Futures Point To A Lower Open
5/24/2005
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INTEREST RATES
Many traders are a little shell shocked by the
recent strength in the Treasuries. The Wall Street Journal credit section
appears to have no explanation for the rise in prices on Monday, but we suspect
that the main driving force behind the current pulse up is the idea that the Fed
is set to acknowledge the slowing in the US economy. We suspect that the Fed
will acknowledge the soft spot in the minutes today, but we don’t think that the
Fed will back away from a rate hike in the coming FOMC meeting.
STOCK INDICES
While the stock market benefited from momentum
yesterday, the trade was also initially lifted by weakness in oil prices and an
upgrade of the software sector. This morning the market seems to lack the amount
of positive news that was present yesterday and with international markets a
little weaker we can understand a softer opening. We also think that
discouraging European economic news undermines sentiment slightly and with
ongoing gains in US Treasury prices there certainly seems to be concern for the
state of the world economy.
DOW
The market is certainly short term overbought and would not seem to be poised to
get help from the scheduled US economic numbers. With the Treasury market
forging rather spooky gains, we have to wonder which market (bonds or stocks) is
incorrect in its view toward the US economy! While the report slate could
surprise and come in better than the early weak forecasts, the main focal point
of the trade today will be the afternoon release of the FOMC meeting minutes. In
our opinion, part of the bull case in stocks is predicated on the idea that the
Fed will soon (maybe only temporarily) get off the back of the economy. In
short, without clear hope for a Fed pause, the June Dow might see a steeper
correction back down to 10,455. In the event that the Fed clearly expresses some
concern for growth or downplays the threat of inflation, we suspect that the
June Dow will manage to respect closer in support of 10,496.
S&P
Critical pivot point support in the June S&P comes in at 1192.70 and then again
down at 1190.20. However, with the talking heads this morning thoroughly
convinced that the market is set to correct, it is possible that the entrenched
bullish momentum rejects the bear tilt present in the early going. However,
unless the energy complex weakens, the numbers are better than initial
expectations, or the Fed is a friend of the market, it is probably time for a
little back and fill type action. In the event that the Fed is hawkish and the
early numbers are softer than expected, we can’t rule out a more aggressive
decline to extremely critical support of 1186.00 basis the June S&P.
FOREIGN EXCHANGE
US DOLLAR
The Dollar action yesterday was extremely
discouraging to the bull camp and we have to think that the slide was primarily
the result of expectations that the US Fed might hint at a pause in the rate
hike pattern. Even more surprising is the fact that the Dollar weakened despite
extremely disappointing economic readings and economic dialogue from the Euro
zone. Even this morning the Dollar has failed to firm in the wake of additional
disconcerting economic information from Germany. In fact, the Dollar even failed
to strengthen in the wake of OECD suggestions that the US needs to continue
hiking interest rates to defeat inflation. In short, today is an extremely
critical junction for the US Dollar, as a failure to rally after the release of
the FOMC meeting minutes, has to be considered an inflection point in the near
term trend. In fact, the bull camp in the Dollar should not tolerate a decline
below 86.06 in the wake of the FOMC minutes. The early numbers should have
little impact on the Greenback, but we suspect that they will undermine the
Dollar slightly. If you are long the Dollar, tighten profit stops and consider
standing aside temporarily. In a side note, the US has apparently asked the
Chinese to allow the yuan to appreciate by 10% and that is a much more
aggressive request than many had expected and that might lead to some additional
Dollar weakness today and might also have been a major influence on the Dollar
yesterday.
EURO
German ZEW sentiment readings declined and the
German Statistical office worried that construction weakness has yet to run its
full course. However, over the last 24 hours the Euro hasn’t been adversely
impacted by weak numbers and even weaker dialogue from the ECB President on the
front page of the Wall Street Journal. In other words, the economic differential
isn’t playing a major role in the current price action of the Euro. Therefore,
the focus must be on the indications put forth from the US Fed later today. In
our opinion, the Euro never would have bounced off the recent low, if a portion
of the market weren’t expecting the US Fed to hint a brief pause in the
consistent rate hike pattern. In the near term, we can’t rule out a bounce to
126.98 but that level would be a place to re-sell the Euro. Longer term position
players should probably simply stick with shorts.
YEN
The yen is technically oversold enough to bounce
back toward the 94.00 level, especially if the US Fed is thought to be poised to
take its foot off the brake. Dampening the upside tilt in the yen is the fact
that April Japanese department store sales were flat, as that reconfirms that
the Japanese economy continues to battle deflation. Off all the currencies, the
sentiment spinning out of the FOMC meeting minutes this afternoon probably
serves to impact the Yen the most! With any dovish signal, the Yen could easily
rise to 94.05 but that still wouldn’t effectively kill the down trend pattern.
Even the Japanese are calling for the Chinese to allow for a wider trading band
in the yuan and that might serve to give the Yen an additional lift on the
coming short covering bounce.
SWISS
Like the Euro, the Swiss is poised to bounce but we
suspect that the weakness of the bounce over the coming 24 hour period will
clearly reconfirm that the trend remains down. Near term upside targeting and a
place that aggressive players might get short is 82.00 basis the June contract.
BRITISH POUND
Near term bounce targeting for the June Pound comes
in at 183.88 but under a sharp slide in the Dollar, a return to 184.14 can’t be
ruled out. The Pound is somewhat an outside market with respect to the Chinese
currency situation, as least from a concentrated volatility standpoint.
CANADIAN DOLLAR
With the US Dollar slackening and the Canadian
seemingly moving to correlate a little more positively with the Dollar, we can’t
rule out a slide back to consolidation support of 78.97. In fact, the influence
of the big picture down trend pattern might facilitate a quick slide all the way
down to 78.85.
METALS
OVERNIGHT
London Gold Fix $420.25 +$2.65 LME COPPER
STOCKS 50,225 metric tons -625 tons COMEX Gold stocks 6.6137 ml oz -31,905 oz
COMEX SILVER stocks 105.6 Unchanged
GOLD
The gold market initially didn’t appear to get
support yesterday from the setback in the Dollar, even though the decline in the
Dollar seemed to come off the idea that the US Fed might be prepared to break
the pattern of consistent rate hikes seen over the last two quarters. We think a
portion of the trade expects the upcoming FOMC meeting minutes to show
recognition of slowing in the US and that may or may not hint at a pause in the
persistent rate hike pattern. In the event that the Fed hints at a pause that
could weaken the Dollar and that in turn could provide gold with some support.
SILVER
Unlike the gold market, the silver market did show
some positive initial action on Monday, in the wake of more equity market gains
and in the face of strength in platinum and copper. Like gold, silver continues
to periodically battle deflationary concerns and that is why the persistent
gains in equity prices are simply managing to discourage some silver selling.
Overnight Mexico indicated that they intend to increase their silver production
this year by roughly 4% and that would be a little negative to silver prices if
the market were in a position to pay attention to physical supply and demand
developments.
PLATINUM
Despite the ability to recoil off the recent lows,
the platinum market appears to have found solid resistance again on the charts
at $870. Slackening attitudes toward Chinese trade activity, would seem to be
discourage paying up for platinum and in our opinion we would wait for a
correction back down to $855 basis the July contract before looking to buy
platinum for a early June bounce off the consolidation lows.
COPPER
The copper market certainly benefited from the
continued upside extension in world equity prices. Even more surprising is the
fact that the copper market this morning hardly seems to care that European
numbers are soft. Therefore, the bull camp seems to have stepped back in to
control near term copper prices.
CRUDE COMPLEX
Initially the energy complex showed signs of
extending the recent downward thrust but by the close Monday, the market had
forged another late afternoon recovery. We might add that the afternoon recovery
action was the hallmark of the bull trend seen prior to the key April top.
However, the energy complex could easily have caved into the bearish
fundamentals thrown at the market early in the session Monday but didn’t! For
instance, the market had to absorb private forecasts that pegged April OPEC
exports to have increased by 430,000 barrels and at the same time the market
also had to weather an extremely bearish EIA gasoline demand forecast, which
suggested that gasoline demand had fallen further than expected, because of
ultra high retail prices.
NATURAL GAS
The natural gas market forged a massive trading
range on Monday and with extreme heat in the southwest and sharp gains in the
equity market, we have to think that the bears are becoming increasing more
uncomfortable. While we hardly see any relief from the near term pressure
arising from the petroleum market we do think that July natural gas could have
forged a significant bottom on the action Monday. A minor shift in the southwest
heat, toward the heart of the nation could prompt increased utility buying and
in the process prompt a larger portion of the fund short to move to the
sidelines.