DEAN WITTER
FUTURES COMMENTARY
Prepared by Dean Witter, Inc.

Financial

U.S. INTEREST RATES: Two developments generated additional moderate losses in interest rate futures. In this process, September Eurodollars, June 5-yr notes and June 10-yr notes made new lows in their major downtrends which have been in effect since December 2. June bonds did not make a new low.

1. The Commerce Department reported that, for the second consecutive month, new orders for durable goods registered large gains. Also, for the second consecutive month, the backlog of unfilled orders grew by more than 1%. This level of bookings should persuade manufacturers to run aggressive production schedules this spring. Consequently, economic growth is likely to remain above the trend rate of 2<$E1/2>% and probably elicit further steps of monetary restraint.
2. Today's auction of $12.5 billion of 5-yr notes drew only limited investor interest.
Important Change To Forecast
Today's price action has necessitated a significant change in my intermediate-term forecast. I no longer expect a near-term rally to revisit yesterday's highs (September Eurodollars"93.90; June bonds "109-25). Any near-term rally will be quite limited, and next week I expect the interest rate contracts to experience another down-leg in their prevailing downtrends.

Details Of New Forecast

1. Interest rate futures are in a protracted bear market which has several months left to run. Eventually, September Eurodollars should reach 93.35 and June bonds should reach 105-00. 2. Two factors convince me that next week the contracts should construct another significant down-leg in their downtrends. A. The economic data is consistently strong, pointing to the probability of two more Fed tightenings over the next six months. Next week's reports should reinforce this view.
B. In today's price action, the June 5-yr notes and the June 10-yr notes penetrated under their previous downtrend lows set on March 20. This penetration argues strongly against the likelihood of a substantial rebound. in fact, the penetration argues for some acceleration to the downside.
3. Listed are my targets for the next down-leg to be attained next week:
September Eurodollars"93.67; June 5-yr notes"104-12; June 10-yr
notes"106-15; June bonds"107-08.
4. Because at today's lows the interest rate contracts were
temporarily oversold, I expect a modest bounce tomorrow or Monday. Listed are resistance levels which should contain this corrective bounce:
September Eurodollars"93.79; June 5-yr notes"104-28; June 10-yr notes"106-15; June bonds"108-26.

JAPANESE YEN: Because of recurring doubts that the Bank of Japan will raise interest rates in the next four months, several hedge funds aggressively sold the yen. The June futures contract declined 28 ticks to close at .8156. In the near term, this downward pressure should continue. Professional speculators want to test the will of U.S. and Japanese officials to put a floor under the Japanese currency at the interbank exchange rate of 125 yen per dollar. Such a downside test would take the June yen to the area of .8085/.8100. However, a trade above .8200 would invalidate this forecast.

DEUTSCHEMARK AND SWISS FRANC: In the absence of influential news, the June DM and the June SF fluctuated in narrow ranges today and closed with minimal losses. Over the intermediate term, I still expect these two currencies to resume their upside corrections which began from the lows of March 6. Growing suspicions that European monetary union will be delayed should foster the forecasted up-movement.
"After the current sogginess which should be contained at .5900/.5910, I expect the June DM to rise to .6050.
"After the current sogginess which should be contained at approximately .6830, I expect the June SF to rise to .7050. BRITISH POUND: Two factors produced another sharp gain in the June BP, and the contract closed at 1.6274"up 96 ticks:

1. The relative attractiveness of UK interest rates; and 2. The narrowing British trade deficit.
I still believe that the major trend in the British Pound is down. By June 30, I expect the lead BP futures contract to trade under 1.5500. From an intermediate-term perspective, however, the June BP is still correcting the large decline which took place from 1.7090 (December 31) to 1.5828 (March 17).

Eventually, the current substantial correction is likely to reach 1.6500. In the next two sessions, I expect the June BP to retreat from the 1.6325 area before it resumes the upside correction. A pullback to 1.6100 is a reasonable attainment.

Precious Metals

June gold and May silver demonstrated impressive resilience today. In continued response to yesterday's decision by the U.S. central bank to raise interest rates, June gold initially sunk to 348.3 and May silver initially sunk to 510.0. However, as the day progressed, these two precious metal contracts rebounded. June gold closed at 353.5, a gain of 3.0 dollars. May silver closed at 516.5, a gain of 4.5 cents. The persistent strength of the U.S. economy is translating into growing demand for metals, both precious and industrial.

"With today's rebound from the early low of 348.3, I believe that June gold has started a climb to 360.0. A near-term pullback should encounter support at 350.0.

"It is unclear whether May silver is ready to immediately turn up. However, I expect the next major move will be up to revisit the March 3 high of 543.5. Consequently, I believe that the area between 505.0 and 515.0 is a buying neighborhood.

Base Metals

COPPER: Prices traded sharply lower failing to follow through after yesterday's firm close. Long liquidation was evident as March copper went off the board while May came under pressure to touch a low of 109.80. Ironically the market failed to respond to a stronger than expected U.S. durable goods number which was up 1.5%. Three-month was also on the defensive, likely in response to a weakening backwardation which is reflecting forecasts of increased world copper output for 1997. At this point prices will likely continue to encounter stiff resistance at the 113-114 area basis May, and 2400-2420 in three-month.

Energy

Crude oil broke sharply from daily highs as products resumed their downside weakness. The products came under heavy sell pressure from two fronts, refiners selling products and buying crude and reaction to the API inventory data released last night. The API report showed a declining demand for gasoline and distillates at the same time as inventories for the products are rising relative to last year. Also adding pressure to the market was news that Venezuela's El Palito catcraker has resumed normal operations after an unplanned maintenance outage. Shell and Mobil have restarted their refinery units in Illinois and Los Angeles.

Natural gas futures were range bound ahead of the American Gas Association (AGA) release of its weekly report. Expectations for the AGA, point to a withdrawal of 30-50 bcf. The weather forecasts call for temperatures in the Midwest to be above average Thursday through Saturday and below normal Sunday and Monday. The New York Mercantile Exchange will be closed Friday and access trading will not open for the Thursday evening session. After the close the American Gas Association reported U.S. gas storage at 832 bcf down 54 bcf.

From an option perspective, implied volatility in the energy complex settled tonight as follows: June heating oil at 25.75%, June crude oil at 28.13%, and June natural gas at 33.91%. Recently implied volatility has declined substantially. Of particular interest has been the weakening of the spread between natural gas implied volatility and crude oil implied volatility, currently at 5.78% down from 80.70%.

Also June unleaded gas implied volatility has declined to a near-term low of 27.92% and July implied volatility settled at 28.10%. Unleaded gas implied volatility has declined from a high of 38.31% established in April 1996. The seasonal tendencies of unleaded gas should help to support unleaded premiums in the coming months pushing implied volatility higher. Utilizing the recent break in unleaded futures establishing bullish, long premium strategies should be considered. Trade strategies should include the outright premium purchase of the June unleaded 64.00/68.00 call spread for a debit of $525.00 excluding commissions and fees. Natural gas futures were range bound ahead of the American Gas Association (AGA) release of its weekly report. Expectations for the AGA point to a withdrawal of 30-50 bcf. The weather forecasts call for temperatures in the Midwest to be above average Thursday through Saturday and below normal Sunday and Monday.
Softs

COTTON: Light buying interest helped firm-up values to close modestly higher on the day. Trade buying pushed prices to test resistance in making a high of 72.89 basis May before pulling back slightly by the close. For the most part, participants were apprehensive in taking positions ahead of the release of Export Sales and Prospective Plantings report due out Monday at 8:30 (est). Tomorrow's Export Sales report is expected to show an increase over the previous week at 125 tb and may provide a much needed bounce to the market. Estimates on planted acreage for 97/98 range between 13.4 and 14.3 million which would compare to 14.7 for 96/97. We suspect the market is oversold and should stabilize and possibly rally into the Prospective Plantings report Monday.

SUGAR: The market traded in a narrow range failing to attract interest in either direction. An early attempt to penetrate resistance at the 10.90 level basis May failed and prices subsequently drifted back to close slightly lower on the day. The general lack of direction can be attributed to the fact that fresh fundamental news has been noticeably absent. Furthermore the outlook for sugar prices remains negative due to the expected surplus for 1996/97 along with the absence of sizable import demand from China and Russia. At this point the market continues to be range bound between 10.70 and 11.10 basis May until fresh fundamentals come available.

Note: Seasonally, July sugar makes its highs in the latter half of March, followed by a sharp break lower. We think any price rallies up toward the 10.70-10.80 area basis July should be viewed as an opportunity to establish short positions for a move down near the 10.00 area.

COCOA: Follow through buying off the opening took values higher and into a firm close on the day. Industry buying was evident which took the market to challenge the 1480 resistance level before light trade selling halted the move. Prices were strong early but failed to add to opening level gains by the close. Although the market appears to be recovering somewhat, the general tone is slightly negative as indications of a better than expected total crop of 1.00-1.05 mmt out of the Ivory Coast will likely continue to weigh on values. In order to resume the up-trend, the market needs to trade back above 1480 basis May, or prices will likely probe the downside toward the 1430-1400 area.

COFFEE: After failing to match the sharply lower call, prices recovered to trade higher and closed firm on the day. A combination of roaster and speculative support pushed the market higher to test the 190 level basis May before pulling back slightly by the close. This latest rally appears to be strengthened more on a technical basis due to the inability to take out the 155.00 support level basis May. Furthermore, the fact that there has been limited origin selling at these higher levels has contributed to the ease in which the market has been able to recover. With fundamentals still pointing to a tight situation, the bull market appears alive and well for a move back over 195 basis May.
Position"On a technical basis we are long May coffee at 161.50, (new) risk 175.00, (new) objective 196.80.

FROZEN CONCENTRATED ORANGE JUICE: Prices continue to trade in a range bound fashion followed by heavy selling going in to the close. Speculative and commission house selling was apparent and pressed the market down to settle near the lows of the day of 81.80. Once again we still maintain the bulk of news surrounding better availability has been discounted, the market appears confined to a trading range until more favorable indications on the demand side are forthcoming. Resistance basis May still persists near the 88-cent level basis May while the lack of trade selling at lower levels should maintain support near the 82.00-cent level. Grains
The CBOT opened mixed on Wednesday. Early commercial buying and talk that India had possibly bought up to 1 mmt of Australian supplies on their modest 50,000 tender on Tuesday helped firm this pit quickly today. Good harvest weather ahead for Brazil and early fund selling weaken the soy complex initially today while reports that hoof and mouth disease had expanded to infect 136,000 Taiwanese hogs and their buyers already deferring 250,000 corn imports left this pit sluggish early.
SOY COMPLEX: After today's initial pressure from Griffin selling 3 mil May and 1.5 mil November beans early, the complex recovered into mid-day. Further reports about Argentina's crop being 12.4-12.9 mmt after recent drought lent support to beans while commercial bean oil buying from Cargill also helped firm this vegoil pit. Talk that China is likely to continue to buy palm oil after Beijing extends their current 700,000 tonnes of unused quota not shipped by previous March 31 deadline also lent background vegoil support, but Taiwan news still overhung the meal pit today with spreads under a bit of pressure, too.

Talk of 300-450,000 beans, 100-150,000 meal, and 3-10,000 tonnes of bean oil on Thursday's weekly Export Sales also lent some support to values today, but many traders still wanted to even positions ahead of Monday's USDA report so prices ended near unchanged. Tomorrow's weekly NOPA crush now expected to be from 27-29 mil versus last week's 28.1 mil pace which would be a positive if an unchanged to higher level occurred, but Monday's stocks and seeding reports will be complex's main nearby price influence. Paranagua's loading belt is also now expected to be going by Sunday. Longer term, the need to curtail U.S. bean demand through higher prices to have a more adequate 150-160 mil carryover still remains the markets duty. With Brazilian crushers grumbling that only one Paranagua loading slot is assigned to meal which may prompt more shipments being switched to U.S. and yield uncertainty during the long U.S. growing season ahead, higher prices still likely even with near-term break.

WHEAT: Cargill buying another 2.5 mil July along with other commercial interest helped set a positive tone early. Overnight rains in Delta continuing to prompt concerns about SRW yields along with western plains dryness and northern plains flooding prospects lending support to K.C. and MGE helped keep this pit firm through the day.

Estimates of 100-300,000 weekly exports prompted a mixed response depending upon which sides of estimates you heard, but more optimism about old-crop demand and Monday's plantings being lower lent general support. This market's longer-term prospects also remain positive with lower world production likely next year, but it's tough to get too bullish with July near 400 unless the beans help open higher levels for all markets.

CORN: Despite early fund selling of 5 mil December by Griffin, commercial support in old crop led by Continental and Dreyfus along with bull spreading helped keep this pit near unchanged much of the day. Late commercial buying lifted old crop on close.

Differing ideas of 300-500K or 750-800K exports existed today, but more evening up likely tomorrow since it's last day before next week's USDA reports with CBOT closed Friday. Hog report also important with 99.3% U.S. total expected versus 1996, but Monday 7:30 AM reports (feeding pace from Stocks report) will likely obscure its influence.
March 26, 1997 Dean Witter, Inc.

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Relocated 04-18-97
Last updated on 04-18-97

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