Futures Point To A Higher Open
5/26/2005
Â
INTEREST RATES
The Treasury market really posted fickle action
on Wednesday, as the initial response to a better than expected Durable Goods
report, was to hold prices up around the week’s highs. However, into the new
homes sales data yesterday, the market began to slip into a profit taking mode
and in the end, forged a rather aggressive downward adjustment. Even more
surprising is that the long end of the Treasury market failed to get much lift
off a very strong 2 year note auction.
STOCK INDICES
A more positive tilt is present in the early
action today (than yesterday) and we suspect that the renewed optimism comes
from the anticipation that the US GDP report will come in stronger than prior
readings. A sharp decline in Petco shares yesterday afternoon seemed to finish
off the 2 day corrective pattern but without a patently supportive GDP figure,
it is still possible that the stock market drifts into a 3rd day down. However,
it is also possible that the stock market will get additional supportive
information from the scheduled data today, as the Fed yesterday suggested that
unemployment levels will continue to decline.
DOW
Unfortunately the Dow futures have remained under the 100 day moving average but
could test that level (10,537) in the action today. While a favorable GDP
reading should benefit the Dow, we suspect that rising oil prices will serve to
temper part of the optimism in the blue chip sector. However, over the last two
sessions, cyclical stocks were under moderate pressure and with a favorable spin
off the GDP report this morning, it is possible that the Dow is due to play
catch up to other sectors of the market. On the other hand, a number of players
saw the tech failure yesterday, as a key undermine to overall market sentiment
and that means the bull camp will need something positive to divert attention
away from the temporarily overvalued Nasdaq. Critical support in the June Dow
today, comes in at 10,501 and an upside breakout takes place with a rise above
10,535.
S&P
As mentioned before, the S&P has managed to hold consistently above its 100 day
moving average this week and the market appears to be poised to make an upside
breakout today. In fact, if this week’s high is taken out at 1199.00, that could
suggest a return to the February and March consolidation that is bound by
1200.00 and 1220.00. The top of the April and May up trend channel comes in at
1203.60 today, but a failure to hold above 1191.30 would be damaging to bullish
sentiment. We might also note that the S&P did manage a big range down reversal
yesterday and that might confirm that a near term low was in fact forged
yesterday. However, the market will need to get a bullish reading from the GDP
this morning, in order to make a new high! In fact, the GDP might have to be
revised to +3.8% or higher to extend the overnight strength.
FOREIGN EXCHANGE
US DOLLAR
A strong bid overnight in the Dollar would seem to
be partly anticipation of a strong US GDP reading but might also be the result
of concern for the Euro, generated by a front page story in the Wall Street
Journal. We also think that many players are expecting the GDP report to be
strong, because of recent trade balance improvements and that is serving to lift
the Dollar. Lastly, it is possible that Fed dialogue yesterday rounded out the
bullish tilt toward the Dollar, as the Fed suggested that US rates will continue
to rise and that US unemployment will continue to decline. In short, higher
yields and more US growth should attract money to the Dollar. However, the
Dollar has acted sluggish lately and that could put the Dollar at a critical
junction in the coming two sessions. In the near term, it is possible that the
Dollar forges an upside breakout, in anticipation of a French failure to ratify
the EU Constitution, but that isn’t a given and a “no vote” might not have a
major impact anyway. The path of least resistance is up, as long as the US
numbers meet or exceed expectations. Those that are long the Dollar, should stay
long, but should seek to insulate the position by selling a call and buying a
put for the coming week.
EURO
The Wall Street Journal article on the EU
Constitution suggests that more are against the Constitution than for it, but it
is still probably too close to call. In the Netherlands, the vote next week is
even more clearly against ratification but the significantly less powerful Dutch
influence within the EU, would seem to make that outcome less important. The
trend is down and the fear of the coming EU vote, probably leaves the market
with a sell the rumor, buy the fact condition in the coming 3 trading sessions.
In other words, we suspect that the Euro will continue to decline today and
possibly Friday but that a bounce might be due early next week.
YEN
The Yen comes into the action this morning just
above extremely critical consolidation support levels of 92.37. Chinese comments
regarding a basket approach to the Yuan float, seems to have added some pressure
to the Yen this morning. Furthermore, the US Treasury Secretary is scheduled to
speak to Congress today and that could yield a much more aggressive call for
action against the Chinese. Therefore, we can’t rule out a downside break, but
selling the Yen might be an extremely risky proposition, especially if the
Chinese decide to head off financial repercussions from trading partners with a
move. However, the technical trend is down and the only way to accept the
potential long risk in the Yen, would be to buy some cheap July calls.
SWISS
The Swiss looks to track to and below the critical
low at 81.00 but our concern is that volatility is set to expand dramatically
over the coming four sessions. We might also add that volume has declined on the
recent price slide, while open interest has soared and that really points to a
major conflict! If short futures, move to puts, if you want to be long, buy
cheap July calls.
BRITISH POUND
The trade continues to point to the slowest UK
economy in 2 years and that seems to justify more declines in the Pound.
However, we continue to think that the Pound will get minor spillover support
from a weaker Euro and Swiss, but with the Dollar apparently poised for an
upside breakout, it would seem like the path of least resistance in the Pound is
still down. We see lower action but wouldn’t accept the risk and reward of a
fresh short.
CANADIAN DOLLAR
The Canadian seems to have lost its positive
correlation with the US Dollar and that seems to be ready to facilitate a slide
to the May lows of 78.55. Like the rest of the currencies we see lower action
but once the Canadian reaches the May lows (or tracks slightly below them) we
fear an aggressive reversal in the action next week.
METALS
OVERNIGHT
London Gold Fix $418.75 +$.25 LME COPPER
STOCKS 46,400 metric tons -2,825 tons COMEX Gold stocks 6.069 ml oz -689 oz
COMEX SILVER stocks 105.0 -584,527 oz
GOLD
With the gold market moderately oversold, the end of
the month just ahead and the French Vote on the EU Constitution this weekend, we
suspect that gold could manage some light gains over the coming two sessions.
However, the US GDP could come in stronger than expected and that could give the
Dollar a boost and in turn that could temporarily limit attempts to rally gold.
However, the Dollar has seemingly lost some positive momentum and that also
seems to have taken the pressure off the gold market.
SILVER
Like gold, the silver market also managed a sharp
probe up overnight but it also failed to hold those gains. The silver market was
apparently lifted at times on Wednesday in response to a World Silver Survey,
which showed a minimal decline in ending stocks last year. Apparently, overall
world silver production rose but lower government sales and less recycling flow
resulted in lower total output! The bears argued that the 61 cent rise off the
January low, in a way factors the slightly tighter silver fundamental picture,
but we suggest that the rise off the January lows was mostly a move away from
deflated pricing.
PLATINUM
The sloppy action continues in platinum, as it
managed an impressive rally yesterday morning but has since failed aggressively.
The platinum market continues to hover around the 100 day moving average, as if
it is attempting to ascertain its trend among the fund players. Every time the
platinum market rises into the upper quadrant of the last five months trading
range, we look to economic sentiment for justification.
COPPER
The copper market continues to fluctuate around the
100 day moving average on the charts as if the market is preparing to adjust
higher. However, some players are suggesting that the copper market is short
term technically overbought but we doubt that will discourage the trade for an
extended period of time. However, we are beginning to notice a resumption of
moderate declines in daily LME stocks (-2,825 tons last night) and that is in
effect rebuilding the old bull case that was based on “tightening”.
CRUDE COMPLEX
With the July crude oil forging an upside
breakout on the charts and the EIA suggesting that the supply of crude oil was
set to “re-tighten quickly”, we suspect that the weekly inventory readings had
little to do with the rally on Wednesday. In fact, with the exception of a
decline in the DOE crude stocks of 1.6 million barrels and a minimal decline in
API gasoline stocks, the inventory report wasn’t particularly moving. However,
crude stocks still stand 7.9 million barrels above the 13 year average.
NATURAL GAS
The natural gas market continues to lag behind the
crude oil market and that could mean that prices won’t really start to rise
until the July crude oil manages to climb above more significant technical
points on the charts. However, the market might be poised to weather another
slightly bearish weekly storage reading today and so far the heat in the
southwest is being countervailed by colder than normal temps in a larger portion
of the US. Gas storage stands at 1,599 bcf, which is 223 bcf above year ago
stock levels and 308 bcf above the 11yr average.