benefit from the whole inflation issue.
Furthermore, we see the path of US economic numbers this week to be
significantly less supportive of the Dollar and in the event that the Chinese go
ahead with a move, that could serve to prompt a profit taking setback in the
Dollar. In fact, considering the aggressive rise in the Dollar, in the month of
May, we have to think that short term technical conditions in the Dollar argue
for a coming correction. A simple retracement of the May rally would give a
downside target of 85.41 for a nominal correction. We would be a little more
comfortable with being long the Dollar, if recent US numbers had continued the
strong pace seen last week but they haven’t, and with the somewhat conciliatory
dialogue between the US and China, we have to suggest that Dollar bulls either
bank long profits or place very tight stops under the market. It should also be
noted this morning the Chinese appear to have targeted June 26th as a date for
change in the Hong Kong Dollar/US Dollar parameters and that also hints at a
move on the bigger Yuan issue.
EURO
While the Dollar might soon show signs of topping,
the Euro would not seem to be able to turn its fundamental track into a bullish
position. Overnight Italy floated a negative March Trade deficit reading and
that would seem to discourage bottom picking in the Euro. However, in the event
that the Dollar slips into a correction mode, the June Euro consolidation zone
of 126.00 probably becomes a significantly more solid area of support. We
seriously doubt that the Euro trend is prepared to shift up, on a Yuan change,
but we do think that a Yuan inspired short covering bounce in the Euro to 126.90
should be sold looking for the rally to be short lived.
YEN
So far the idea of a change in the Yuan has not
resulted in long speculation in the Yen. With the BOJ dredging up the idea of an
ongoing Japanese deflation problem, we partially understand the Yen’s persistent
weakness. In fact, in the event that China stalls on a move, we can’t rule out a
temporary slide back to the early April lows in the June Yen down around the
92.37 level. Not surprisingly the Yen has been weak since Japanese officials
suggested that a rising Yuan doesn’t definitively promote a higher yen.
SWISS
A 3 day consolidation pattern in the Swiss seems to
give pause to the bear camp and with the Dollar possibly short term overbought
and potential change in the Yuan in the air, we can’t rule out a temporary short
covering rally in the Swiss. However, the big picture trend in the Swiss remains
down and a rally back to 82.50 in the June Swiss should be sold.
BRITISH POUND
The Pound was presented with disappointing
employment data this morning and that should facilitate more selling in the
sessions ahead. In fact, considering the fundamental setup in the Pound, a short
covering bounce should be considered a good opportunity to get short at higher
levels. Ultimate downside targeting in the June Pound comes in at 181.52, look
to sell a rally back to 183.55.
CANADIAN DOLLAR
Given the massive slide in the Canadian off the
March highs, we are no longer interested in pressing the short side of this
market. On the other hand, it is still premature to expect a solid bottom and an
uptrend in the Canadian. Those that are short should pick a point just below the
current market and look to bank profits on near term weakness.
METALS
OVERNIGHT
London Gold Fix $419.40 -$0.95 LME COPPER
STOCKS 53,400 metric tons -775 tons COMEX Gold stocks 6.201 ml oz +71,936 oz
COMEX SILVER stocks 105.3 -290,927 oz
GOLD
With the US Treasury Secretary calling for China to
take an interim step to float its currency, it would seem like the US is set to
challenge the Chinese desire to act on its own schedule. Therefore, we would not
be surprised to see the Chinese adopt a hard line on the subject. While the PPI
report yesterday was supportive to gold from an inflation perspective, the
inflation tilt presented by the reports yesterday, in some ways supports the
Dollar, which in turn limits gold.
SILVER
Despite the fact that silver has shown some positive
leadership this week and has at times managed to attract some fund buying
interest, the market is still without a clear dominating bull focus. In order to
turn the technical picture bullish, the July silver would have to rise above the
March through May down trend channel line up at $7.187 today and at $7.176 on
Thursday. Unfortunately the bounce off the May lows was accomplished on sagging
volume and open interest and that seems to argue against the signs early this
week that the funds were becoming a little more interested in silver.
PLATINUM
An interesting spike in volume on the recent
bottoming and talk in the Press about rising Chinese demand, seems to have
firmed up support above the $850 low. Considering the talk about Asian physical
buying of gold, it would seem like the Chinese platinum demand rumors might have
some substance. We noted in a number of other markets early this week, that
Chinese April crude oil imports reached another new all time high and that would
certainly suggest that the Chinese economy remains a little stronger than many
in the market have been expecting.
COPPER
Apparently, the move by the Chinese government to
release some copper reserves to the market wasn’t capable of forcing copper down
to more new lows and that hints at a bottoming effort. However, the Dollar
generally remains strong and the US has apparently fired a fresh verbal shot
toward the Chinese government on the floating currency issue. Seeing the Chinese
make an “intermediate” adjustment to their currency could increase the
purchasing power of China and at the same time bring the market back away from a
potentially negative conflict with the US.
CRUDE COMPLEX
The energy market might have been restrained by
the options expiration in crude oil on Tuesday, but without the slightly bullish
dialogue thrown out by the Saudi Oil Minister and the presence of a US refinery
glitch we are not surprised that the tone of the market firmed up. While the
California refinery problem isn’t a significant issue it might serve to give the
bears notice of a potential change in energy market sentiment. In fact, with the
Saudi Oil Minister pointing out the obvious yesterday morning, by suggesting
that the ongoing problem of high oil prices is inadequate US refinery capacity
the refinery glitch carried more cache.
NATURAL GAS
While the natural gas market didn’t seem to garner
support from the forecast of an active 2005 hurricane season, we suspect that
the potential for firming seasonal demand in the petroleum market, the hurricane
forecast and the prospect a rising utility demand has effectively discouraged
the bear camp from aggressively attacking the natural gas market. However, it
would seem folly to buy the natural gas market in anticipation of the hurricane
season but in the event that unleaded begins to show consistent bullish
leadership, it is possible that more spec players will be inclined to play for a
key seasonal bottom in natural gas. With a wild range in the June natural gas
contract yesterday resulting in a spike up probe, it is possible that some
shorts (non commercial shorts) decided to lifted positions and that also helps
to increase the odds of a bottom.