Futures Stronger Ahead Of CPI Report
INTEREST RATES
The Treasury market should have plenty of
information today, with several critical economic reports and potential dialogue
from the Chairman of the US Federal Reserve. However, it would seem like the
Fed’s tone has already ramped up, with the Fed’s Poole suggesting that some in
the market might be surprised by coming rate moves. Furthermore, another Fed
member suggested that the Fed must remain vigilant toward inflation and that is
a distinct change from the concerns of deflation last year! However, it should
be noted that some of the US economic reports have remained soft and the
technical condition of the Treasury market seems to argue against another big
wave down in prices.
STOCK INDICES
Surprisingly the US stock market was expected to
open higher ahead of the CPI report, possibly because of the overdone status
from Monday. It is also possible that the market is being lifted by consistently
lower energy prices and by the idea that the world economy has reached a level
of activity, where many central banks are now confident enough to raise interest
rates. We think that the stock market has grown comfortable with the idea of a
25 basis point rate hike, but if the CPI report today comes in ultra hot and the
expectations for a 50 basis point hike rise, that could spark a more extensive
liquidation in stocks.
DOW
The September Dow has critical support today at 10,327 and with the net spec and
fund long only 1,000 contracts and the market declining another 70 points since
the report was measured, we see the spec position as flat coming into the action
today. However, it would not be a good trade for the Dow to fall below 10,325 in
the first hour of trade today. Fresh longs probably have to risk the September
contract to a close below 10,290 to attempt to weather today’s volatility!
S&P
Typically the S&P doesn’t bottom off a series of lower lows but with the recent
COT report showing the spec long to be only 29,000 contracts the market really
isn’t that vulnerable to technical stop loss selling. In short, expect a break
off the CPI flap, but for the market to shake off the impact after a short
selling wave. Fresh longs probably have to risk positions to a close below 1120.
Critical moving average support comes in at 1114.25.
FOREIGN EXCHANGE
US DOLLAR
The Dollar seemed to come apart in the face of more
evidence that the US Trade Balance continues to spin out of control. However,
the Dollar has come back into partial favor overnight because the trade might
see evidence of inflation, which in turn might prompt the Us Fed to raise rates
more than the 25 basis points that many traders think is in the market. In other
words, some traders are expecting the Fed to surprise the market with a 50 basis
point hike. While expectations for the CPI are for a hot number, the CPI report
hasn’t been nearly as hot as the PPI report. In the near term, the Dollar has a
critical pivot point up at 90.73 (which is the 40 day moving average) with
critical support coming in down at 90.09. The path of least resistance might be
up but the Dollar is fighting a tide of skepticism and will need clear cut
evidence of rising rates to effectively shut off the down trend pattern that was
in place for most of May! In other words, it is not the pace of the US economy
but the anticipated rate of gain in interest rates that the Dollar bulls want.
EURO
The Euro comes into the session this morning
hovering right on critical moving averages at 119.92 and as long as the market
is anticipating US inflation, the Euro will remain under pressure. In other
words, the Euro is pointing down but only if the US CPI fulfills early
expectations. There would appear to be moderately solid support in the Euro at
the 120.00 level and it could take a trade below 119.61 to hint at a downside
extension. On the other hand, any trade back above 120.70 following the CPI
report, could mean that the Euro is primed to return to the June highs.
YEN
The negative chart action in the yen seems to leave
the trend pointing down but it might be difficult for the September yen to trade
down below 90.06, unless the US Dollar is really strong. The BOJ continues to
suggest that the economic outlook in Japan is not entrenched enough to allow
long term rates to rise and that probably discourages investment in Japan.
Therefore, the fundamental bias in the Yen is pointing down along with the
technicals. However, the yen will need a little extra fundamental push to fall
below 90.06.
^next^
SWISS
The slight corrective bounce Monday corrects the
market just enough to facilitate an extension of the downside in the Swiss but
that downside extension only comes if the US CPI is at or above expectations. In
the event that the US rate hike expectation is muted, the Swiss could easily
rise back above 80.00.
BRITISH POUND
The UK inflation reports today were mostly as
expected but with the BOE already acting, the inflation situation in the UK
isn’t nearly as important as the inflation focus in the US. With the Pound
managing to regain the 180 level, it would seem like the aggressive selling
pattern is taking a pause. However, we would suggest that aggressive traders
look to sell the Pound on a rally to 180.41, while conservative traders might
want to wait for a sell up at 181.65.
CANADIAN DOLLAR
The Canadian continues to slide and now looks headed
down to the 72.00 level. Hopefully traders that were long off our suggestion,
also carried the long put and short call coverage we suggested. For now that
coverage should remain in place, until the washout appears to have run its
course. Near term downside targeting is seen at 71.90.
METALS
OVERNIGHT
London A.M. Gold Fix $382.30 -$.60 LME
COPPER STOCKS 118,475 mt tons -1,325 tns COMEX Gold stocks 4.387 ml -101 oz
Comex Silver stocks 117.7 ml -16,888 oz
GOLD
The gold market remains under pressure partly
because of a higher Dollar and partly because many traders fear rising interest
rates and increased forward spreading off contango. With Chinese gold lower on
light selling overnight it would not seem like the downward pressure is that
intense and that might mitigate the pressure on US gold prices. The weekly COT
report showed the net spec long position to be 83,000 contracts, which is a net
decline of only 2,000 contracts from the prior week.
SILVER
The silver market is surprisingly holding above
close-in support of $5.63. With gold pointing down the bias in silver is also
pointing down. The silver market posted a net spec long of nearly 52,000
contracts, which is a moderate spec long but the bulls might point out that the
net spec long position actually fell by almost 5,000 contracts from the prior
week.
PLATINUM
With a massive downside probe overnight it would
appear that the spec long position in platinum is exiting the market and might
be doing so because of the constant talk about Chinese tightening. Because
copper and platinum have been consistently weak, we lay the blame for the break
on the Chinese story. Near term downside targeting in July platinum comes in at
$760.
COPPER
The headlines continue to suggest that copper is
under pressure because of concerns for Chinese and US growth and with reports of
lower Chinese steel imports for the month it would seem that past tightening in
China has had some impact on the economy. While US financial markets haven’t
priced in an imminent rate hike threat, they are fearful of an eventual move. In
fact, some copper traders are suggesting that a surprise 50 basis point hike
could catch the market by surprise and cause investors to spook.
CRUDE COMPLEX
The energy complex really acted poorly Monday, as
the market failed to respond to potentially bullish longer term developments and
also failed to respond to the violence over the weekend. In other words, the
bull camp wasn’t able to exert itself despite news that UNTIL recently would
have sent the shorts running. With retail gasoline prices falling sharply it
seemed like some of the speculative fervor was forced out of the futures market.
NATURAL GAS
Surprisingly the natural gas market broke the
correlation chain with crude oil, as it managed to climb above near term
resistance and above the 40 day moving average. The weekly COT report showed
natural gas to have a minimal fund short and a rather burdensome small spec long
position. In fact, with the gains posted since the report was measured, we have
to think that the small spec position has expanded even more.