Big Ben, IMF Report in Focus
Dow – Stocks posted strong gains yesterday, with the Dow recording a gain of over 300 points on a stronger-than-expected ISM number and signs that the subprime fiasco may be nearing an end. Futures have retreated in overnight trading on a lower growth forecast for the U.S. economy from the International Monetary Fund, which reduced its outlook to 0.5 percent for the year. More troubling than the U.S. outlook, however, is the fact that the IMF slashed its global growth outlook to 3.7 percent from 4.1 percent and suggested that there is a one in four chance of a global recession. Today's factory orders report is expected to show a drop of 0.8 percent, which is also weighing on the market early. Traders will focus most of their attention, though, on the testimony of Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee, which is his first such engagement since the proposed financial oversight plan was laid out. The Fed has worked overtime to try to keep banks and the credit markets liquid and his testimony on these subjects will be keenly watched. June mini Dow futures broke out of a sideways-to-lower consolidation pattern on the daily chart and closed above the near-term relative high close. This suggests a possible test of the next relative high of 12722, with a close above this level possibly signaling a longer-term recovery. Support comes in at 12330, 12032 and 11870, while resistance can be found at 12790, 12952 and 13250.
Gold – Gold futures jumped this morning on the IMF report, which signals weakness in the global economy and makes the metal appealing once again as a “safe haven” investment. The report was especially skeptical of the U.S. growth outlook, sending the greenback lower and commodity prices higher. Gold has had its share of struggles recently due to the recovery in the equity markets, which along with a slight rebound in the Dollar has pulled capital away from commodities and led to a collapse in Gold prices. Failure to make further advances in the major stock indexes could result in a recovery in precious metal prices. If economic data continues to surpass analyst expectations and the U.S. economy shows signs of recovery, it could lead to a larger sell-off in Gold, as traders would continue to pull their funds out of commodities and buy equities. Also, this scenario could lead to a larger-scale recovery in the U.S. Dollar, resulting in overseas money leaving the precious metals market. The daily June Gold chart shows a bearish reversal from contract highs, but has not given an indication of bear market conditions to this point. Closes below 860 could signal that the bull run may be over, and sell-offs beyond 830 would signal a technical bear market. Support comes in at 867.50, 847.20 and 818.10, while resistance can be found at 916.90, 946.00 and 966.30.
10-Year Notes – Notes fell sharply yesterday, as money flowed into the equity markets at the expense of commodities and treasuries. The recent rebound in equity prices from lows has put some pressure on Note and Bond prices, leading to sideways congestion on the daily chart. Today's testimony by Bernanke will give traders better insight into the Fed's mindset and may give a clearer picture of what the central bank's interest policy may be in the near-term future. If the testimony is dominated by talk of inflation and recovery, it would likely be seen as bearish for interest rate instruments. On the other hand, if the session is marked by talk of economic uncertainty and the housing and credits crises, it would likely be seen as Bond and Note friendly. Yesterday's close below recent lows of 117-26.5 can be seen as bearish short-term, but June T-Notes have chart support at 117-14, 116-21 and 116-05 to buffer the downside. The 9-day moving average looks to be crossing the 18-day to the downside, which is a bearish signal short-term. Support comes in at 117-01, 116-11 and 115-10, while resistance can be found at 118-24, 119-25 and 120-15.
Rob Kurzatkowski, Commodity Analyst
