Word From The Wise
Federal Reserve
Chairman Greenspan’s comments to the House Financial Services Committee that
the economy is still under performing and that “we are not free of the risk
that economic weakness will be greater than currently anticipated, and (could)
require further policy response†dominated trading action in financial futures
markets. Debt futures rallied, stock index futures slumped, and currencies
re-adjusted as players pondered the comparative strength of the world’s
biggest economies.
Greenspan’s notification that the central bank is standing at the ready to
continue its campaign of lowering interest rates if the economy fails to respond
to the 2.75% in cuts it has made so far this year spooked markets. That
Greenspan’s testimony took an unexpectedly negative tone caught many players
by surprise and dashed expectations for a hoped-for, quick economic recovery.
The words from one of Wall Street’s wisest ups the odds of a rate cut:
December federal funds futures (FFZ1)
priced in all of an additional .25% rate cut by the end of the year and a 28%
chance of a .50% cut by Christmas.
Interest rate futures across the yield curve closed higher, reflecting
expectations of lower rates ahead. T-bonds (USU1)
and 10-years (TYU1)
closed higher for the eighth time in nine sessions and made good on Momentum-5
List indications and Off The Blocks entries. (After a lower start for M-5
futures, Off The Block entries kick in once a market trades above the high of
the previous day’s last hour’s high). Both contacts eclipsed three-month
highs. USU1 rallied nearly a full point, or 31/32 to 103 13/32 and 10-years
jumped 25/32 to 105 20/32.
A lower inflation report for the European economies left the impression that
the Fed’s counterpart in Europe, the European Central Bank (ECB) will have
more leeway to lower interest rates to stimulate continental economic recovery.
Coupled with Greenspan’s comments that the US economy may be worse off than
previously thought, traders adjusted their view of who might recover more
quickly — Europe or the US —upping the chance for faster relative recovery
in Europe.
In the process, traders bid up Euro FX futures (ECU1)
to a two-month high. The highly correlated Swiss franc (SFU1)
also rallied to a multi-month high and responded to the momentum indicated by
its New 10-Day High reading. As mentioned yesterday in futures commentaries, the
outside-day-bar-at-high traced by the Swiss franc Tuesday proved to be a very
constructive pattern–the Swiss closed up .0108 at .5809.
As the dollar fell against its major trading partners’ currencies,
dollar-denominated gold added 2.20 to close at 270.80.
The doubt about the economic recovery from Greenspan worked to send stock
index futures lower as participants worried about an even greater delay to
improved corporate and earnings performance. Dow, Nasdaq 100, and S&P 500
futures all fell and closed near Pullback From Low triggers.
From the Implosion-5 List, August crude (CLQ1)
and heating oil (HOQ1)
gapped lower and finished on their lows at their lowest points this year. Last
night’s weekly API inventory report took an unexpected dip, showing the
biggest gain in stockpiles since April. Inventories have risen 15% over the past
three months, hammering prices