Watch the US futures strip – it’s telling us something...

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Macro Trader’s view: On the 16th September the Eurodollar market spiked to new recent highs and then during the same session abruptly sold off. The reason for this dramatic price action is now well known: the collapse of Lehman brothers followed by the nationalization of AIG. The initial rally was driven by hysteria in equity markets that saw financial stocks sold particularly aggressively, but when the US Government stepped in to rescue AIG and the Fed failed to ease policy to counter market turmoil, as was widely expected, choosing instead to reiterate policy makers’ concerns over inflation, Eurodollars sold off and have sold off hard over succeeding days. A contributory factor was also the announcement by Treasury Secretary Paulson of a plan to create a special vehicle to buy all the ‘Toxic’ assets sitting on Banks balance sheets which lead to the view that policy was more likely to be tightened if this plan went ahead. However there is much dissent among members of Congress and the hoped for rapid passage of a bill enabling the rescue has become bogged down. This has lead to pleas from the administration, from Bush down to support the plan or else the economy will suffer a deep recession. In all likelihood the economy will go into recession anyway: - The housing market correction seems to go on endlessly, and - Jobless claims hit 493k today, a level which is usually consistent with the economy already being in recession. So why are Eurodollars almost uniformly pricing in higher rates across the futures curve? The Fed squashed all optimism of easier policy at the last FOMC meeting, choosing instead to pump in extra liquidity at the same interest rate. But if the Banking industry isn’t fixed soon, the economy will slow inexorably on the lack of credit. This could then turn fears of inflation to fears of deflation and force the Fed to cut rates further, almost to zero. Currently the Fed remains focused on monitoring inflation and providing a flood of liquidity, but if the rescue plan isn’t voted through, or the version that is doesn’t live up to expectations, equity markets will resume their slide and change the Feds priorities. As ever timing is crucial and it isn’t yet right for a trade, but it might soon be. The Technical Trader’s view: DAILY CHART DEC 08 The Eurodollar futures strip is almost flat - uniformly pricing in higher rates in the future. But notice that the near months have fallen hard to the lows of June this year. There was once optimism in the near term – which has now disappeared Now look along the strip... DAILY CHART DEC 09 Even though the market here is still pricing in higher rates notice the technically more powerful position: The market remains well above the June lows. Certainly the support from the prior High 96.44 is being tested (and may have broken today). But the relative strength (technically) of the far end of the futures curve is clear. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

We are still sellers of Gold 19th SEPTEMBER 2008

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: WEEKLY CONTINUATION CHART The market has bounced better from the powerful support at $732. But there is impressive resistance above the market at $848 and above. And the failure of the $873 very long term prior High support from 1980 is still vitally significant. DAILY CHART: The Dec contract shows the wildness of the price action. Dec contract traders will be unconvinced by the bullishness short-term unless the market can get above and stay above the horizontals $858-$868. Dealers will have to make their own minds about stops losses in conditions of such volatility. Watch the price action carefully but we are looking to get short again. The Macro Trader’s view: The rally in gold which occurred earlier this week was a natural and rational reaction to great uncertainty in not only the equity markets but also the financial system in general. Many Banks were finding their very survival under threat following the collapse of Lehman brothers, and not only in the US, but in the UK too. Traders had lost confidence in the Banking industry in general, as it was still impossible to know who was holding non-performing assets, leading to an almost complete freeze in money market inter-Bank lending. Thus the Dollar retraced a good deal of its recent gains. The gold rally was gold fulfilling its role as hedge of last resort. But overnight the US Treasury announced it was working on a plan to create a special Government sponsored vehicle to house the “toxic” securities, thus removing the sense of fear from the market which has lasted for over a year and impeded the normal flow of credit throughout the US and UK economies. The rally underway in stocks now is a rational short term move as short selling of financial stocks is now banned and positions need to be covered. Moreover the optimism generated by the rescue plan announcement, though still not finalized, would be most felt in both equity and wholesale lending markets. This reduces the sense of crisis and reduces the need for safe haven trades, so why the rally in gold today? Possibly the focus of attention has shifted back to inflation, in the belief that think that the economy will be quickly fixed. If so, that is wrong. The economy globally remains weakened and cleaning out bad assets from Bank’s balance sheets won’t fix it over night. Lending standards have been dramatically tightened, not just here in the UK but elsewhere so the credit flow to consumers and home buyers will not quickly return to pre-crisis levels. Additionally, people have lost jobs in large numbers just this week, with the HBOS-Lloyds deal in the UK likely to result in many thousands out of work and in the US Lehman s demise will also see several thousand highly- paid jobs lost. In technology Hewlett-Packard has this week announced the loss of 25,000 jobs. Alternatively, there may be large speculative/safe haven trades are being unwound and the markets are in a state of heightened volatility. In which case it may take a few days/weeks for a clearer picture to emerge and underlying fundamentals to re-assert, but we think they will. In either case the Gold market is a sell. But timing as ever is crucial and so is sentiment. We will be watching the market carefully to finesse our timing. Mark Sturdy John Lewis Seven Days Ahead