Futures Point To A Flat Open

9/2/2004
 

INTEREST RATES

The pattern of higher highs continues but after the numbers yesterday, it seems that Treasury prices might be getting a little too much mileage off the economic reports. While the readings yesterday were “contractionary” they were not nearly as weak as the numbers in the prior session. However, traders might have been watching the sharp rise in energy prices and were fearful that energy prices were going to ramp up their drag on the economy.

STOCK INDICES

We were a little surprised that the stock market was able to mount such an impressive rally yesterday morning in the wake of soft US numbers and soaring energy prices but that action continues to highlight a residual bullish tilt in the market place. Since the August lows, the stock market seems to be looking beyond near term energy prices to better times ahead. Surprisingly the stock market has also risen in the face of Treasury market gains, which typically indicate a worsening economic outlook is unfolding.

DOW
The Dow futures apparently realize the importance of the upcoming payroll decision, as it has fell back and consolidated below the recent high. Critical support in the September Dow comes in at 10,251 and then again at 10,123. We think that a moderate break today could create the opportunity to buy September 10,200 calls but those that want to play a shorter term strategy could buy the 10,100 puts for a 24 hour hold.

S&P
While some might call the recent pattern in the S&P a rounded top pattern, one can’t help but be impressed with the magnitude of the rally yesterday morning. Solid support should be able to hold around 1098 for the coming two sessions, unless the report is really bad Friday morning. However, longs should note that a simple retracement off the August move could allow the September S&P to slide back to 1090.85 without injuring the uptrend pattern. While we hate to be on both sides of the market, the at-the-money puts and calls in the September S&P look attractive.

FOREIGN EXCHANGE

US DOLLAR
The Dollar is attempting to hold against more liquidation and with German August jobless figures rising, it would seem that other economic regions are slowing. While weak numbers outside of the US are hardly going to discourage selling, it is possible that weakness in the Euro zone mitigates the downside in the Dollar. With the majority of regularly scheduled US economic reports coming in soft, we can understand Dollar bulls being concerned about the August jobs report. Given the down trend pattern in effect since the May high, it is clear that the Friday morning report is an extremely critical report. In fact, with another disappointing report we suspect that the Dollar will easily slide to the August low of 87.73, while a very disappointing report (similar to the last 2 reports) could justify a slide down to the July low of 87.20. However, economists are almost uniformly expecting a decent to slightly strong reading in the report. When one has a potential volatility event (where prices can realistically run hard in a short period of time) it can pay to control risk and participate with a cheap near to expiration option. The September Dollar Index options expire tomorrow! Using futures is risky because the pattern of numbers hints at a weak report, while the economists are calling for the opposite.

EURO
The Euro is undermined slightly by a 24,000 gain in the German jobless readings for August. However, the Euro isn’t going to be driven by its own fundamentals, it is going to be driven by US fundamentals. In fact, with the Euro sitting almost exactly in the center of the last three months range, we could argue for a 200 point rally or a 200 point decline. Since the trend is non existent we are not inclined to force a trade, but forced into the market we would prefer to sell the euro on a rise above 122 but we would prefer to buy the Sept Euro 121 puts and either be in the money tomorrow, or see the entire premium lost to expiration.

YEN
With sentiment and economic numbers swinging wildly in Japan, it is clear that a major decision is ahead for the Yen. We have to favor the downside, even though the bear case only has minimally more evidence than the bull case. In the event that US numbers come in anywhere near expectations Friday, we suspect that resistance in the Yen will become more formidable.

SWISS
The Swiss continues to be in a league of its own (with the exception of the Canadian) as it has shown the ability to rise against the Dollar without significant news. Therefore, the Swiss could see the biggest technical backlash Friday morning in the wake of a decent US report and the Swiss seems to have massive overhead resistance on the charts.

BRITISH POUND
Talk that the UK housing bubble is breaking and that the UK economy is slowing, has the Pound on the verge of a downside breakout. We are not even sure if a bad US number Friday will save the Pound from a downside thrust. Consider buying near to expiration puts for a 24 hour play.

CANADIAN DOLLAR
The Canadian is a high beta currency for the coming 24 hours. Since the Canadian has managed an impressive rally off the recent low, it will have to see disappointing US figures in order to continue up to the top of the recent consolidation above 77.00. Unfortunately the Canadian could easily fall back below critical support of 76.00. If long futures, consider buying a Sept Canadian put 76.50 put for a 24 hour cushion.

METALS

OVERNIGHT
London Gold Fix $407.80 -$0.20 LME COPPER STOCKS 111,175 mt tons -150 tons COMEX Gold stocks 4.880 ml +98 oz COMEX Silver stocks 109.6 ml +362,161 oz

GOLD
Despite the sloppy to lower action this week, the gold market has managed to forge a week of higher lows. While the extremely weak US economic numbers provided gold an initial pulse down in the Dollar, it could be pretty negative for gold if the numbers continue to tail off and the Dollar doesn’t fall. In other words, too much slowing could prompt concerns of deflation and that usually serves to undermine gold and silver.

SILVER
The silver market continues to forge a solid upward track from the August 24th low. However, considering the consolidation action of the last month, one might suggest that silver is sitting just a little bit above the middle of the range. The top of the consolidation range in silver comes in $7.00, while the top of the up trend channel in silver comes in at $7.096.

PLATINUM
Even after some negative fundamental news yesterday, the platinum market managed to maintain bullish sentiment. Rumors yesterday of a Russian port work slowdown wasn’t expected to affect shipments of platinum, or copper concentrates for that matter but that situation should be watched closely, as a temporary supply disruption, in already tight platinum shipments condition could exert significant upward pressure on prices. The path of least resistance is up with $880 targeted in the October contract.

COPPER
Chinese copper prices were slightly lower overnight but with the US market maintaining a slightly bullish tilt, we suspect that the market will find leadership in other areas. Fortunately for the bull camp, the LME stocks resumed their general pattern of declines and the market is aware of that port slowdown in Russia. It is a little surprising that the market hasn’t focused more on the Peru strikes and that could be because the majority of the economic report flow is serving to countervail the bullish tilt off the strikes.

CRUDE COMPLEX

With the pattern of weekly crude stocks declines extended Wednesday and the energy complex sitting in an oversold position early this week, it was not surprising that prices managed such an aggressive bounce yesterday. With the shocking 8 million barrel API crude stocks decline, the US crude stocks have now moved into an annual deficit condition. Countervailing the sharp decline in crude stocks, was a slight rise in gasoline stocks and the revelation that US gasoline stocks expanded their annual surplus standing to 15.9 million barrels.

NATURAL GAS
Natural gas prices continued to decline despite strength in the regular energy complex and that really suggests that the market is in the midst of a final capitulation. With weather forecasts calling for temps to begin tapering off, it is clear that the cooling season isn't going to provide any late surprises. We also have to think that the market is expecting another bearish injection reading in the weekly inventory report and the market won't really have a grip on the magnitude of the spec and fund positioning until after the close Friday.