Surprise Rate Cut Buzz is Short-Lived
Dow – Continued economic uncertainty and a downward earnings estimate revision from Apple have pushed stock index futures lower pre-open. Yesterday’s surprise three quarter point rate cut from the Fed managed to temporarily soothe investors’ worries, but many traders viewed the move as several weeks too late. Stocks tumbled in Europe, as central bankers at the Bank of England and European Central Bank only hinted at future rate cuts while traders were banking on similar emergency action from the two. Today will likely be another volatile session, compounded by the fact that there are more big names – Motorola, eBay, Pfizer and General Dynamics among them – reporting quarterly earnings. There has been some pre-market chatter suggesting that all of the previously mentioned companies may post disappointing figures or revise future earnings downward. The panic selling seen yesterday caused the March Mini Dow to break through near-term support. The cash index fell below the key weekly support area of 12,100, which would be seen as bearish over the near term if the market is unable to rally beyond the figure. One positive that can be taken from yesterday’s sell-off is that the cash Dow did come close to reaching the downside target of the head and shoulders pattern created on the weekly chart. The move suggests that the market may be in store for more of a harsh, quick correction than an extended slump. Support comes in at 11500 and 11250, while resistance can be found at 12400 and 12550.
Sugar – The Sugar market has been on the same wild ride as stocks in recent days. After spiking as high as 13.09 in the March contract, the market has since dropped 150 points. The ICE exchange restricted a large Sugar trading company from Brazil from placing orders, which led to some panic selling as rumors swirled of a large block sell order. Fundamentally, world supplies of the sweetener remain on the high side, suggesting that the recent upward move may have been due to “hot money” entering the market and needing to find a home, as well as funds trying to balance commodity portfolios. The extreme volatility the market has seen over the past three sessions seems to have scared away some traders and resulted in a relatively tight range this morning. The pattern on the daily chart suggests a bearish engulfing reversal with wild price moves typically seen in “boom and bust” markets. March futures did manage to hold above support at 11.30, which is somewhat encouraging for bulls. Momentum has taken a sharp turn lower and is continuing to drop even as the RSI has stabilized. Support comes in at 11.30 and 10.75, while resistance can be found at 11.70 and 12.45.
Bonds – The Bond market is sharply higher again this morning, as traders begin pricing in the next rate cuts from the Fed. The three quarter point cut was already partially priced into the market, although it came a week earlier than traders were expecting. Mounting sentiment suggests that fixed income traders are banking on further expansionary policy from the central bank in the near future if the economy does not show some signs of improvement. The treasury market has seen solid inflows of funds due to the sell-off in equities, and further selling in overseas markets could attract further inflows of cash. Traders have been averse to corporate paper and bonds, making U.S. government debt obligations more attractive. Yesterday’s gains signaled a breakout above recent highs of 120-12 in the March Bond contract. Momentum is outpacing the RSI indicator, which points to the possibility of even more upside to the market. March Bonds are now approaching overbought levels, which could inhibit upward price movement and trigger some profit-taking. Support now comes in at 120-12 and 119-07, while resistance may be found at 122-16 and 113-08.
Rob Kurzatkowski, Commodity Analyst
