Stocks are likely to follow the dollar, commodities trade again Tuesday, with little economic news to drive direction early.
Brown Brothers Harriman chief currency strategist Marc Chandler warns that it could be a down day, a "turnaround Tuesday" for the dollar but that any selloff in the currency would create a buying opportunity, and its uptrend remains in tact.
Stocks, in recent sessions, have moved higher as the dollar strengthened against the euro and as commodities, particularly oil, sell off. A reversal in that trend could help send equities lower. The dollar saw its biggest one day move up against the euro in six years on Friday, a triple digit day for the Dow.
"The (dollar) move has been a lot faster than people had thought. It was the fastest, sharpest move in years. We've gone from a range trading market to a trend market," he said.
"The real money has been caught kind of napping. They didn't adjust their hedges or adjust their exposure," said Chandler. He points out the European stock markets and bond markets have not followed. "Because the European assets are holding up, that's sort of blunting the impact," he said.
He said the currency market will be attuned to the trade deficit Tuesday, retail sales Wednesday and then focus on the European and Japanese GDP, expected by the market to be weak. "I wonder if it's buy the rumor and sell the fact," he said.
Brian Dolan, chief currency strategist at Forex.com, said he too thinks the dollar has made a turn and its uptrend is here to stay. "The further confirmation I get is what I've been seeing so far from other currency analysts. They're saying it is too far, too fast. It can't be sustained. That's a contrarian indicator," he said.
In the very near term, he said the euro could trade down to $1.45 and then ultimately to $1.35 to $1.38 in early 2009. "Every attempt for the euro to bounce back and retrack to the upside has been sharply rejected," he said.
The dollar rose 0.77 percent against the euro Monday, to a value of $1.4903 dollars per euro. It slid 0.04 percent against the yen.
Tuesday's economic data includes international trade data at 8:30 a.m., and the NFIB small business survey, issued at 7:30 a.m.
Important to watch too will be CNBC's Steve Liesman's interview with Minneapolis Fed President Gary Stern at 10:30 a.m.
In earnings news, UBS is expected to report a loss early in the morning, and Thomson Reuters and retailer TJX also report earnings before the opening bell.
The Dow closed up 48 to 11,782, well off its highs of the session, and the S&P 500 was up 9 at 1305, the beginning of a level where traders see resistance. The Nasdaq rose 25 or 1.1 percent to 2439.
The big trade in the market has been anti-oil. The stocks that have the most to gain from falling energy prices have been the most attractive, and energy and materials have been sold off. Consumer discretionary stocks were up 2.5 percent Monday, and materials stocks and energy were the worst performers, both off 0.4 percent.
As far as Tuesday goes, "I feel like we're going lower," said Pat Kernen, who trades S&P options with Cardinal Capital. "We actually saw a lot of options buying again toward the end of the day which makes me think we're still looking for a push lower." Kernen said the week will be volatile because of the options expiration at the end of the week.
Greatest Decline Ever
The Reuters Jefferies CRB, an index that includes 22 commodities, declined again Monday.
In the 27 trading sessions since its peak July 2, the CRB has fallen 18.7 percent.
Jeff Rubin of Birinyi Associates said in a note Monday that this is the greatest commodities decline in the period between 1970 and present, and the closest similar move in this index was in April 1974 when commodities lost 14.6 in a similar time frame. In 1974, commodities continued lower in the short term before rebounding in July of that year to test their previous highs.
Gold on Monday continued to melt down, losing 4.2 percent to $821.50 per troy ounce, off more than 30 percent from its March high. Silver was off 4.6 percent, and copper was off 1.2 percent.
But agricultural commodities were another story. Corn, wheat and soy bean futures were all higher ahead of the USDA crop report, due Tuesday morning. The August crop report is always a big event, but this year it will include a special survey of farmers who were hit by floods earlier in the summer.
Corn trader Carol Hurley saw a buying opportunity before the release of the report. "Corn dropped form $8 to about $5 (per bushel) on the December contract. We've had good weather, and they've been pricing in better than what the market was looking for a month ago. I want to buy them down here," said Hurley, who trades with M.F. Global's Lindwaldock unit.
The energy market has largely been ignoring the Russian assault on Georgia, which could certainly have been a factor capable of sending oil higher just weeks ago. On Monday, oil slipped $0.75 per barrel, or 0.7 percent to finish at $114.45.
President Bush Monday said the Russian drive into Georgia is unacceptable, and it has damaged Russia's standing in the world.
A big concern in the energy markets is the oil pipeline that runs through Georgia, and connects the Azerbaijani oil center of Baku to Cheyhan on the Mediterranean in Turkey.
"The Russians were always denouncing the pipeline ... It was built as a way to provide an avenue to the global markets for landlocked Caspian oil, and thus contribute to greater energy security by helping consolidate the independence of Azerbaijan and Georgia," said Cambridge Energy Research Chairman Dan Yergin.
"This is a key global energy asset ... The Russian aim seems to be regime change in Georgia. There's a deep antipathy between (Russian Prime Minister Vladimir) Putin and (Georgia President Mikheil Saakashvili). I think clearly their main objective is to remove Saakashvili and bring Georgia back into Russia's sphere of influence," said Yergin.
Yergin said the pipeline has a capacity of a million barrels a day, and it typically has 800,000 barrels flowing through it daily. However, it was attacked by a Kurdish extremist group several weeks ago in Turkey and was impaired.
"The U.S. is currently promoting a plan for a gas pipeline that would parallel that and bring gas off the Caspian Sea and into Europe as a way to diversify away from Gazprom," he said.