Futures Point To A Lower Open
3/23/2005
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INTEREST RATES
Just as we expected the Treasury market attempted
to forge a short covering rally off its ongoing overly short spec positioning,
but in the end the weight of the bigger picture fundamentals controlled the
action. While the Fed didn’t exactly offer up anything specifically different in
their statement, the conclusion of the marketplace is that inflation concerns
are on the rise. Initially the PPI report seemed to spark a short covering
bounce, as many in the trade concluded that the PPI report (excluding food and
energy) showed muted inflation of +.1%.
STOCK INDICES
At times yesterday the stock market appeared to
be capable of discounting the rising inflation/rising interest rate environment.
However, we suspect that the mid session stock market rally on Tuesday was
mostly the result of the first significant liquidation in energy prices in
almost a month. Unfortunately the flow of regularly scheduled economic
information remains disappointing (the Richmond Fed readings yesterday were
contractionary) and with the threat of even more aggressive interest rate hikes
in the future, the equity market simply wasn’t able to fully embrace the sharp
declines in energy prices yesterday.
DOW
The Dow continues to take the brunt of the liquidation pressure and considering
the impact of rising interest rates, we are not surprised that the Dow is
leading the market on the downside wave. However, the June Dow would seem to be
drawing closer to critical consolidation support around 10,473. On the other
hand, we can’t rule out a further decline to 10,409 in the event that the
inflation mongers find additional ammunition in the US CPI report this morning.
Considering the ongoing slide in energy prices overnight and the presence of a
weekly energy inventory reading this morning, it is possible that a massive
washout in energy prices could inspire buyers to step forward and forge a low in
stocks today. Therefore, traders might look to the 10,473 level as a point to
re-enter long positions.
S&P
The June S&P comes into the action this morning much closer to consolidation
support than the Dow and probably has seen the short fund position balloon to a
significantly overdone level. Therefore, the market might be set to forge a
bottom but will need outside help in order to entice the buyers into a market
that has been under persistent pressure for most of the last month. Some might
suggest that it will take something significant to turn off the selling trend
and that something significant might come in the form of a major energy price
decline. On the other hand, a close below the January consolidation lows of
1170.00 could be extremely damaging from a technical perspective, as that would
strike down the uptrend pattern in place since early November!
FOREIGN EXCHANGE
US DOLLAR
The June Dollar Index overnight managed to climb
above the early March high of 83.50 and that has apparently sparked an
additional wave of short covering. It still seems like the Dollar is the
benefactor of its own rising rate structure, even if the Treasury market is
showing anything buy fresh buying interest. However, it would seem like the
market is assuming a perpetually higher US yield and perhaps even expects US
rates to rise at a faster pace. Adding into the upside momentum in the Dollar,
is the fact that the market is discounting soft US numbers and embracing soft
European economic numbers. However, some traders suggest that until the June
Dollar manages a rise above the 84.00 level, very little long term change has
taken place with the rise off the March lows. We understood the all or nothing
condition of the Dollar yesterday and that is why we suggested that traders
consider an extremely cheap and near to expiration put on the Dollar. As it
turns out, the Dollar got the spin it needed from the Fed and that seems to put
the Dollar into a new higher range that could be bound by 83.36 to 84.13.
EURO
While the market has usually discounted the actual
economic differential between the US and the Euro zone, it would now seem like
the weak German IFO readings this morning have added to the selling interest in
the Euro. The German Ifo readings showed a decline in current conditions and in
expectations and that simply gives the market the resolve to continue to press
the Euro despite the significant technical damage already factored into prices.
In the near term, it would appear as if the June Euro is headed down to the
consolidation support around the 130 level and until the market is exhausted on
the US inflation theme, there could be very little interest in picking a bottom
in the Euro.
YEN
Even a sharp slide in energy prices is being
ignored, as the trade remains content to sell the Yen. With the June Yen sliding
below consolidation support there would appear to be very little incentive for
the currency to avoid a slide down to 95.00. We have to think that the BOJ is
extremely happy with the developments this week, as lower energy prices and an
improvement in the exchange rate really takes some additional pressure off the
Japanese economy. Therefore, we wouldn’t be surprised if the BOJ were set to
talk the Yen even lower in the days ahead.
SWISS
Apparently concern for the US trade deficit budget
deficit and consumer debt has left the Swiss. While some might point to support
at 84.00 we are not sure that the Swiss is going to be able to check up at that
level. In fact, we suspect that stop loss selling might dominate and result in a
Swiss trade below 83.60 this week.
BRITISH POUND
With the 4th quarter UK GDP showing a rise of only
+.7%, it is clear that UK growth pales in comparison to US growth and that is
accentuated by the rising US inflation expectation which in turn should continue
to pressure the Pound. Near term downside targeting in the June Pound comes in
at 186.35. Even a reduction in the UK current account deficit of significant
proportion was ignored in the overnight action and that highlights the
entrenched negative psychology present in the Pound.
CANADIAN DOLLAR
The Canadian is resisting the selling pressure
partly because of the strong retail sales readings yesterday but in the end we
are not sure that the Canadian can totally avoid the broad based selling
pressure. While the charts are damaged in the June Canadian, the ability to
mount a close back above 82.44 could really serve to temper the current bear
tilt.
METALS
OVERNIGHT
London Gold Fix $427.25 -$3.40 LME COPPER
STOCKS 46,700 metric tons -625 tons COMEX Gold stocks 5.929 ml oz -96 oz COMEX
SILVER stocks 102.4 ml -1,061 oz
GOLD
Apparently the currency markets are convinced that
rising US interest rates are set to temporarily reverse some of the capital flow
away from the US. In other words, investors and traders look at the mixed pace
of the international recovery and the lack of forward progress in the US
recovery and the conclusion is that rising US interest rates might offer the
best rate of return for the coming quarters. With last week’s dismal European
employment readings and the rising interest rate expectations from the FOMC
meeting yesterday, it would seem like many players have already made a decision
of where to park capital in the coming months.
SILVER
Given the bearish leadership of gold and the recent
70,000 contract small spec and fund long in silver, one can hardly argue against
additional downside action. In fact, the failure to hold above $7.00 would seem
to target the top of the January consolidation around $6.82. With the outlook
for the economy also disappointing, there would seem to be little reason for the
bulls to even fight the current liquidation trend.
PLATINUM
The platinum market certainly isn’t immune to the
selling binge unfolding in gold and silver. In fact, given the ultra high
historical pricing of platinum, we can easily justify a slide all the way down
to $847 basis the July contract. Rising inflation concerns in the US and the
prospect of higher US interest rates are pretty defeating for platinum and that
could leave the potential for Chinese and Asian demand as the sole stop gap
issue for the bull camp.
COPPER
So far, the copper market has managed to skirt the
aggressive liquidation in the precious metals markets. However, because the
global macro economic outlook continues to contract and the Dollar is on the
rise, we suspect that the bull camp in copper is becoming less enamored with the
idea of being long May copper above the 148.00 level. Weakness in London and
lower Chinese copper price action overnight could turn up the internal pressure
on copper prices but we also fear some negative spillover from outside forces.
CRUDE COMPLEX
Yesterday the energy complex forged the most
significant correction since the March 9th to March 11th break and seemed to
forge the washout mostly off suggestions from the former Saudi Oil Minister that
OPEC must provide more oil. The former Saudi Oil Minister also suggested that
OPEC must put a brake on oil prices and that seemed to prick the speculative
bubble that has been in place for most of the last two months. Certainly the
fund long in crude was extensive and somewhat vulnerable at 107,000 contracts as
of March 15th, but we suspect that position became even more overdone on the
$2.50 extension up to the high on March 17th.
NATURAL GAS
While natural gas prices were pulled down slightly
by weak crude oil price action yesterday, we would suggest that the natural gas
avoided the brunt of the potential liquidation. In fact, when one considers the
size of the small spec long position and the size of the washout in crude oil,
we wouldn’t have been surprised to see May natural gas slide below $7.17
yesterday. In fact, while near term weather remains supportive, the weather next
week is a different story altogether.