Bonds are a Flop

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The war has now widened in scope
And though all of us truly hope
It won’t last too long
We could, there, be wrong
As such we must all learn to cope
 
So, oil, right now, knows no top
While havens like bonds are a flop
There’s no place to hide
Thus, you must decide
If trading makes sense or should stop

Carl von Clausewitz, the 19th century Prussian military strategist, is credited with describing the fog of war in his 1832 book, On War.  “…three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”  This is quite an apt description of things, even now with cameras literally everywhere in the world.  Context remains difficult to understand, and, of course, there is an enormous amount of propaganda from both sides of any conflict as the protagonists attempt to sway both their own populations and those of their opponents.

I highlight this because I continue to be amazed at the certitude with which some analysts proclaim to “know” how things will turn out.  As I have written elsewhere, nobody knows nuthin right now.  With that in mind, I would highlight the IMF’s statement yesterday which added exactly zero to the conversation, “It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict.”  Now, don’t you feel educated after that pronouncement?

At any rate, with more than a full day’s trading in financial markets, perhaps we can try to assess how things are going.  The first thing to note is that many alleged haven assets are not performing up to snuff, notably Treasury bonds, Japanese yen, Swiss francs and gold.  In fact, as of this morning, the only traditional haven that is performing as expected is the dollar.

It was just over a month ago when the cognoscenti were explaining that the euro above 1.20 was indicative of the dollar’s long decline into the depths of history.  I recall someone in my LinkedIn feed asking how soon the euro would trade through 1.25 and beyond.  I would argue that timeline has been extended somewhat, if you still believe that is likely to be the case.  Rather, as you can see in the below chart, the single currency (-0.8%) is now back below 1.1600.

Source: tradingeconomics.com

There are several things weighing on the euro right now.  First is the fact that they are energy price takers for every form of energy, so not only are higher oil prices hurting the continent, but NatGas there has exploded higher as per the below chart, rising 37% today and nearly 95% since the weekend.

Source: tradingeconomics.com

Recall, Europe has been trying to wean themselves off Russian gas, have been huge buyers of US LNG but also huge buyers of Qatari LNG, and with the Strait of Hormuz effectively closed (shipowners cannot get insurance so nobody transits the Strait), this is a problem.  Adding to the European problem is the fact that their storage levels of NatGas are extremely low for this time of year, about 30%, when typical levels in early March are near 50%.  We cannot be surprised at this price action.  So, while US NatGas (+6.3% this morning, 10% this week) has risen, it is currently trading at $3.14/MMBtu.  The comparable Eurozone price is $20.28/MMBtu.  Perhaps a weaker euro is not that surprising after all.  (As an aside, one of the reasons I find it difficult to accept the weak dollar story is that the US controls its own energy destiny and given energy is life and the economy, we are fundamentally in better position to perform going forward.)

But the dollar is strong against all comers again today as per the below table from 7:10 this morning.  Will this continue?  While nobody knows, my take is there is still ample room for further strength in the buck, probably another 3%-5% before it starts to impact other things significantly.

Source: tradingeconomics.com

I think the biggest surprise for most of us is the incredibly poor performance of the bond market, which has always been seen as a safe haven.  However, this morning, that is not the case at all as you can see from the Bloomberg table below.

My take is that there is only one thing we truly know about war, it is inflationary.  While the early signs are for energy prices to rise, war is a major consumer of resources that will never be recycled and therefore will require new baseline production.  As well, governments don’t fight war on an austerity budget, so you can be sure that there will be plenty of money around.  All that leads to higher prices and that is why bond markets are feeling pain around the world this morning.  If, as President Trump has indicated, this war ends in the next 4 weeks or so, we will be able to re-evaluate the inflationary and other impacts, but while I had thought bonds were going to perform well, clearly that is not the case right now.

Turning to commodities, oil (+6.75%) continues to rise and I expect will remain well bid until the fighting stops.  The prospects for higher prices from here remain dependent on whether Iran tries to destroy other Middle East production facilities and if they are successful.  Meanwhile, in the Western hemisphere, the US, Canada, and all of Latin America are going to be pumping at full strength for now.  So, while prices may tick higher, it is unlikely we will see any supply issues here.

Metals are another surprising trade this morning with gold (-2.65), silver (-7.8%) and copper (-2.3%) all sharply lower.  Given the sharp decline in equity prices I will discuss below and given the amount of leverage that is rampant in the equity markets, I think gold is a victim of ‘sell what you can, not what you want to.’  Arguably, there is some of that with bonds as well.  In a way, though, I am more surprised about silver and copper given their criticality in fighting the war.  Both are being consumed rapidly via weapons being deployed so this is more baffling to me.  However, I do not believe the longer-term thesis in either of these metals has changed, there is a supply shortage relative to industrial usage for both with no new supply on the horizon.  As such, I do see prices here rallying over time.

Finally, the equity markets are sharply lower almost everywhere.  The below Bloomberg table shows how major markets in Asia performed overnight and how Europe stacks up at 7:30 this morning.

What it doesn’t show is that the KOSPI in Korea fell -7.25%, nor that there were sharp declines in India (-1.3%), Taiwan (-2.2%) and Thailand (-4.0%).  You will also not be surprised that US futures are pointing much lower this morning, -1.5% across the board.  Yesterday’s performance was quite the surprise, I think, but today is much more in line with what we expected.

And that’s where things stand this morning.  obviously, the war is the only story that matters, so data releases are going to be secondary for now, even Friday’s payroll report.  At some point, I expect that traditional havens will play their role, but as leveraged positions continue to get unwound, it may take a few more sessions before we see that.  If you’re trading, smaller sizes make sense.  If you’re hedging, stick to longer term fundamentals I think.

Good luck

Adf

No Longer the Same

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The world is no longer the same
So, now everyone must reframe
Their views on positions
And whether conditions
Allow them to still play the game
 
Most markets have priced fatter tails
With stock markets seeing net sales
But oil and gold
Seem likely to hold
Their gains across longer timescales

Here we are on Monday morning in a very different world than we left on Friday evening.  While there was much talk about whether a peace would be reached then, obviously that never happened.  Of course, at this point, there is no other story than the ongoing military action in Iran and the Middle East.  As this is not a news commentary, but a financial markets one, that is all I will discuss here.

Not surprisingly, we have seen some large moves across markets, and largely in the direction one would have expected regarding risk.  So, oil prices (+7.5%) have exploded higher as shipping through the Strait of Hormuz has ceased for now and there is no timeline for it to reopen.  Given ~20% of the daily global consumption of oil flows through that waterway, there should be no surprise here.  You can see from the chart below that as concerns grew regarding military action, oil’s price climbed and then, of course, gapped on the opening last night.

Source: tradingeconomics.com

Perhaps a bit more surprising to me is that Brent Crude (+7.5%) has moved virtually the exact same amount as WTI.  I only say that because Brent is the price basis for global oil outside the US which is obviously going to be more impacted than the US markets.  But the Brent chart is virtually identical to the WTI above.  As to the future, clearly, no market is more dependent on the Middle East conflict than this one, but at this point, there is no indication it is going to end very soon, so I expect prices to remain at least at current levels for now, and if the conflict starts to target oil production facilities, we could go quite a bit higher.

While we are looking at commodities, it should also be no surprise that gold (+2.1%) is higher this morning as it performs its historical role as a safe haven.  While not quite as extreme as the oil chart, the similarities between the two, as you can see below, are significant.  Of course, it was a bit more than a month ago when we had that dramatic sell-off in the precious metals, so this has all been a recovery from there.  But a grind higher punctuated with a gap last night is the gold story as well.

Source: tradingeconomics.com

Arguably, gold will have more staying power than oil as when the conflict ends, and my initial take is it will not be a forever war, oil will once again flow more freely.  Gold, however, remains a haven in an uncertain world and nothing seems likely to reduce uncertainty anytime soon.

The other two traditional haven assets are the dollar and Treasury bonds so let’s look at them next.  Starting with the dollar, it has done what it regularly does in an uncertain situation, it has rallied sharply.  As you can see from the below table, shot at 6:39 this morning, the dollar is firmer against every single major currency this morning.

Source: tradingeconomics.com

Too, using the euro as our proxy for the dollar writ large, you can see that the chart below looks almost identical to that of both gold and oil above.  (I have inverted the Y-axis to highlight the similarities.)

Source: tradingeconomics.com

It appears that markets began pricing in this event back in the middle of February, although the real move required the onset of the military action.

As to the last haven asset, US Treasuries, they are not really doing the job today.  Yields there have edged higher by 2bps this morning and we are seeing similar price action across the entire European sovereign space.  The two exceptions today are UK Gilts (+8bps), which seem to be trading on concerns the BOE is less likely to cut rates as higher oil prices will prevent inflation from continuing lower and JGBs (-4bps) which are serving their haven role well, arguably given the distance from the action and the fact that with yields above 2%, investors seeking safety feel they have some cushion.

Source: tradingeconomics.com

The treasury move was interesting as the initial trade, at last night’s opening, was for lower yields as per the chart above, but that has since reversed.  It could be investors are concerned over additional defense spending blowing out the deficit further but there is no clear signal or commentary I have seen yet on the subject.

Finally, it should not be surprising that equity markets around the world are mostly lower this morning as investors pull in their wings and await more clarity on the outcome and how long this will continue.  The exception to this was mainland China (+0.4%) which managed to edge higher, but otherwise, all of Asia and Europe are down on the day, some pretty substantially.  Below you can see a screenshot of futures markets at 7:00 with the type of movements ongoing.

Source: tradingeconomics.com

The MOEX is Russia’s stock market, so it is not clear what value that adds to the conversation and the TSX, Toronto, does not have a futures market, so the price represents Friday’s close.  But as you can see, all of Europe and all of Asia ex-China have fallen sharply.

And that’s where we sit this morning.  Ironically, there is going to be a significant amount of data released this week, including the NFP report on Friday, but it is not clear market participants will be paying close attention.  For good orders’ sake, I will list the data releases anyway.

TodayISM Manufacturing51.8
 ISM Manufacturing Prices59.5
WednesdayADP Employment45K
 ISM Services54.0
ThursdayInitial Claims216K
 Continuing Claims1840K
 Nonfarm Productivity Q44.8%
 Unit Labor Costs Q40.2%
FridayNonfarm Payrolls60K
 Private Payrolls65K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.5%
 Retail Sales-0.2%
 -ex autos0.1%
 Consumer Credit$11.8B

Source: tradingeconomics.com

To me, market dynamics now are entirely restricted to the ongoing Middle East conflagration.  Ultimately, war is inflationary, and for many firms it is quite profitable.  But right now, investors are mostly hiding under their desks, waiting for the smoke to clear.  Institutional investors are typically unwilling to buck a key narrative trend, and I see no reason to believe this time will be different.

While much of this price movement will likely reverse when the bombing stops, until then, be prepared for more volatility, not less.

Good luck

Adf

Not Existential

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The story that has the most traction
Continues to be the reaction
To stories AI
Will force firms to try
To profit from worker subtraction
 
The tech nerds see naught but potential
For robots plus, workers, essential
But history’s shown
Employment has grown
And new tech’s threat’s not existential

Block, the payments processing company announced during its earnings call that it would be laying off 4000 employees, nearly half its workforce, by the end of Q1 this year.  This was not a response to weak performance, but rather the founder, Jack Dorsey’s, belief that AI has reached the point where his company can be more effective with much fewer staff.  Of course, this is the entire AI argument compressed into a single event.

Recall Monday’s note and market response to the Citrini Research article that explained one scenario from AI adoption would be massive layoffs, a recession and a major stock market decline by 2028 as companies eliminated people from their processes.  This brought about a tremendous amount of back and forth with economists and historians explaining that every major technology creation (e.g. electricity, the automobile, the internet) was both disruptive but instrumental in expanding economic activity.  This morning’s WSJ had a nice summation by Greg Ip of the entire discussion.

It strikes me that this discussion is only beginning and we are going to hear from proponents of both sides for many months to come, although I imagine it will not be the top story every day.  As I consider the issue, I think back to John Maynard Keynes forecast in 1930 that the rapid advancement of technology would lead to a 15-hour workweek as all our needs could be met with much less effort.  Obviously, that was not his best forecast.  Rather, Jevon’s Paradox comes to mind, which states that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases, it doesn’t decrease.  In this discussion, that resource is human labor.

FWIW, my view is AI is a remarkable tool for certain things but is neither sentient nor capable of breakthroughs on its own.  It is a wonderful research tool, and a wonderful computer programming tool, but as my experience taught me, people like to deal with people, not with machines, even when there are machines available to do the job.  Economic dislocation in certain areas is likely going forward, but not collapse, at least not because of greater usage of AI tools.

I highlight this because, while Block’s stock price rallied sharply in the aftermarket, up more than 20%, US futures are lower this morning by -0.5% or so as there continue to be fears about the dystopian outcome.  Remember, Nvidia had terrific earnings and the stock fell as well.  Of course, this could also be a response to the fact that the price of many equities is extremely rich on a P/E basis or a P/S basis, and we are simply seeing a little reversion to the mean.  

At any rate, as no war in Iran has begun and there have been no other changes on the geopolitical map, let’s tour markets to see how things look as we head into the weekend and month end.

Yesterday’s desultory equity performance in the US was followed by a mixed picture in Asia with the Nikkei (+0.2%) and Hang Seng (+1.0%) closing the month higher, but China (-0.3%), Korea (-1.0%) and India (-1.2%) all falling.  Malaysia (-1.4%), too, stands out for a poor session but the rest of the region was mixed with much smaller moves.  Given the tech heavy makeup of most of these nations’ bourses, I suspect that volatility will be the main feature going forward.  As to Europe, it’s a sleeper with continental bourses all +/- 0.2% or less while the UK (+0.35%) managed a modest rally after a by-election resulted in PM Starmer’s Labour party coming in 3rd place in a seat they have held for 100 years.  This appears to be adding pressure on Starmer to do something, or on Labour to remove him, but a key concern is they will move further left, something which I doubt will help the UK economy or stock market.

Turning to the bond market, yields are declining all around the world with Treasuries slipping -5bps yesterday and another -2bps this morning, now below the 4.00% level.  In fact, a look at the chart below shows a pretty strong trend lower in yields.

Source: tradingeconomics.com

But we saw European sovereign yields slide yesterday and continue lower by another -1bp to -2bps this morning and last night, JGB yields fell -4bps and showing a very similar trend to Treasury yields as per the below.  It seems that concerns over too much debt issuance driving yields higher have been put on the back burner for now.

Source: tradingeconomics.com

In the commodity space, it appears that Iran fears are making a comeback as oil (+2.1%) has rebounded sharply from the levels seen in the wake of the massive inventory build I described yesterday morning. It sure looks like somebody bought a lot of oil yesterday morning at around 9:45am, although I have no guess as to who it would have been.

Source: tradingeconomics.com

Interestingly, the news from Geneva is that the talks are going to continue next week, so while both sides are disputing the other’s version of things, the fact they are still speaking is a huge positive.  I fear given the military buildup, some type of action will occur, but we can be hopeful. 

Meanwhile, in the metals space, gold (+0.1%) is little changed for the past several sessions, consolidating just below the $5200/oz level.  Whatever the narrative may be here, regarding central bank buying and the end of the dollar system, this tells me that the market is tired and needs some R&R before moving forward.  I remain bullish, but not today.

Source: tradingeconmics.com

Silver (+1.7%) is showing very similar price action to gold, albeit with a bit more daily volatility.  The story here about a short squeeze for COMEX delivery is fading from the FinTwit feeds, but the structure remains not enough of the stuff for industrial usage going forward.

Finally, the dollar, this morning is, net, doing very little.  But there are two stories to note.  The first is CNY (-0.2%) where the PBOC changed its risk reserve rules for foreign exchange holdings for Chinese banks, reducing the required reserve to 0% from 20%.  In practice, this means that Chinese banks can run forward positions without a capital charge and allows them to be more competitive pricing forward sales of CNY for local hedging counterparts.  Obviously, this is a huge adjustment and speaks to the fact that they must be getting a bit uncomfortable with the speed with which the renminbi has been rising over recent months.  Ironically, there was a Bloomberg article highlighting how options traders were paying up for 6.50 CNY calls/USD puts anticipating further CNY strength.  Perhaps the PBOC didn’t like that!

The other story is from Hong Kong, where the currency is usually not an issue as it is pegged in a very tight band to the USD, allowed to trade between 7.75 and 7.85.  The HKMA (HK’s central bank) is committed to buying and selling HKD as necessary to maintain that band.  This has been a key feature of Hong Kong’s financial attractiveness for the past decades.  The way this operates is there is an exchange fund that is designed to be used only for FX intervention, and it has ~HKD 4 trillion in balances (~$510 billion) which, given their GDP is only $400 billion or so, seems like plenty.  Well, as always seems to be the case, the government there is proposing taking some of that money to use for financing a government project, a technology hub being built, and since they don’t want to raise taxes, they thought raiding that fund would be the answer.  The concern is the precedent it sets as if that goes through, what is the next project that will be determined to need the funding.  If we know one thing about governments it is that if they find a pot of money they can tap to spend more without raising taxes, they are going to do it!  The amount in question is a small fraction, just $19 billion, so would not likely impact the HKD peg.  But this is something to watch as it will not be a positive if we see this a second time.

Otherwise, NOK (+0.5%) is gaining on oil’s gains while KRW (-0.5%) is slipping on the equity market decline and foreign sales.  Beyond that, nothing.

On the data front, this morning brings headline PPI (exp 0.3%,2.6% Y/Y) and core (0.3%, 3.0% Y/Y) as well as Chicago PMI (52.8).  Regarding the last, a look at the chart below shows that last month’s reading was the highest since November 2023 and is arguably a good sign that we are seeing increased industrial activity in the middle of the country.  Recall, the Chicago number is often seen as a precursor for the economy as a whole.

Source: tradingeconomics.com

And that’s it.  Given equity market performance this month has been flat to slightly negative, it seems unlikely there will be large rebalancing flows.  I continue to look for quiet markets although the trend in bonds does seem like it is building up some steam.

Good luck

Adf

No Desire

Posted on by

Some days markets have no desire
To move, lacking seller or buyer
But don’t be concerned
The one thing we’ve learned
Is narratives always point higher

While it is clearly not summer as I look out my window and see a snow-covered yard, the doldrums seem to be the best description of markets right now.  A dearth of data, and in truth, a lack of commentary by all the usual players, at least new commentary, has both investors and traders looking elsewhere for signals.

Now, this is not to claim that there is nothing happening in the world, but right now, it all seems to be on hold.  With the SOTU behind us, we have had nothing new from the White House regarding virtually anything, tariffs, taxes, Iran, you name it.  Nvidia earnings last night beat expectations, but apparently not by enough to get people excited.  And virtually every other story is a warmed-over version of things we already know.

I think the most interesting market related news that I saw this morning was that the most hawkish member of the BOJ, Hajime Takata, said the BOJ needed to raise rates to fight Japan’s “heated” inflation.  This seemed a response to Takaichi-san appointing two doves to the board there.  However, the market response was essentially nil, as it should be, with the yen (+0.2%) edging higher while JGB yields (+2bps) also edged higher.  

Other than that, seriously, I cannot find a single thing that seems to matter to markets.  And it’s not like we have that much to look forward to today in the US, with Initial Claims the only data, so there is no reason to go on too long.

Here is a recap of the overnight session.  As I touched on JGB’s above, I will start with the rest of the government bond markets. What we see is that yields are literally unchanged this morning from yesterday’s closing levels.  All of them!  I am hard-pressed to describe a less exciting market than this.

Turning to equities, yesterday’s solid US performance was followed by mixed outcomes in Asia (Tokyo +0.3%, HK -1.4%, China -0.2%) in the major markets while most other regional bourses saw modest gains or losses with no driving stories.  The exception to this was Korea (+3.7%) which has been on an amazing tear lately, as the two largest market cap stocks there, Samsung and SK Hynix, continue to explode higher on demand for memory chips.  In fact, I think it is worthwhile to visualize this move as it is rare for equity markets to go parabolic like this.

Source: finance.yahoo.com

Of course, remember what happens to parabolic markets.  We just saw that in silver one month ago as per the below, so traders beware!

Source: tradingeconomics.com

Turning to Europe, France (+0.9%) is rallying on some earnings data from key companies, but the rest of the continent, and the UK, are doing little (Germany +0.4%, Spain -0.2%, UK +0.1%).  Fittingly, US futures are also unchanged at this hour (7:00).

In the commodity space, oil (-1.7%) has softened substantially this morning as the absence of a war in Iran weighs on long positions, but more importantly, I believe, yesterday’s EIA data showed a massive build of inventories of 16mm barrels, far higher than expected and the largest build since February 2023.  Back then, it appeared to be the residual response to the Russian invasion of Ukraine as there was a scramble for barrels.  Perhaps this is a signal that in the event of a war, there is supply around.  If you look at the inventory chart below, we have certainly seen a net build over the past three years.  Again, it is hard for me to look at things like this and see significantly higher prices in the future.

Source: tradingeconomics.com

In the metals markets, gold is unchanged this morning, though trading well above the $5000/oz level and seems like it is consolidating before moving higher.  Silver (-2.5%) is sliding as there continues to be a discussion regarding deliveries into COMEX contracts with the first notice day for the March contracts tomorrow.  There are many pundits who claim there is insufficient silver available to handle the likely deliveries which, if true, would likely cause a significant short squeeze.  However, I have no insight into how this will play out.  My longer-term view remains that there is a structural shortage of the stuff for industrial applications and the price trend will continue higher, but we have learned how volatile it can be.

Finally, the dollar is modestly stronger this morning with the yen’s rise the exception in the G10 space (EUR -0.1%, GBP -0.2%, AUD -0.2%, CHF -0.3%, NOK -0.3%).  In the EMG bloc, we are seeing similar modest weakness across the board (PLN -0.2%, ZAR -0.3%, MXN -0.2%) with the outlier here being CNY (+0.2%).  Regarding the renminbi, the Chinese have been marching it slowly higher for the past year, as per the below chart.  My take is President Xi is very focused on convincing others the CNY is a viable reserve currency candidate despite all the capital flow restrictions.  I’m not sure how that would work, but that is the best I can come up with.

Source: tradingeconomics.com

And that’s all we have in markets this morning.  On the data front, Initial (exp 215K) and Continuing (1860K) Claims are the only releases and we hear from Fed governor Bowman, although to the best of my knowledge, nobody is listening to Fedspeak right now.  The market continues to price just one 25bp cut for 2026 at this point, although that seems likely to change once we get a better idea as to what Mr Warsh would like to do when he gets the Chair.

My guess is that if there is going to be an attack on Iran, it will happen this weekend, so until then, given the absence of data, I think we drift in all markets and wait for Monday.  Today, and tomorrow, ought to be quiet.

Good luck

Adf

To Excess

Posted on by

The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

Adf

A Future, Dystopic

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On Monday, an analyst wrote
His thoughts how AI might promote
A future, dystopic
Though somewhat myopic
And offering no antidote
 
Although prior views had explained
That once AI’s suitably trained
Most labor would suffer
And lacking a buffer
Folks’ politics would be quite strained

This is the research report that got tongues wagging on Wall Street yesterday and the fear it allegedly engendered was impressive.  In essence, it said that by 2028, AI would replace vast swaths of the labor force, notably white-collar workers, and that it would lead to a massive recession, and more importantly to the Street, a significant decline in stock prices.  The back and forth on X was amusing all day as there were those who hyperventilated over the coming tragedy, and those who fought back.

It is important to understand this was not a prediction, per se, but one of the scenarios they came up with, although clearly the most dramatic one.  It certainly gained a lot of clicks and notoriety, and let’s face it, isn’t that the idea these days?

Given that the tariff story has now become too complex for anyone to truly understand, and while we all await the denouement in Iran, this appeared to be the best thing to occupy time amongst the trading community.  Personally, I spent the entire morning shoveling snow, but then, I’m no longer a trader.

The upshot is that the major indices all fell more than 1% while gold and silver rallied and bond yields fell.  Fear was palpable.  But will it last?

Last month’s yen rate checks
Came not from Ueda-san
But Bessent, himself

The other story of note was almost an aside, although it helps outline recent movement in USDJPY.  We all remember last month when the yen rallied very sharply during a Friday session in NY as word got out the Fed was “checking rates”.  As a reminder, this is when the Fed calls out to bank FX desks and asks for prices, although doesn’t actually deal.  However, the signal is strong as all the banks recognize the opportunity for intervention, and the news quickly spreads through the market with the effect you can see in the chart below.  During the next three sessions, the yen rallied 4.5%.

Source: tradingeconomics.com

During my career, I had never heard of this activity driven by anyone other than the BOJ, as they were always the most concerned with the yen’s value.  Certainly, they may have been responding to US pressure, but it was always their call.  Now the news comes out that Treasury Secretary Bessent did this on his own last month, a clear indication that the administration is not happy with an over weak yen.  This sets an interesting precedent regarding who controls any given currency.  Now, I doubt we will see this type of thing frequently, but we need to keep it in the back of our mind.  Meanwhile…

Seems Takaichi
Told Ueda, higher rates
Are not helping her

Last night, in a surprise to many in the market, news of a meeting between PM Takaichi and BOJ Governor Ueda resulted in Takaichi-san imploring Ueda-san to leave rates alone, rather than continue raising them.  Higher rates are not helping her growth agenda, and I imagine her belief set is that if the yen weakens too far, she can always intervene, and now that we know about Bessent’s actions, she can count on the US to help.  But I cannot observe this and think anything other than the market is going to test 160 and do so before long.  One poet’s opinion.

Ok, let’s see how markets traded overnight.  First off, last night was the first that all of Asia was back at work so overall liquidity was improved.  However, the results were mixed with Tokyo (+0.9%) ignoring the AI driven US rout while the Hang Seng (-1.8%) fell right alongside the US.  China (+1.0%) rallied in its first day back but consider that simply offset the decline of their last session and, like most other markets, it remains relatively unchanged over the period.  Meanwhile, the tech sense was strong with Korea (+2.1%) and Taiwan (+2.75%) both up nicely while India (-1.3%) suffered under the AI fear umbrella.  Elsewhere in the region, there was no pattern of note with both gainers and losers.

In Europe, the largest markets (UK, Germany and France) are basically unchanged this morning while both Spain (-0.7%) and Italy (-0.4%) are under some pressure.  There is talk of tariff issues, but I’m not sure why only those two markets are taking the heat.  As to the US, at this hour (7:00), all three major indices are higher by about 0.2%.

In the bond market, after a -4bp decline in Treasury yields yesterday they are unchanged this morning while European sovereigns are seeing yields slip -1bp across the board.  Too, JGB yields (-2bps) have continued their slow descent as it appears investors have acclimatized to the risks of Takaichi-nomics.  I think we will have to see inflation figures there to get a better sense.  Regarding Treasury yields, I’m not sure I can explain why I feel this way, but given how bearish sentiment is for bonds, (leveraged players are short >1 million futures contracts), it feels to me like we could see a short-term continuation of the recent rally with yields heading back to test the 3.8% level at least.  I understand both the fiscal argument and the technical argument (see long-term chart below) but neither rules out a short-term rally to inflict pain.  After all, that is what markets do best!  (full transparency, I bought some June TLT call spreads yesterday, so I am talking my book!)

Source: finance.yahoo.com

In the commodity markets, oil (+0.3%) continues to hold its recent Iran inspired gains as the world awaits the outcome of Friday’s meetings between the US and Iran.  I have no insight as to the potential outcome here other than what I read, but it does seem like there will be some type of military action as I do not see Iran ceding anything.  As to the precious metals, gold (-1.0%) is giving back yesterday’s gains but remains in its recent uptrend after the end-January crash, although it has yet to regain the old highs.  I imagine this will take more time, but it also seems quite likely to happen. This is still a quite bullish chart in my view.

Source: tradingeconomics.com

Interestingly, silver is little changed this morning as there continues to be much talk of delivery questions at the COMEX given the apparent lack of available ounces relative to outstanding contracts.  My take is things will get rolled as they usually do, but if not, beware a major spike higher on Friday!

Finally, the dollar continues to be the least interesting space there is with today’s JPY (-0.8%) move the exception that proves the rule.  Having already touched on that situation, there is literally nothing else to describe in either G10 or EMG currencies as +/-0.15% describes the entire session.

As to data this week, here’s what we have coming:

TodayCase Shiller Home Prices1.4%
 Consumer Confidence87.0
ThursdayInitial Claims216K
 Continuing Claims1872K
FridayPPI0.3% (2.6% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Chicago PMI52.5

Source: tradingeconomics.com

In addition to this bit, we hear from seven more Fed speakers across nine venues, but I still don’t think anybody cares.  The market has priced out any rate cuts before Powell leaves, although there is still one cut priced for the year, expected in October.  

Frankly, it is not surprising that markets have calmed down so much given how much activity we saw in January.  As I wrote then, markets have a great deal of difficulty maintaining high volatility as traders and investors simply get tired and tune out.  We will need a new catalyst to get things going, either an attack on Iran or some new China news in my view.  Tariffs are no longer interesting, and frankly I think Iran and AI have both lost some pizzazz.  Maybe the UFO releases will get things going again!

Good luck

Adf

Far Too Extreme

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Said Roberts and five more Supremes
Those tariffs, are far too extreme
They don’t pass the test
And so, we request
You find a new revenue scheme
 
Said Trump, while I think you are wrong
Your actions won’t stop me for long
We have many laws
That give me good cause
For tariffs, that help make us strong

For whatever reason, this is what first popped into my head upon hearing the tariff ruling on Friday.  I guess I confused love for law, but whatever.  At any rate, I’m sure you have seen far too much on this subject already so I will be brief.  The Supreme Court ruled against President Trump’s use of the IEEEA law to enable the imposition of tariffs on foreign nations.  They did not discuss what to do about the ~$200 billion that has already been collected under that law.  The companies that sued want the money rebated, but that was not part of the decision, and of course, the logistics of that would be extraordinarily complex.

But in the end, President Trump simply imposed a sweeping 15% tariff across the board under a different law, which to my understanding can remain in place for 150 days.  The equity market shook off the news, rallying across the board on Friday (DJIA +0.5%, S&P 500 +0.7%, NASDAQ +0.9%), so it didn’t seem to be that big a deal.  But then when Asia opened Sunday night, risk was in a much less desired state.  Early returns show equities softer across the board (-0.75% at 10:00pm), the dollar (DXY -0.4%) under pressure and gold (+1.25%) and silver (6.25%) seeing significant haven demand.

One of the things that appeared to be in question was whether countries that had signed trade deals accepting tariffs and promising investments as part of the deal, would renege, but thus far, that has not happened.

My take is the tariff discussion is no longer a concern to investors.  Playing the lead role once again is Iran, as concerns over a potential US military strike rise, with a new actor joining the cast, Mexico, which appears to be suffering significant chaos after the elimination of a cartel leader, “El Mencho” has resulted in fire fights throughout the country there.  Obviously, given the proximity to the US, this has the potential to be quite significant, although since the border with Mexico has been effectively sealed, my take is all the action will stay in country there.

Historically, when there’s a war
The first move is stocks to the floor
But generally speaking
Post first mover freaking
The buyers step up to the fore

So, if tariffs are not going to be the primary topic of discussion, and I sincerely hope that is the case, after we finish congratulating the US men’s ice hockey team for the thrilling Olympic victory this weekend, what’s next on the agenda? Iran.

The US continues to amass forces in the Middle East and from various sources, including MSM and X and Substack, the growing consensus is that some type of military action is going to occur.  The question now seems to be whether it will be an attempt to decapitate the regime, or just to impede its ongoing buildup of armaments, notably ballistic missiles.

Negotiations are set to resume this week in Geneva and given the stakes, especially for the Ayatollah, it remains unclear as to his willingness to cede to American demands of essential disarmament and the end of terrorist support.  For President Trump, the risk is that any military action does not work as quickly and smoothly as either the first attacks on the nuclear sites, or the exfiltration of erstwhile Venezuelan president Maduro.  If there is something quick and relatively clean that achieves a clear objective, I think it can be a huge boon for the President, but if anything drags on, it will have numerous ramifications for both the mid-term election and the markets.  Let’s focus on the latter.

Below is a long-term chart of the S&P 500 which shows both the extraordinary recent performance relative to its previous history, as well as helps highlight some of the downturns seen during that time.  Of course, the noteworthy feature is that the downturns don’t last very long.

Source: finance.yahoo.com

If we move from right to left on the chart (these are monthly candles), the first spike down is Liberation Day in April 2025, when President Trump first announced his tariff plans.  Obviously, that is long past investors’ concerns now, especially given the events on Friday.  The next major decline took place in February 2022, when Russia invaded Ukraine.  But remember what also happened around that time, the Fed began its aggressive rate hiking when it figured out that inflation may not be transitory after all.  You probably remember that 2022 was one of the worst market performances for both stocks and bonds.  It is a worthwhile question to ask how much of that was the Russia/Ukraine situation and how much was the Fed.  My money is on the Fed.  Moving left, we see the Covid spike lower in Q1 2020 and then a baby dip during the repo shock of late 2018, when the Fed lost control of the Fed funds rate.  After that, we go back to the GFC in 2008-09 and the bursting of the dot com bubble in 2000 – 2003.  Sure, in 2003, the US invaded Iraq, but I don’t think that was the market driver.

My point here is that any impact from military action is likely to be very short-lived in equity markets.  The other market that will certainly be impacted is the oil market.  A look at the long-term story there shows that, here too, there are many things that have a major impact on oil other than war.

Source: finance.yahoo.com

The huge decline on the left was the GFC and ensuing recession.  The drop in 2014 was the realization that shale oil was going to add an enormous amount of supply to the market.  You can see the Covid spike to negative prices and then the run up in prices in the wake of the Russian invasion in 2022, which was relatively short-lived, and we have been declining ever since.

Much of the commentary regarding Iran right now revolves around their ability to close the Strait of Hormuz and how that would cut 20% of the world’s oil supply from reaching the market.  (It would cut almost all of Iran’s oil off from the market as they have virtually no pipeline network).  But even here, the evidence is that a price spike will be relatively short-lived.

I raise these issues because while war is inflationary, that is generally not because of the impact on oil prices, but rather because of the increased government spending that accompanies war (remember LBJ’s guns AND butter policies leading to the inflation of the 1960’s and 70’s.). 

Summing the discussion up, while in the immediacy, there will be market responses to military actions, I do not believe they will have long-term impacts.

Ok, I went on way too long, so let’s do a hyper quick tour of markets this morning and I will leave the weekly data until tomorrow.

Equities – mainland China is still closed, (they open tomorrow) but the rest of Asia mostly ignored the war drums.  HK (+2.5%), Korea (+0.65%), India (+0.6%) and Taiwan (+0.5%) all showed strength although Australia (-0.6%) seems to have suffered on the tariff story.  Tokyo, too, was closed last night.  In Europe, despite slightly better than expected German Ifo data, the DAX (-0.45%) is today’s laggard while the IBEX (+1.0%) and FTSE MIB (+1.0%) both have seen strong support, ignoring any uncertainty regarding the US tariff situation and benefitting from positive earnings results. The UK and France have done little.  As to the US futures market, at this hour (7:15) they have risen from their early evening lows but are still softer by -0.35% across the board.

Bonds – the bond market remains the enigma, in my mind, as it is basically locked in place and has been for months.  Treasury yields (-1bp) have edged lower and European sovereign yields are essentially unchanged, as are JGB yields.  It continues to baffle me that bond markets, which typically sense fear first, do not seem to care about all that is ongoing in the world right now, whether war, government spending, or commodity prices.

Commodities – this morning, oil (0.0%) is ignoring Iran, which is maybe the most surprising thing of all.  Perhaps this is telling us that concerns over a closure of the Strait of Hormuz are overblown, or perhaps if that does happen, we will see a dramatic spike higher.  Again, like the bond market, something feels amiss.  In the metals markets, while both gold (+0.8%) and silver (+2.25%) are higher than Friday’s closing levels, they are well below last night’s opening levels.  I guess fear is abating, at least for now.

FX – As to the dollar, it’s early decline has largely been erased with both the euro and pound unchanged, AUD (-0.4%) sliding and the rest of the G10 under pressure.  In the EMG space, MXN (-0.5%) is feeling a little stress from the increased violence that has begun and there seems to be some sympathy in that move with CLP (-0.3%) and BRL (-0.2%). On the flip side, CZK (+0.5%) is the biggest gainer as the market continues to respond to recent central bank hawkishness.

In the US today we see the Chicago Fed National Activity Index (exp 0.3 in January) and Factory Orders (-0.5% from Dec).  But remember this, as per the below, don’t look for that much activity in NY as this is the picture out my backyard this morning, I’m estimating 10” of snow, so skeleton staffs will be the rule.

Good luck

Adf

Not All in Sync

Posted on by

The story that’s tripping off lips
Is whether the buildup in ships
And aircraft we’ve seen
Is likely to mean
A war with Iran’s in the scripts
 
But markets are not all in sync
As equities clearly don’t think
That war would be trouble
While bond traders’ double
Their bets war will drive stocks to drink

Economic data is clearly not a key driver of market movement these days, arguably because we continue to get mixed outcomes, with some things looking good (Initial Claims, Philly Fed) while others are less positive (Trade Balance, Leading Indicators), although granted, it is not clear to me what the Leading Indicators purpose is anymore.  My point, though, is that we have not seen unambiguous strength or weakness across the data set for several months.  This allows every pundit to frame the economic situation through their own personal lens, whether bullish or bearish.  A perfect example is the dichotomy between the strength of US corporate balance sheets, as per Torsten Slok and seen below, 

and the rise in corporate bankruptcies as per this X post from The Kobeissi Letter (a great follow on X) which shows the following chart.

So, which is it? Are things good or bad?  My understanding is that strong balance sheets and a high number of bankruptcies are not typically correlated, but I could be wrong.  

Given the lack of direction, markets have turned their focus to other things, with most headlines currently garnered by the ongoing buildup of US military power in the Middle East as President Trump tries to pressure Iran into ceding its nuclear and missile programs.  (Of course, the announcement that all information on UAP’s (fka UFO’s) has many excited, and of course, the Epstein files continue to garner attention, as does the SAVE Act, but none of those are even remotely related to financial markets.)

But even here, we are seeing very different responses by the financial markets.  For instance, equity markets continue to perform pretty well, even though Tokyo and Australia sank a bit last night.  Look at the monthly and YTD returns in Europe, Japan and Australia below:

                                           Daily   Weekly   Monthly   YTD

Source: tradingeconomics.com

It strikes me that if war was a major concern, investors wouldn’t be stocking up on risk assets.  Rather, havens would be in more demand, which we are also seeing with gold (+0.4%) and silver (+3.3%) rising overnight as despite extreme volatility in the precious metals space, there is clearly underlying demand for these havens.

Bond yields over the past month have declined, indicating that despite ongoing deficit spending, investors are seeking their perceived safety whether in Treasuries, Bunds or JGBs as per the below chart of all three.

Source: tradingeconomics.com

Finally, the dollar, despite frequent calls for its death, has been edging higher in a classic risk-off response as no matter how much some may hate the dollar philosophically, when bad things happen, its massive legal and liquidity advantages outweigh virtually everything else.  Once again, the DXY has moved back to the middle of its trading range, just below 98.00 this morning, and to my eyes, shows no signs of an imminent collapse.  Rather, if hostilities do break out in Iran, I expect the greenback to rally to at least the top of this trading range at 100, and depending on the situation, it could easily go higher.

Source: tradingeconomics.com

All this is to point out that nobody knows nothing.  Narrative writers continue to try to keep up with the action, and it is increasingly difficult to do so as things change on the ground so rapidly.  Let me be clear when I say I have zero inside information regarding any of this, I am merely an observer.  However, my observations are that there will be some type of military action in Iran as to build up this much fire power in a concentrated area and not use it would be remarkable and I can see no way in which the Ayatollah can accept the terms being offered as it would end his leadership if he does.  I guess we will find out soon enough as President Trump has put a 10-day timeline on things.

Arguably, the only market I didn’t mention here was oil (-0.5%) which is consolidating after a 20% rise in the past two months.  Remember, if military activity is directed at oil production or transport, we could see a sharp spike here and that will not help equities or economic data, although both gold and the dollar are likely to benefit.

Source: tradingeconomics.com

I don’t think there is anything else to discuss market wise so let’s turn to the data.  This morning brings a bunch of important stuff as follows:

Personal Income0.3%
Personal Spending0.4%
PCE0.3% (2.8% Y/Y)
-ex food & energy0.3% (2.9% Y/Y)
Q4 GDP3.0%
Flash Manufacturing PMI52.6
Flash Services PMI53.0
Michigan Sentiment57.3
New Home Sales730K

Source: tradingecomomics.com

We also hear from two more Fed speakers, but at this point, they are all singing from the same hymnal explaining policy is in a good place and unless there are major changes in the data, there is no reason to change.

Arguably, the PCE data is the key for markets here as if it continues to run hotter than target, hopes for further rate cuts will continue to dissipate.  In fact, the next cut is now priced in for July with a second for October.  

Source: cmegroup.com

Remember, too, at that point it will be Kevin Warsh’s Fed, not Jay Powell’s, and Warsh has a very different idea about the way things need to be done.  Interestingly, as this 4th Turning proceeds and old institutions come under increasing pressure, their efforts to fight back and maintain the status quo is no longer behind the scenes as evidenced by this Bloomberg article this morning.

As I have written before, President Trump is the avatar of the 4th Turning and the institutions that are going to change are desperate to maintain the status quo.  This is, truly, the big fight that will continue through the end of the decade in my view.  Every institution that has been overseeing the global situation, whether politically, financially or militarily, is coming under pressure as income and wealth inequality have driven an ever wider disparity of outcomes.  As much power as the rich have, there are a lot more people who are not rich.  Ask Louis XVI how much being rich helped him.

On a lighter note, I watched the gold medal skating performance of Alysa Liu and it was truly magical.  A much better thought for the weekend!

Good luck and good weekend

Adf

Chock Full of Crises

Posted on by

Their mandate includes stable prices
And that they should use all devices
To work to achieve
That goal lest they leave
A legacy chock full of crises

“Most participants, however, cautioned that progress toward the Committee’s 2 percent objective might be slower and more uneven than generally expected and judged that the risk

of inflation running persistently above the Committee’s objective was meaningful.”

These words [emphasis added] are from the FOMC Minutes released yesterday afternoon.  To set the stage, the Fed left rates on hold then, although there were two votes for another cut.  However, a full reading of the Minutes shows there were those who would have considered a hike as well.   Now, I am just a guy in a room who observes market behavior through the lens of too many years involved on a daily basis, and my resources are virtually nil, especially compared to the Federal Reserve.  I don’t have a PhD in economics (although I believe that is a benefit in this context, if not every context).  However, the bolded part of the comment seems a tad disingenuous to me based on the below chart which shows the history of their inflation metric, Core PCE prices.

Source: tradingeconomics.com

It has been exactly 5 years since their metric was at or below their 2% target by which they defined stable prices.  The idea that they are claiming the risk of inflation running hot was a meaningful risk is perhaps the worst gaslighting comments they have made.  It is very difficult to believe that the Fed, in its current incarnation, is going to ever address the inflation issue appropriately.  Perhaps a Chairman Warsh, if he is successful at reconfiguring their operating procedures will be able to drive positive changes.  I am hopeful but not confident.  The one thing we know is that changing government institutions requires a mammoth effort.  And let’s face it, he will only have two plus years of leeway for sure depending on whoever becomes president in 2028.

I continue to believe that the market is going to increasingly focus only on Warsh’s comments going forward as the direction he has expressed is very different than the current FOMC membership mindset.  We shall see how this all evolves.  In the meantime, I expect that Fed funds are not going anywhere before Warsh is confirmed.  As to bond yields, that is a very different question and will depend on both the macroeconomic outcomes and the risk perception of investors around the world.  For now, that trading range of 4.00%. – 4.20% seems likely to hold absent a major economic data miss in one direction or the other.  But as long as we continue to get mixed data, this market will remain on the backburner.

The fear that is growing each day
Trump’s policy might go astray
Regarding Iran
Although not Japan
Thus, oil’s up, up and away

Texas tea (+1.5%) is following yesterday’s 4.6% rise with another strong session and as you can see in the chart below, is showing a very clear trend higher since December.

Source: tradingeconomics.com

This movement is very clearly a response to the ongoing buildup of US military assets in proximity to Iran, with two aircraft carriers, and somewhere above 200 military aircraft as well as the carrier group tenders with Tomahawk missiles in tow.  While negotiations are ostensibly ongoing, the one thing that seems clear is that absent a complete capitulation by the Iranian government, something big is going to happen here.  Of course, the question is, how much, and for how long, will it impact oil supplies?

Obviously, nobody knows the answer to that question, but the recent history has shown that every time there was an event in the Middle East, whether the 12-day war several months ago, the killing of Suleimani, the attacks on Saudi oil infrastructure, or others, prices retraced pretty quickly as per the below.  

Even the Ukraine invasion in February 2022 saw prices retrace 50% within a few months.  Other issues lasted less time than that.  This recent history implies that fading the rally is the right trade, but boy, that is hard to do.  And of course, in the event that the Iranian government falls, the chaos could result in a significant degradation of Iranian oil production.  Given they pump about 5 mm bpd, ~5% of global supply, that would matter a lot at the margin.  Certainly, the oil glut narrative would disappear in a hurry.  This is a very large risk to both markets and the economy, and one which needs to be hedged, if possible.  This will certainly be the focus of markets for the next few weeks, at least, so be prepared.  Personally, I do own some stuff here, but I like the drillers generally, as they are going to be employed no matter what!

Ok, let’s see what else is happening.  After a solid US session yesterday, Asia saw some major positive price action with Korea (+3.1%) the leader although Tokyo (+1.1%) also had a solid session, as did Taiwan, New Zealand, Singapore and Australia.  The exception to this rule was India (-1.5%) which suffered after a three-day positive run as traders and investors fled worrying about oil, the Fed, and the future of India’s relationship with Russia after the seizure of more ‘dark fleet’ oil tankers trying to avoid sanctions on Russian oil.  Europe, meanwhile, is uniformly lower this morning, with all the major indices slipping -0.8% or so.  The narrative is pointing to the escalation in Iran as the cause du jour.  US futures are also slipping at this hour (7:20), -0.25% or so across the board.

I touched on bonds briefly above, but today’s price action shows yields edging higher by 1bp in Treasury markets and between 1bp and 2bps across European sovereign markets.  There has been no data of note to alter views, and the only ECB news is that Spain has thrown their hat into the ring to have the next ECB president.

In the metals markets, yesterday’s gains are being followed by a mixed picture with gold (+0.2%) and silver (+0.3%) edging higher while copper (-1.6%) and platinum (-1.8%) cede those gains.  However, as I highlighted yesterday, this all still feels like consolidation.  FYI, there is much talk in the markets about silver and how there is not enough physical silver in the COMEX vaults to cover open interest, and how that could result in a major squeeze, but my take is most of it will roll forward as the fundamental supply/demand equation does not appeared to have changed.

Finally, the dollar had a strong session yesterday, rising 0.6% as measured by the DXY, and making gains vs. almost all currencies.  This morning, those trends are continuing with SEK (-0.4%) and GBP (-0.2%) leading the way lower in the G10 space while ZAR (-0.85%), INR (-0.4%) and KRW (-0.4%) are dragging down the EMG bloc.  Again, data has been scarce, so I see this as a more traditional risk-off sentiment than some new macro story.

Data yesterday was generally stronger than forecast, notably IP and Capacity Utilization, which showed solid outcomes that were ascribed to AI infrastructure building as well utilities activity.  It strikes me this is exactly what the Trump administration is trying to achieve with their reshoring goals.  I guess the question is how productive this investment will be and how will it impact inflation readings.  This morning, we see the weekly Initial (exp 225K) and Continuing (1860K) claims, as well as the Trade Balance (-$55.5B), Philly Fed (8.5) and Leading Indicators (0.0%).  The interesting thing about the Leading Indicators number is that a flat result would be the highest in 4 years.  A look at the Conference Board’s chart below shows an interesting thing about this number, and to me, anyway, calls its value into question.  Leading Indicators have been declining for four years while coincident indicators (and economic growth) have been moving along just fine.  I’m trying to figure out what these indicators lead.

And that’s really it for today.  We do see oil inventories as well, with a slight build expected and we will hear from Minneapolis Fed president Kashkari, but I cannot remember the last time he said anything interesting.  To me, the concern today, and tomorrow and next week, is that we see an escalation in rhetoric regarding Iran, at the very least, if not an actual military strike.  That feels like it would be bad for stocks, good for bonds, the dollar and gold.  Hopefully I am wrong there.

Good luck

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No-Holds Barred

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The rumor is Madame Lagarde
Who, through her incompetence, scarred
The ECB, now
Is set to, out, bow
To run for French Prez, no-holds barred
 
The fear that this move does display
Is Madame LePen’s making hay
So, globalists now
Will hardly allow
Their efforts to just go away

We continue to trade in recent ranges across most products in financial markets as investors and traders seek the next catalyst for secular movement.  Even precious metals, which have shown the most volatility of any sector, are now developing a new range as per the chart below.

Source: tradingeconomics.com

Now, I will grant the range in gold (+0.7%) is wider than many other products, but the chart clearly looks, at least to me, like an ongoing consolidation awaiting the next big thing.  As to other products, I have shown bonds, the dollar and even stocks doing the same thing lately, consolidating, and as of this morning, none of them are breaking out in either direction.  (As an aside, there is still a very loud group claiming the dollar is about to collapse, but thus far, their views have been unrequited). In fact, if we use the DXY as today’s dollar proxy, we appear to be heading back to the middle of the range rather than breaking lower.

Source: tradingeconomics.com

Net, there is not much to discuss in the markets which leads me to the most interesting topic, what will be the catalyst to break these ranges?  Historically, there are two types of things that act as a market catalyst, a change in the data trajectory or a geopolitical shift.  Right now, the former does not appear to be in the cards.  We know this because there are vocal proponents of both substantial economic strength and economic weakness in the future.  The lesson from this is that the data remains quite mixed, with some areas of the economy performing well, while others are struggling, but not enough on either side to expect a major trend.  

For instance, in the US, recent data showed relative employment market strength while inflation data continues to compress.  Now, you can quibble with the construction of both data sets, and there are many valid concerns, but for policymakers, especially those steeped in the view that strong growth necessarily drives inflation higher and vice versa, the current data set does not argue for any policy shift.  

Arguably the biggest geopolitical change of late was the dramatic Takaichi-san victory in Japan, which has enabled her to impose her will on the economy.  As such, we can expect more ‘run it hot’ actions there.  However, thus far, the JGB market has not rebelled against further unfunded government spending.  We are one month, and 20bps, removed from the recent peak in yields.  We shall see how long that lasts and if, a change in that view impacts bond markets elsewhere in the world, but as you can see below, it does not look that scary right now.

Source: tradingeconomics.com

But otherwise, Russia/Ukraine continues apace with negotiations going nowhere and the US/Iran talks, with articles this morning claim progress is being made there.  Arguably, some type of deal with Iran ought to be bearish oil as it would seemingly involve the lifting of sanctions on their oil sales, but who knows.

Which takes us to the most interesting headline this morning (see Bloomberg’s headline below), the story that Madame Lagarde is rumored to be stepping down as ECB president before her term expires next year.  While, naturally, she has denied the story, there is certainly enough palace intrigue to dig a little deeper.

Ask yourself why, a woman who has spent her career striving to reach the pinnacle of geopolitics, would willingly give up a role at the top.  While the initial punditry stories indicate she wants to allow President Macron to be involved in the discussions as to her replacement (if she serves out her term, he will be gone and they fear Marine LePen on the right will be able to influence the next decision), Occam’s Razor tells me it is far more likely she is going to prepare to run for president of France herself.  After all, did she not just see her erstwhile colleague, Mark Carney, be elected PM of Canada?  And as powerful as major central bank president is, it pales in comparison to national president.  Added to her impetus was the resounding Takaichi victory, demonstrating that a woman can be elected in the CEO role, and I must believe, this is her motivation.

If you are of a globalist mindset, Christine Lagarde is the perfect French president, completely beholden to your ideals, and yet, as a woman, believed to be able to work effectively with others (notably President Trump) in order to prevent further damage to your goals.  Mark my words, she will step down and announce her candidacy before the summer. Funnily enough, I expect if she leaves, it will be a benefit for the euro!

Ok, the briefest of turns around markets shows that Asian equities followed yesterday’s US market rally higher, at least those that were open, with New Zealand (+1.5%) leading the way after the RBNZ left rates on hold, as expected, but came across as more dovish than expected.  Otherwise, Tokyo (+1.0%) and Australia (+0.5%) were the next best gainers with the former responding to the news that the first major Japanese investment into the US was announced, a $36 billion set of deals including a massive NatGas power project in Ohio.

European bourses (DAX +0.85%, CAC +0.55%, IBEX +1.25%) are also higher, rising on hopes that the announced increases in defense spending will be spent at home and boost European companies across the continent.  As to the UK (+1.0%), softer inflation readings this morning have raised hopes that the BOE will be more aggressive easing policy soon.  US futures are higher by about 0.5% this morning as it seems many of the fears about overinvestment in AI have suddenly waned.

Bond yields, which have fallen steadily over the past several weeks have all backed up 1bp, in the US, Europe and Japan.  Overall, nothing really to mention here.

In the commodity markets, oil (+2.9%) just jumped after the Russia/Ukraine peace talks broke up abruptly after just 2 hours.  Fears of more strikes on Russian infrastructure have risen.

Source: tradingeconomics.com

As to the metals, after yesterday’s declines, this morning they are all bouncing (Au +0.9%, Ag +2.8%, Cu +1.2%, Pt +1.6%) as they continue to consolidate.

Finally, the FX markets are showing very modest net USD strength with NZD (-0.7%) the laggard after the RBNZ while NOK (+0.7%) is the leader, jumping right after the oil news.  Otherwise, +/- 0.15% is the order of the day.

On the data front, we get some second-tier information as follows: Durable Goods (exp -2.0%, +0.3% ex transport), Housing Starts (1.33M), Building Permits (1.40M), IP (0.4%) and Capacity Utilization (76.5%).  (An interesting tidbit regarding Capacity is that I read China’s Capacity Utilization is just 74.3%.  Based on their trade balance, I would have expected a much higher number.  It tells me that over (mal?) investment there is even greater than I thought.). 

Too, we hear from Fed Governor Michelle Bowman and get the FOMC Minutes at 2:00.  Yesterday, Governor Barr said there was no reason to adjust policy for the reasons I stated above, nothing is clear, and I suspect Ms Bowman will be similarly inclined.

It is hard to get excited in today’s market, that’s for sure.  In fact, I expect we will need to see something pretty dramatic to drive a break of these ranges, and I have no idea what that will be.  Play it close to the vest for now.

Good luck

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