Futures Point To A Lower Open
12/9/2004
INTEREST RATES
weakened over night on profit taking ahead of
today’s 10 year note auction. The two key factors that seemed to have
changed in the bond market over the last two weeks are evidence the economy
is not on a solid growth path and that foreign demand for US assets remains
strong. March bonds are in a position to test the October highs and will
likely test that level this week if the Dollar continues its upward reversal
and foreigners increase their appetite for US bonds to capitalize on a
developing interest rate advantage over foreign debt securities.
STOCK INDICES
A weak Japanese stock market and earnings
warnings from several computer chip companies should lead to a weaker US
stock market opening. While the Dollar continued to gain ground over night,
it was at a less furious pace and the benefit of a stronger Dollar was
offset by the continued rise energy prices. While the Dec S&P has stayed
within Wednesday’s trading range over night, it will be technically critical
for the market to hold above yesterday’s low at 1176 for Dec and 1179.10 for
the March contract.
DOW
We like the way the Dec Dow held the support zone between 10,447 and 10,429.
Rejection of this area puts the market in a more positive technical
position. All the market may need are some positive corporate news or
improving Christmas sales announcements to push prices back to the upper
range near 10,600.
S&P
It will be very important for the Mar S&P to hold Wednesday’s lows. Follow
through gains in the Dollar and more metals losses would help support
prices. Near-term resistance for March is at 1195.10 then 1191.40, with
support at 1180 then 1176.30.
FOREIGN EXCHANGE
US DOLLAR
Over night action saw the Dollar continue to
gain ground, although at a slower pace, as some poor economic numbers in
Japan and the UK provided further incentive for Dollar short covering. While
many traders remain skeptical that the Dollar can continue on a recovery
path, the fundamental situation may be improving enough for the US currency
to begin to formulate a bottom. US growth rates outperform foreign rivals,
crude oil prices have fallen nearly $14 from their highs and foreign Central
Banks appear to be ending their rate tightening cycle which would give the
interest rate advantage to the Dollar. An improving US economic outlook
should help trim both trade and current account deficits. The turn in the
Canadian dollar may be just the first currency to put in a major top. Both
the Bank of Canada and Australia left interest rates unchanged on concerns
that strong domestic currencies were choking their commodity based
economies. With the Fed still in the midst of a tightening cycle, the shift
in interest rate dynamics is attracting foreign investment to the US. We
also think that bearish sentiment against the Dollar has likely reached a
crescendo, with the market at least temporarily sold out. Apparently, the
Dollar’s broad based rally was the result of year end profit taking by
traders who have been building up massive short positions in the Dollar over
the last year. While Central Banks have been trying to talk the Dollar
higher through intervention threats, the timing for an actual intervention
would now be more effective since the banks would not be up against a wave
of speculative selling. Traders can not ignore that the Dollar took out
several resistance layers during Wednesday’s move and if the March contract
can close back over 83, another short covering wave could ensue. We are
cautiously optimistic that the Dollar has made a major bottom and therefore,
traders should continue to hold the long March Euro and long June Canadian
put positions.
EURO
While the ECB denied any intervention
involvement, their recent threats of the action appears to have gotten
traders nervous enough to stop pushing the envelope on the Dollar. The jump
in US bonds apparently off foreign investment demand is a critical trend
reversal in capital flows as traders dumped Bunds to buy Bonds. In their Dec
bulletin, the ECB left rates unchanged and revised down growth prospects for
2004 through 2006, citing high oil prices as the main drag to growth. While
the March Euro did hold critical support at $1.32, the chart pattern suggest
at least an intermediate high is now in place. With the interest rate and
economic growth advantage clearly in the US favor, we expect more money to
flow out of the Euro. There are still a lot of shorts to be flushed out, but
traders are advised to use put strategies to capitalize on a further break
given the potential for high market volatility.
YEN
With Wednesday’s massive sell off the chart
pattern is clear that the Yen has topped leaving the March contract to face
a solid wall of resistance between 97.36 and 98.30. With Japan’s economy
just limping a long, a Yen this strong is way out of line with the
fundamentals. A sharp drop in Japan’s Oct Machine Orders (the 2nd month of
decline) suggest the country’s economic conditions remain weak in the 4th
quarter. Near-term resistance is now at 97 with a close under 96 likely to
trigger another heavy profit taking wave.
SWISS
With officials not veering from the January
elections in Iraq, which seems to have taken the anxiety level down a notch,
and the massive sell off in gold, the Swiss looks to be losing its safe
haven appeal. A close under 86.80 in the March contract puts first
retracement support from the contract high at around 85.25.
BRITISH POUND
With the UK trade deficit widening in October,
the Bank of England is likely to leave interest rates unchanged at today’s
meeting. The Pound fell hard on the negative economic news overnight and
more selling pressure is likely during the US trade session. The break below
192.16 suggests the Pound will continue to slide, with next critical support
at 190.70 to 190.00 then 189.04.
CANADIAN DOLLAR
Those who took our recommended to buy 2 June
Canadian 79 puts for 48 should hold for a long-term position play. The BOC
left interest rates unchanged and indicated a policy shift that the rate
tightening cycle has ended. With the US gaining an interest rate advantage
the Canadian has more downside adjustment ahead. A close below 81.40 would
be a major blow to the bulls and would likely trigger a slide back to the
October consolidation range between 80 and 79.10.
METALS
OVERNIGHT
London Gold Fix $437.35 +$0.60 from
previous fix. LME COPPER STOCKS 57,100 metric tons -125 tons COMEX Gold
stocks 5.561 ml +170,812 COMEX SILVER stocks 103.4 ml +600,313
GOLD
As in the currency market so goes the metals.
Yesterday’s washout in the Euro triggered heavy long liquidation in gold and
silver, as the currency’s decline left the gold bulls with little else to
hold onto. Given the sharp break in energy prices and tepid inflation
readings, the gold market needed the support of a weaker Dollar to keep the
uptrend intact.
SILVER
March silver has given up a month and a half
worth of gains as it has reacted to the dollar recovery. Further weakness
overnight has sent price to their lowest level since October 13, which was
also the last time the market closed below $7.00. Given the size of the spec
and fund net long position, which reached a 9-year record high in the most
recent COT report, we expect more long liquidation pressure head.
PLATINUM
January platinum also succumbed to the dollar
recovery and the massive declines in other precious metals. The recent COT
report did not indicate the imbalance that was present in gold and silver,
but that did not prevent the market from falling to the bottom of a 5-month
consolidation pattern. The fact that the specs are not as heavily long in
platinum lends hope to the idea that yesterday’s low at $813 will hold.
COPPER
Fund liquidation selling drove March copper
prices sharply lower yesterday, although prices were able to bounce off the
130 support area. Reports that China is taking further steps to dampen
demand for base metals dealt a major negative blow to the market. While LME
warehouse stocks have been declining, the pace has slowed which reflects
less copper demand from Asia.
CRUDE COMPLEX
A combination of oversold market conditions
and a stocks report that was not as bearish as expected was enough to
trigger an across the board short covering rally in the energy complex. The
energy complex continued to gain ground over night on comments from the
Kuwait oil minister who is calling for OPEC members to cut back production
to official quota levels and reduce total production by half a million
barrels in the 2nd quarter next year. The market had been anticipating
another large build in energy stocks, particularly distillate stocks in this
week’s stock report.
NATURAL GAS
With the market oversold, the rebound in crude
oil prices gave a needed lift to natural gas. However, with storage near
record levels, the market will likely need to see follow through gains in
the rest of the complex to sustain Wednesday’s rally this session.
Temperatures in the Northeast are expected to turn colder next week, and if
the EIA report shows a 70 bcf to 100 bcf fall in stocks, it could prompt
more short covering as it may signal the start of a consistent drawdown in
stock levels for the winter period.