U.S. stock index futures are trading lower in the pre-market. Although the indices sold off last night, they did mount a recovery from the lows, but traders are still skeptical about how the markets will react to the news that Cisco’s sales forecast missed analysts’ estimates when U.S. markets open later this morning.
Investors are asking themselves this morning whether the news from Cisco means the technology rally has been derailed. Cisco’s sales miss comes on the heels of research reports calling for a slowdown in spending by global companies on information technology.
Weakness in the equity markets this morning seems to be hinging on how the market interprets the comments from Cisco’s Chief Executive Officer John Chambers. The CEO said the company was seeing “unusual uncertainty” and getting “mixed signals” about the health of the economy.
Technically the September E-mini S&P is nearing its first downside objective at 1065.25. The September E-mini NASDAQ which could take the brunt of the selling pressure this morning has an objective at 1782.25 and the Dow futures market is set up for a short-term break to 10096.
The Treasury markets are flat overnight in limited trading activity. Traders seem to be waiting for this morning’s weekly initial claims report before taking a side. Pre-report guesses call for 465K versus 479K from last week.
Although this report is expected to trigger movement in the market, don’t expect the trend to change because of what the Fed did earlier in the week. A higher than expected number should trigger a further rally in the T-Bonds and T-Notes. A lower than expected number is likely to trigger a position evening break but losses should be limited by fresh demand. The size and direction of the moves in both of these markets will also be dictated by the activity in the equity markets. A sharp break in the equity markets should trigger more flight-to-safety buying.
The December Gold market remains a mystery. My expectations are for gold to mount a strong rally if equity markets continue to deteriorate. This stems from my thinking that gold and stocks are competing for the same investment dollar.
In early morning trading, December Gold is trading on the bull side of a pair of downtrending Gann angles. This move suggests further upside action is forthcoming. The first obstacle will be a major 50% level at $1215.00. Once this area is penetrated with conviction then look for a further rally to the .618 level at $1228.00. If buyers don’t begin to show up, longs may throw in the towel, triggering a correction back to $1186.30.
The U.S. Dollar is trading slightly better against the Japanese Yen after Japanese Prime Minister Kan voiced his strong opinion about the recent movement in the Forex markets.
In what amounts to be a form of “verbal intervention”, Kan called the recent swings in the currency “rough”, and said they “are a little too rapid”. These are the strongest comments from the Japanese government which usually only says it is concerned about the movement in the currency and excessive volatility. Some traders believe the strong language used by Kan is a scare tactic which only represents an attempt to limit gains in the Yen and in no way should be interpreted as a precursor to an actual intervention.
Some traders rushed out to sell the Yen based on the comments, but the majority of market participants are said to believe that an intervention is unlikely for mostly logistic reasons. The likelihood of an intervention is small because they seldom work and the size needed to actually have an influence on the market would require the cooperation of the U.S. and other key central bank players.
Some Forex traders also believe that the recent rally in the Yen has been orderly and based on sound economic reasons. As long as the currency doesn’t swing violently or is influenced by excessive speculation, the chance of the Japanese government garnering support from other nations for an intervention remains remote.
The concerns voiced by Japanese officials are not without merit however. Their primary concern at this time is to protect the economy. By expressing strong opinions which may weaken the Yen, the government is doing its best to protect Japan’s export driven economy.
Another reason why an intervention may not work at this time is because the desire to buy the Yen is being triggered by safe-haven demand because of fear that the global economic recovery may be stalling. Declines in the Euro Zone and U.S. economies could fuel worries that the world’s economy is headed toward a double-dip recession. The action by the Fed earlier in the week has contributed to this growing pessimism. If a slowdown is confirmed, then investors may begin to buy the Yen more aggressively.
Technically, the Japanese Yen rose to a 15-year high on Wednesday before sellers stepped in to trigger a profit-taking break into the close. The follow-through weakness overnight helped form a minor top at 1.1805, but failed to garner enough downside momentum to trigger a clean closing price reversal top.
Yesterday’s break and subsequent follow-through, however, has put the Yen in a position to post a weekly closing price reversal. The key number to watch is last Friday’s close at 1.1695. This price level may act as a pivot today with choppy two-sided trading on both sides of it, but a close under this level on Friday will be a strong indication that this market is gearing up for a 2 to 3 week retracement.
Trading may get volatile over the next two days because of the struggle between fundamental and news driven traders who believe a move by the Japanese government to weaken the Yen is inevitable. These traders may get support from technical traders who believe that the Yen is overbought, but trend traders may prevail if demand for risky assets continues to decline, triggering an extension of the flight-to-quality rally.
The tone in the market today is likely to be set by investor interpretation of the Cisco data. With short-term conditions oversold in the currencies and equities, don’t be surprised by a strong short-covering rally at some point today. Watch the Japanese Yen carefully. If the Yen begins to weaken, then look for buyers to step into the equities. 
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