Futures Point To A Lower Open
5/20/2005
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INTEREST RATES
While some might suggest that part of the
overdone action in the Treasuries recently was the result of an overreaction to
the hedge fund issue, we have to wonder if the story about Norway cutting their
holdings of US Treasuries prompted some players yesterday to revisit the
diversification issue again. In fact, with the Wall Street Journal Credit
section this morning officially downplaying the credit risk threat, (off the
hedge fund situation) we suspect that both flight to quality buying of
Treasuries and yield curve buying is declining. Furthermore, the Treasury market
isn’t totally ignorant to the economic optimism being thrown off by the stock
market this week and that could be why a number of longs banked profits around
the highs.
STOCK INDICES
While the broad based economic outlook continues
to improve, the market appears to be set to bank some profits today, after one
of the most impressive rallies of the last year. In fact, there are a number of
issues that seem to countervail the optimism that has generally controlled
sentiment this week. For instance, with energy prices higher this morning and
OPEC is suggesting that strong energy demand patterns, could head off a June
production hike.
DOW
While the June Dow appears to have run into a bit of solid resistance up at
10,500 and is certainly in need of a technical balancing, we doubt that the
market will slide aggressively. In fact, in the event that the June Dow slides
back down to 10,450 support, we suspect that moderate buying interest will
surface. We continue to think that the June Dow is ultimately headed back to
retest the March highs. However, fresh longs might have to risk positions to at
least 10,346, so fresh buyers certainly need to be patent early today. In fact,
unless there is a specific positive headline to rekindle the buying interest
early today, we suspect a minor decline to 10,450 is in store.
S&P
While we suspect that the June S&P will manage to respect support down at
1186.80, we can’t rule out a slightly steeper correction in the S&P due to its
overbought technical condition. In fact, with the rise off the May low of
1147.20 rather significant and the rise coming in a compacted fashion, we
wouldn’t be surprised to see a 1185.70 trade before prices resume the upward
adjustment that seems to be due, off the persistent improvement in the macro
economic condition. However, the first two hours of trade today could be
important, as the ability to get back above 1191.20 early today could dash the
early bearish tilt and result in another adjustment up. We suggest that
conservative traders look to buy the June S&P on a dip to 1186.00 with an
eventual target of 1230!
FOREIGN EXCHANGE
US DOLLAR
The Dollar held up impressively yesterday in the
wake of patently disappointing US scheduled economic information and perhaps
even more importantly, in the face of more aggressively US threats against
China. The US Treasury Secretary suggested yesterday afternoon that the US would
begin to utilize financial diplomacy, in an effort to get China to revalue its
currency. Unilaterally or because of the US pressure, the Chinese have announced
that they will impose an export tariff on 74 clothing and textile products and
that would seem to show some malleability. However, the US might be gunning for
a change in the currency, as that is a blanket scenario instead of an isolated
appeasement. Considering the action in the Dollar this week, it would almost
seem as if the trend and not the information has lifted the Dollar and that
without ongoing optimism toward the US economy, therefore the Dollar could have
trouble holding above the 86.00 level. However, in the event that the Dollar
breaks out to the upside, that action would seem to be the influence of the
whole Chinese currency situation. We think that Dollar longs should bank profits
or at least protect those positions with short call and long put positions.
EURO
The Euro has certainly managed to respect the
consolidation lows around the 126.00 level this week, but just as the Dollar has
held up despite disappointing US numbers, the Euro hasn’t exactly taken the
advantage of the poor US numbers. It is possible that a refinery strike in
France is discouraging some Euro buyers, as the French government might have to
tap strategic reserves to avoid seeing a sustained economic impact off the
action. We continue to think that the Euro is a sale on rallies but we can’t
rule out a temporary rally back above the recent highs of 126.99.
YEN
The Bank of Japan continues to fret over the correct
amount of money supply to battle the ongoing threat of deflation and that seems
to leave the Yen under pressure. We have to think that the potential US/China
trade war issue is a potential major negative to the Yen and for that reason we
can’t rule out a slide down to the April lows in the yen. The BOJ is apparently
concerned enough about deflation that they felt the need to directly downplay
the fact that they let liquidity levels fall below previous target levels. Near
term downside targeting is 92.68.
SWISS
While the Swiss has managed to hold up above the key
pivot point of 81.64, the market continues to show a preference for the bottom
of the consolidation and that hints at the prospect of a downside breakout. Near
term downside targeting is 81.10 but we can’t rule out a temporary rise to
82.50.
BRITISH POUND
Some players think that the Pound’s ability to hold
above 182.03 hints at a bottom but we think that the economic condition in the
UK is making it harder for the currency to bottom and in fact turn up. Those
that want to get long for a bottom need to carry along some put protection with
those positions.
CANADIAN DOLLAR
The Canadian managed to right the technical setup
with the impressive close yesterday and with the higher probe this morning, it
is possible that the June Canadian will attempt to re-test the long term down
trend channel up at 80.32 sometime next week. It would almost seem as if the
Canadian benefited from the partially muted CPI reading overnight of +0.3% and
that could mean that the Canadian economy is just right, not too fast and not
too slow.
METALS
OVERNIGHT
London Gold Fix $420.80 -$0.95 LME COPPER
STOCKS 51,900 metric tons -675 tons COMEX Gold stocks 6.169 ml oz Unchanged
COMEX SILVER stocks 105.3 Unchanged
GOLD
We are a little surprised that the Dollar hasn’t
caved in to some selling in the wake of US Treasury Secretary comments yesterday
about the US preparing to employ Financial diplomacy in an effort to get China
to move forward on its currency float. Since the market isn’t sure how the
Chinese will respond to such direct pressure from the US, the Dollar really
hasn’t made a definitive move. However, we would have expected the Dollar to
have been pressured or at least undermined by the fact that US economic numbers
have generally been softer than expected this week.
SILVER
We see the silver market as vulnerable in the short
term. While the market certainly managed to kick up the long term trend with a
close above the 100 day moving average early this week, the market is relatively
overbought off the May rally. The 100 day moving average comes in today at
$7.086 and we would not be surprised to see the market slide back down to $7.03,
especially if the Dollar manages to rise above 86.30 in the early action this
morning.
PLATINUM
Following the sharp bounce off the May low, it would
seem like platinum has run out of upside momentum. In fact, with a sharp
reversal at the $870 level it is clear that platinum has seen some buyers back
away from the market. Unfortunately for the bulls in platinum, the talk of
increased Asian platinum buying hasn’t been followed up with additional evidence
and that could leave the July platinum in a near term trading range of $870 to
$857.
COPPER
The bulls in the copper market certainly haven’t
responded as wholeheartedly as we would have expected this week in the wake of
such a significant run up in equity prices. Shanghai copper stocks increased on
the week by 843 tons to stand at 27,019 tons and that is a minor disappointment
for the bull camp. Chinese copper prices were lower overnight, possibly in
response to weekly stocks readings and partly because of the recent US trade
threats.
CRUDE COMPLEX
After some fleeting attempts to firm yesterday,
the crude oil market finished the session close to the recent lows. Weighing on
prices yesterday were suggestions that OPEC oil flow might have increased by
210,000 barrels per day out to June 4th. Furthermore, even with the trade
suggesting that OPEC flow looked to taper off after June 4th, the market really
didn’t show much interest in the bull case.
NATURAL GAS
While the natural gas market still managed to forge
a new low for the move, we suspect that some sellers were a little concerned
about the reports of a hurricane. However, with the regular energy complex
remaining weak and weekly storage figures bearish again, the bears certainly
have control over prices. The weekly gas storage report showed an injection of
90 bcf compared to estimates between +75 bcf to +105 bcf.