Futures Point To A Lower Open
5/17/2005
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INTEREST RATES
The US Treasury market mostly managed to hold
around the highs yesterday and seemed to get initial support from the softer
than expected Empire State manufacturing Index. Not surprisingly the sharp gains
in the equity market yesterday afternoon seemed to evoke some profit taking in
bonds and notes but the market has apparently maintained some of that profit
taking mentality into the early action today. Certainly some longs were
unwilling to sit with profitable positions into the coming wave of inflation
data, especially considering where the trade has placed early estimates for the
reports.
STOCK INDICES
While the market certainly responded to favorable
leadership from Citigroup and Home Depot on Monday, the Home Depot earnings were
actually a little anticlimactic. We are very concerned about the Capital flows
report that was released on Monday, as the report showed a reversal of inflows
away from the US, with the inflows coming in at the lowest level since October
of 2003. In other words, the old fear of international diversification has
resurfaced again.
DOW
Home Depot appears to have bought the rumor and sold the fact off its earnings.
It would also seem like some investors are fearful of rate hike dialogue,
considering the upcoming release of the US PPI. In conclusion, it would seem
like the Dow is vulnerable to some selling today, especially if housing stats
fail to shine through the fog on the US economic trend. It would seem like the
June Dow is in a pattern of lower highs but is also coming off a pattern of
higher lows and that could set up an extremely critical decision point today or
Wednesday. In fact, traders should expect some near term declines, perhaps to
10,161 but a recovery and trade back above 10,260 could result in an upward
extension. Fresh longs probably have to risk positions to at least 10,075.
S&P
Clearly the S&P is showing a pattern of lower highs and given the usual 2-3 day
recovery count, we suspect that the overnight highs stand a good chance of being
the high for the session. However, traders should take any rise back above
1167.60 in the June S&P as a potential reversal signal. In our opinion, it will
take a clearly muted PPI reading and suggestions that the Fed is possibly on
hold, to directly turn stocks up in the action today. We seriously doubt that
PPI will be soft, unless the March and April slowing period was in reality
something much more significant than the scheduled numbers have already
suggested.
FOREIGN EXCHANGE
US DOLLAR
The Dollar bulls were humming along until the US
capital inflows report noted the lowest reading since October of 2003. In other
words, the rotation or diversification threat has once again surfaced and for
the Dollar’s sake, it is fortuitous that the inflows data came in the wake of a
dramatic upswing in bullish sentiment toward the Dollar or the Greenback might
have been smashed. As it stands, the recent upward track in the Dollar is called
into question and for the bull camp to regain control and push up the Dollar,
the US will have to post decent momentum and hot pricing in the reports this
morning. Recent comments from the Chinese, that they would not be forced to move
on their currency quickly, would seem to temper the downward tilt in the Dollar,
off the Yuan situation but at the same time the trade isn’t that focused on the
Chinese currency issue. We get the sense that a large portion of the Dollar
gains off the early May lows, came compliments of surging US numbers and not
necessarily inflationary buying. Therefore, we suspect that the Industrial
Production and housing readings today will be a little more important than the
PPI. However, if the PPI is patently soft and some in the trade conclude that
the Fed is less likely to hike in June then the Dollar could certainly see some
selling off the PPI report. We get the sense that the Dollar is vulnerable and
needs some help today to avoid profit taking selling.
EURO
While the Euro is showing some signs of forging a
mild bottom, the fate of the Euro sits with the US numbers. However, preventing
the Euro from garnering a more significant early edge this morning are
statements from the Bundesbank that the 4th and 1st quarter GDP readings were
slightly exaggerated and that creates some economic doubt toward the Euro. Talk
of a corporate tax cut in Germany could certainly serve to whip up positive
sentiment toward the Euro, but with the Bank also predicting no “Comprehensive
Labor Market improvement” we suspect that the macro economic tilt will simply
limit the Euro, unless the numbers from the US patently serve to undermine the
Dollar. In order to turn the near term trend up in the Euro, the market will
have to manage a rise above 126.80 in the first two hours of the US trade.
YEN
The Japanese growth rate of 5.3% hasn’t done much
for the Yen this morning and that is a very bearish sign. While some suggest
that the number failed to show accelerating growth that would seem to be a
higher standard than is being applied to other currencies. Therefore, we still
can’t rule out a temporary slide to 93.00 but we suspect that the Yen will be
able to hold that critical support zone on the charts.
SWISS
Minimal signs of a bottoming in the Swiss would seem
to suggest a temporary bounce ahead and then a resumption of the downside track.
However, a normal retracement bounce is too much to expect in the Swiss and
therefore traders might have to be content to re-sell the Swiss on a bounce back
to 82.30.
BRITISH POUND
We doubt that the UK CPI reading this morning of
+0.4% is the type of number to facilitate a sustained bounce in the currency,
especially since the market was expecting a slightly hotter number. However, as
in other markets the main focus will be the US numbers and whether or not the US
numbers justify the recent aggressive rally in the Dollar. Therefore, for a
bounce in the Pound, the US numbers will only have to be slightly soft!
CANADIAN DOLLAR
Given the recent disappointment in Canadian
readings, soft readings from the US might only serve to slow the slide in the
Canadian instead of sparking a sustained short covering move. Therefore, fresh
shorts might consider getting short the June Canadian on a bounce to 79.06
today.
METALS
OVERNIGHT
London Gold Fix $420.35 +$0.45 LME COPPER
STOCKS 54,175 metric tons -875 tons COMEX Gold stocks 6.129 ml oz +100 oz COMEX
SILVER stocks 105.6 Unchanged
GOLD
While we wouldn’t make too much out of the reversal
Monday, it would seem like some bargain hunting buying surfaced and considering
the similar reversal in the Dollar off the highs on Monday, there would seem to
be at least two forces hinting at a temporary bottoming action. The slightly
improved stance in the gold market was confirmed by slightly higher Chinese and
European overnight action. While the gold market hasn’t paid too much attention
to regularly scheduled economic information, the Dollar probably will react to
the numbers this morning and therefore gold might also be expected to react to
the US Industrial Production numbers.
SILVER
The silver market seemed to have more upside
capacity than gold in the action Monday and it also appears as if the silver
market were getting more fund interest than the rest of the metals markets. In
fact, with copper and platinum price action showing less impressive action of
late, it is possible that some specs and funds have moved toward silver.
However, in order to get out of a sideways consolidation track, July silver will
have to mount a rise back above $7.08 and that might be a lot to ask in a
lackluster trade environment.
PLATINUM
The platinum market has managed to recoil from the
sharp declines posted Monday in the wake of the most recent Johnson Matthey
report. Apparently the report noted a moderate decline in jewelry demand but
also indicated that autocatalyst demand was on the rise. Johnson Matthey also
indicated that they expected significant fund participation in platinum over the
coming months and that could serve to increase price volatility.
COPPER
News that China released 10,000 tons of copper from
the State Reserve, discounts the recent concerns of tightness at the Shanghai
exchange and that in turn leaves the copper market at vulnerable levels on the
charts. US industrial production readings this morning could be critical to
copper and with the US also floating some housing figures this morning, there
will certainly be a macro economic impact on copper prices today. Singapore
copper prices fell overnight, with traders overnight suggesting that buyers are
stepping back from the market, as they are waiting for even lower pricing ahead.
CRUDE COMPLEX
While the energy complex was mostly lower
throughout the session Monday, the market didn’t show the typical downside tilt
that has been present for most of the last month. We can understand the markets
ongoing bearish tilt considering the assurances floated by OPEC recently, but we
also think that news of record April Chinese crude oil imports give the bear
camp something to consider temporarily. However, the energy complex might
temporarily be in need of a corrective bounce even though it might still be set
to slide lower in the coming week.
NATURAL GAS
A nice bounce off the lows on Monday would seem to
create some support under the June contract, but in the event that crude oil
resumes its downside slide, we suspect that more declines are in store. Weather
appears to be returning to normal, but normal weather could favor the bear camp.
We are a little surprised that natural gas failed to rally in the wake of
predictions for an active 2005 hurricane season yesterday but that suggests the
market is still back on its heels and currently unable to respond to nominally
bullish information.