Futures Point To A Lower Open
5/12/2005
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INTEREST RATES
Apparently the whole hedge fund risk issue
managed to get into the Treasury market yesterday afternoon and with the Wall
Street Journal credit section this morning trumpeting the concern again this
morning, we can understand the Treasury markets falling back from their recent
highs. We didn’t get the sense that the Treasury market was aggressively
undermined by the afternoon recovery in stock prices or by the sharp continued
slide in energy prices. However, the action in stocks and energies certainly
added into the reason for long profit taking yesterday afternoon.
STOCK INDICES
The stock market was really lucky to have turned
the tide yesterday, as the market was close to kicking off a more significant
wave of selling when it turned. While we haven’t seen specific evidence that
sharply lower oil prices inspired the buyers, we do know that sharply lower oil
prices didn’t hurt the bull camp. We do think that the Press has made too much
out of the Hedge Fund issue and certainly attempted to fan the flames of anxiety
yesterday morning, by fretting over a contagion among funds.
DOW
Those that took our suggestion, into the non farm payroll report last Friday, to
buy the June Dow and to buy 3 June Dow 10,100 puts should have lifted the puts
for a modest profit and should this morning take profits on the long Dow futures
position, as we doubt that the June Dow is going to effectively manage to turn
the overall trend up. In other words, the short covering bounce off the low is
probably within 65 points of running out of gas. In fact, unless the US retail
sales grew by at least 1% in the upcoming report, or June crude oil quickly
falls back below the May 4th lows, we are not even sure that the Dow will make
another 65 points before rolling over again. Aggressive traders could get short
the June Dow on a bounce to 10,365, with an objective of 10,090.
S&P
While the bounce off the lows yesterday furthered the pattern of higher lows, we
are not convinced that conditions are set to improve enough, that the trade is
going to discard the soft spot concerns and consistently bid up stock prices. In
fact, on a rally back to 1175.30, aggressive traders might consider getting
short the June S&P for a return to the middle of the consolidation back down at
1155.00. In order to shift the trend up, the June S&P needs the Fed to hint at a
temporary on hold status, or oil prices declines will have to simply dominate
the headlines in a positive fashion.
FOREIGN EXCHANGE
US DOLLAR
With another new high for the move overnight, the
trend in the Dollar seems to be pointing toward more gains. However, with the
Euro zone posting some decent numbers overnight and the outlook toward the US
economy conflicted, we are somewhat surprised that the Dollar has managed such
impressive gains. However, it is not an insignificant development that the US
has managed to turn its trade deficit direction around. We also think that the
Dollar is indirectly deriving support from the consistent declines in energy
prices, as the US economy is thought to be acutely sensitive to the blight of
high oil. In fact, some of the biggest limitations to buying the Dollar might be
the concern for such US industries that are on the ropes because of oil prices.
In other words, the US economy has been held down by its airline and auto sector
and significant declines in oil prices would seem to moderate the ongoing macro
economic concern toward the US. If the macro economic concern toward the US is
tempered, at the same time that the threat of international investment rotation
is tempered (because of the trade balance improvement) it is not surprising that
the Dollar has returned to the vicinity of the April highs. However, to get
above the April high, could prove to be difficult unless one can read the front
page of Wall Street Journal or listen to the talking heads and feel optimistic
toward the near term future.
EURO
It seems a little strange that the press sees the
1st quarter Euro zone GDP as a positive. Maybe because the reading was better
than expected, the trade is able to spin the rather insignificant gain into a
positive but in the end, one simply can’t get fired up about the upcoming rate
of return potential in Euro investments. In fact, we suggest that Italian
economic readings overnight completely countervail the German and Euro zone
figures, especially since some Press outlets suggesting that the Italian numbers
actually point to a return to recession! Therefore, more gradual declines are
expected in the Euro in the near term, with the important action in the currency
markets coming from the Dollar or from the Yen.
YEN
With the BOJ calling for China to enact more
flexible currency policies, it would seem that the pressure to float the Yuan
continues, but with the Dollar strong this morning it would not appear that the
Greenback is factoring a near term change and therefore neither is the Yen. In
our opinion, the current slide in the Yen might create a buy, but not until the
market manages to slide back down toward more credible chart support around and
just below the 94.00 level. With Japanese stock prices weak and falling on low
volume, it is clear that sentiment toward Japanese investments is disjointed at
best and that could allow for more near term declines in the Yen.
SWISS
Like the Euro, the Swiss is poised to return to the
April lows but unless the Chinese patently discount the prospect of change in
their currency, we doubt that the Swiss will take out the February and April
consolidation lows. In the mean time, the path of least resistance is down and
it would seem like open interest is rising on the slide, which also favors the
bear camp.
BRITISH POUND
The Pound is without a near term reason to shut off
the selling pattern. In fact, some traders suggest that the overnight losses
have kicked off fresh sell signals and that a slide all the way down to
consolidation support at 185.10 is in order. We doubt that domestic economic
readings are going to turn the Pound up, but a surprisingly disappointing US
retail sales reading this morning might have a chance of stopping the current
slide.
CANADIAN DOLLAR
The bad technical action in the Canadian continues
and with the next support level seen down at 79.78, we see little reason for the
currency to turn on a dime. Unfortunately, the technicals dominate the near term
and the fundamentals simply don’t have a definitive case to alter short term
sentiment.
METALS
OVERNIGHT
London Gold Fix $426.25 -$2.10 LME COPPER
STOCKS 56,350 metric tons
-4,225 tons COMEX Gold stocks 6.083 ml oz Unchanged COMEX SILVER stocks 104.9
Unchanged
GOLD
At times the gold market attempts to track something
other than the Dollar but given distinct action in the Dollar, it becomes almost
impossible for the gold market to break the relationship. We suspect that gold
will continue to see decent support off the $425 level, but in the event that
the June Dollar manages to rise above the April 14th high of 85.31 an additional
wave of long liquidation could temporarily send June gold prices back down below
$425. About the only positive in the overnight action is that the Press noted a
decline in Chinese gold trading volume on the price weakness.
SILVER
While the pattern of higher lows remains in place,
we are not sure that the macro economic outlook is actually helping silver.
Recently the silver market has seemed to track closer to the copper market than
to the gold market and until the July silver manages to rise above critical down
trend channel line resistance at $7.22 the overall pattern would seem to be
down. In fact, yesterday the weakness in copper seemed to pull silver down and
with recent silver volume patterns falling off, we are concerned that a slide
back to the May low will be brought on by ongoing weakness in the equity
markets.
PLATINUM
A significant reversal in platinum sends another
signal of an overly expensive condition. Just as the platinum market recoiled
off the March high and the late April high, it would seem that platinum prices
above $885 yesterday, completely shut off buying interest. With open interest
extremely high and this Friday’s COT report expected to post a fresh record in
the spec and fund long, this market is both technically and fundamentally
overbought.
COPPER
Despite talk of tighter supply in China early in the
week, it would not seem like the market is able to hold gains. In fact, recent
rallies have also seemed to lack the usual driving power and that is painfully
evident in the decline volume and open interest patterns. While some esoteric
metals prices continue to rise off the export rebate change in China, we can’t
help but notice the weakness in Chinese stock prices, as that suggests some fear
of slowing is present in the Chinese economy and that in turn could foster
concern for Chinese copper demand.
CRUDE COMPLEX
The energy complex certainly suffered under the
weight of the bearish weekly inventory reports, but early in the session
Wednesday, negative energy demand news and weakness in the US equity market
certainly laid the ground work for the more significant late selling binge. Some
might suggest that the weekly inventory reports were actually a little
countervailing but we think that the trade is beginning to discount the API
readings due to their recent inconsistency. The International Energy Agency
added to the near term bearish /long term bullish market mentality with
suggestions that 3rd and 4th quarter Non OPEC supply would grow by 100,000
barrels per day and that the call on OPEC (demand) for the 3rd quarter was to be
unchanged and that the 4th quarter call was expected to decline by 100,000
barrels per day.
NATURAL GAS
While natural gas prices faired better than crude
oil in the action Wednesday, it would not seem like the market has the scope to
rise above consolidation resistance, because of the ongoing pressure in the
petroleum markets. In fact, with the natural gas storage readings due out today,
it is possible that natural gas will get a negative reaction off the supply news
that will be released during the session today. Recently Gas storage stood at
1,455 bcf, which is 238 bcf above year ago stock levels and 295 bcf above the
11yr average.