Futures Point To A Mixed Open
10/14/2004
INTEREST RATES
The Treasury market seems to have been given a
lift by the broad based commodity price liquidation and the assumptions that
world growth is set to slow. With the OPEC President suggesting that oil prices
could continue to rise, the argument that soaring oil prices will derail the
recovery is gathering momentum. Since late June and early July when the Fed
discounted the impact of energy prices, we have seen crude oil prices rise by
nearly $16 a barrel.
STOCK INDICES
The stock market remains vulnerable to more
liquidation! Certainly a number of favorable earnings reports from companies
like Citibank and Apple cushion the market against what appears to be a
consistent deterioration in the macro economic condition. Certainly soaring oil
prices are the root of current problems but one sadly didn’t see much focus on
that problem in the Presidential debate. The US Congress showed the power of
“Big oil lobbies†by the fact that new tax breaks were lavished on existing
energy producers, but the Congress steadfastly refused to mandate an increase in
the percentage of ethanol used in the US energy mix.
DOW
Unlike other stock sectors, the Dow futures have showed almost no bounce off the
recent lows. In other words, the extreme pressure of soaring oil prices on large
cap stocks is very severe and with the Fed’s head in the sand on the need for
further interest rate hikes, there is a chance for a slide all the way back down
to the August lows of 9,793. In order to turn off the downside tilt, the Dow
needs to manage a climb back above 10,039. Aggressive traders should look to see
a minor rally to 10,005.
S&P
While the December S&P should be able to respect support of 1110, we have to
think that the trend remains down and that new highs in crude oil prices will
simply facilitate a return to the September low of 1101.60. Right now, the bull
camp has to pull a rabbit out of its hat, just to turn off the downward tilt. In
order to turn the down trend around, the December S&P would have to climb back
above 1116.90.
FOREIGN EXCHANGE
US DOLLAR
We are not sure what the trade in the Dollar is
thinking, as the sharp rise yesterday seemed to come under the assumption that
energy prices were set to weaken. This morning soaring oil prices have returned
selling pressure to the Dollar and it would seem like the December Dollar is
headed back down to the recent lows. We think that traders should continue to
look at the technical trend in the market and assume that near term losses are
in order. Near term downside targeting in the Dollar comes in at 87.49 and under
a new high in the crude oil, it is possible that the US Dollar temporarily
forges a new low. It is simply amazing how the focus of the currency trade is
shifting wildly between oil benefiting the Dollar and oil damaging the Dollar.
In order to turn off the downtrend pattern in the December Dollar, it would have
to manage a climb back above 88.65.
EURO
Early this week the Euro was tagged as the most
likely economy to falter under the rising tide of energy prices. Even with
McDonalds showing positive same store sales in almost every area but Europe and
GM showing good earnings in most regions besides Europe, the trade is content to
bid up the Euro. In other words, the macro economic differential argument isn’t
being considered. In short, we suspect that the Euro is capable of returning to
the 124.00 level, especially since the ECB is out with suggestions that the
recovery appears to be on track and that the Euro zone has achieved price
stability! Therefore, buyers of the Euro must have been looking for price
stability.
YEN
The argument that the Japanese economy is more
vulnerable to high oil prices hasn’t discouraged buyers. Furthermore, concerns
about Chinese demand and the Chinese economy also haven’t undermined the Yen and
therefore the December Yen might be able to rise to 92.00 resistance. However,
buying the Yen at resistance and in the face of potentially negative
fundamentals, seems to be an extremely risky venture.
SWISS
Given more labor problems in Nigeria one might
expect to see soaring energy prices. With the sharp commodity washout yesterday,
one can also suggest that economic uncertainty is rising and that should in turn
boost the Swiss. Near term upside targeting in the December Swiss comes in at
80.40 but a rise to the top of the channel at 80.60 shouldn’t be ruled out.
BRITISH POUND
The woes of the Dollar seem to push some capital
toward the Pound. Therefore, the Pound wins by default and could now see a rise
back up to resistance of 180.00.
CANADIAN DOLLAR
Following the massive correction and the weakness in
the US Dollar, we have to think that the Canadian Dollar is poised to lead on
the upside. In fact, if current conditions hold, we see new contract highs soon.
METALS
OVERNIGHT
London Gold Fix $416.65 +$2.20 LME COPPER
STOCKS 88,525 metric tons -50 tons COMEX Gold stocks 5.178 ml +42,552 oz COMEX
Silver stocks 106.8 ml -98,125 oz
GOLD
At least part of the washout in gold was driven by
the continued rise in the Dollar but the majority of the slide seemed to be
spawned by talk that Chinese demand for commodities might be set to tail off.
For some reason the market is suddenly concerned about future demand, with some
analysts suggesting that the big across the board slide in many commodities was
an indication that world growth was tailing off. We wouldn’t argue with that
analysis if it were not for the fact that the big washout in copper, gold,
silver, and other base metals came after massive sustained gains in those
markets.
SILVER
The silver market comes in the opening this morning
23 cents above the steep washout low posted Tuesday afternoon. Talk that
international commodity demand was set to decline, seemed to spark the slide but
we think that simple technical selling by the funds caused the across the board
debacle. While one can’t rule out more fund selling, we think that silver still
remains in a bull trend and that traders can buy March silver and buy a March
silver 625 put and that should at least cushion fresh longs against near term
volatility.
PLATINUM
Even before the massive commodity fund washout on
Wednesday, the platinum market was acting poorly. Therefore, even if the Chinese
demand lull fails to materialize, the platinum market might remain in a
liquidation mode. With a strike ending, Chinese demand for platinum suspect and
the world generally fearful of slackening growth, we have to think that January
platinum is capable of sliding back to consolidation support of $823 and
possibly down to $818.9.
COPPER
The market is still generally scratching its head
over the record single day slide in copper prices. Supposedly the funds were
mostly behind the slide and the losses were so significant, we have to think
that some would-be buyers are afraid to jump in for value. Even Chinese traders
suggested that the fundamentals in copper are basically unchanged even though
some traders are fostering talk that world wide commodity demand is set to
slide.
CRUDE COMPLEX
The energy market comes into the action this
morning boosted by talk from the OPEC President that oil prices are set to rise
further and may rise for the next month. In other words, the OPEC President is
no longer blaming speculation but is suggesting that the fundamentals foster
more gains. Yesterday, the crude oil market started out weak, but came on strong
into the close, as the trade was fueled higher by expectations for the weekly
inventory report today.
NATURAL GAS
After a wild downside correction off the high, the
December natural gas has been resurrected by the recovery in crude oil. Some
traders think that outages in the Gulf might be narrowing to less than 10%,
which isn’t a big change from the 14% recently documented. We continue to think
that fresh longs should implement short call and long put wings in an effort to
ride through some near term volatility.