Purchasing Al’s Panic

• January 4, 2001
• Marc Dupee

Currency traders scrutinized the timing of the Federal
Reserve’s inter-session rate cut yesterday, a gesture reeking of panic, and
reckoned that the damage to consumer and business confidence could far outweigh
the boost lower interest rates could have on the economy and the dollar. 

European currencies futures retraced big moves from yesterday in the
overnight cash markets and the futures responded by gapping higher. The euro FX futures
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and
Swiss francs
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all of Thursday’s loss. 

The European Central Bank (ECB) also left short-term
interest rates unchanged at 4.75, demonstrating that the continental monetary
policy organism will not follow the US in a global round of rate reductions, a
euro-positive event. Rising consumer confidence figures from France today and
lower European unemployment data last week suggest that Europe’s economy has
room to grow without an immediate rate cut and that the economy could receive a
further stimulus with a rate cut, if needed, sometime in the future. At the same
time, Al Greenspan’s hasty rate cut will not be expected to not work its
economically stimulative magic for many months. 

Hence, in the short- to intermediate-term, today’s strong
move that  recaptured all of yesterday’s slide is a market vote that
currency traders see more upside vis-à-vis the dollar in coming months. Foreign
currencies have been dominating the Momentum-5 List recently. Swiss franc futures remain on the Momentum-5
List and euro FXs recently came off the list but have been in an upside momentum
impulse phase. Euro FX futures
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.95240,
Swiss francs
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British pounds
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March dollar index futures’
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futures was muted by a new low versus the
Japanese yen
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March yen gapped lower and continued straight down to close on their low of the
session, down .0162 at .8737.

Stock index futures closed lower after a record rally in
Nasdaq 100 futures yesterday and back-to-back record volume days on the NYSE (in
excess of 2 billion shares).
Nasdaq 100 futures
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December S&P futures
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Dow futures
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Sell signal to close down 17.0 at 11,025.0. Tony Crescenzi pointed out a
historic statistic that gives stock index futures a decided upside bias in his Crescenzi
On T-Bond Futures commentary. “It
is important to note, however, that over the past 30 years, the S&P has
averaged a gain of about 10% three months after the Fed first cuts rates, 20%
after 6 months, and 24% after 12 months.“

Where do we go from here? A look at the valuable federal
funds futures contract provides some interesting clues as to what the Fed might
next do. This morning, the
February contract
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Fed will cut an additional 50 basis points at its January meeting. To learn
how to make this simple calculation yourself, see Loren Fleckenstein’s article
titled Forecasting
The Fed With Federal Funds Futures. Further down the road,
the June contract
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will stand at 5%, down from its current level of 6%.

Another factor that could influence the Fed’s monetary
policy decisions to keep the economy growing without sparking inflation is the
price of world oil. An OPEC meeting this week will play a key role in
determining the price of oil. Estimates of how much OPEC may cut its output at
its upcoming January 17 meeting, range as high as 1.5 million barrels per day.
Algeria’s Oil Minister Chakib Khelil said today that a 500,000 barrel cut could
come within the next few days. OPEC has a policy of striving to keep the price
of a basket of seven of its crude oils, an “OPEC barrel,” between $22
and $28 a barrel. An OPEC barrel rose .21 to 22.61.

Both crude oil and unleaded
gasoline rallied for a fourth consecutive day. February
unleaded gasoline
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made it onto the New 10-Day Highs List
on the Futures Indicators page and is trading above its 50-day moving average. February crude
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.8186.

Natural gas surged higher after the weekly American Gas
Association’s weekly industry report showed national stockpiles fell last week.
The February contract
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displayed recent characteristic volatility rallying 9.49% to 8.966.