While nations worldwide celebrate The holiday Marxists made great Most markets are closed With traders disposed To twiddle their thumbs and just wait
Almost every market in both Asia and Europe was closed last night and this morning as the May Day holiday, which while it became a labor celebration in the late 1800’s was actually a pagan ritual in ancient times, coincides with the Golden Week holidays in most of Asia. Yes, US markets are open, and so are UK markets, but that’s pretty much it.
The biggest market news, I would argue, was the BOJ intervention that we saw early yesterday morning, and then, apparently, again during the session. Bloomberg calculated they spent ¥5.4 trillion in their efforts, a cool $35 billion or so. As you can see from the chart below, it did look like there might have been a second, smaller wave this morning, but there is no confirmation of that happening. The second sharp decline could simply be an order in thin holiday markets.
Source: tradingeconomics.com
Of course, the Japanese intervening in the FX markets is not that newsworthy in the big picture, they have done so many times. What was much more interesting was the fact that they ostensibly intervened in the oil market as well, selling futures to help cap the price there. While there are many market participants who decry official intervention in markets, and I understand their concerns, long ago I recognized that governments, by the very fact that they make the rules, are going to do what they want. And while some will claim this was a sop to President Trump to help keep energy prices down, it helps the Japanese economy as well. Japan has been negatively impacted to a much greater degree than the US by high oil prices.
Source: tradingeconomics.com
My final thought on this subject is that it is likely to be a huge win for the Japanese as well, shorting oil at $108/bbl, or whatever their price is will be seen as genius when the end game plays out and oil prices tumble due to massive supplies becoming available.
But really, it is hard to look around and see much more than that. While there is still some discussion of Powell’s decision to remain on the FOMC after his chairmanship ends, I don’t think the market cares all that much anymore as all eyes are now on Mr Warsh to see how he navigates things.
Otherwise, every other story is clickbait and largely unrelated to financial markets today. Rather, it is a good day to play golf, or sit outside and read a book, at least in NJ where it is sunny and heading to 65 degrees.
So, let’s do a quick recap of the few things that did happen overnight. Apple reported strong earnings last night which helped confirm the new record highs in US equity markets, at least in the S&P 500, and helped all US markets to a strong session yesterday. This morning, though, the NASDAQ futures are pointing slightly lower, -0.2%, as I type at 7:15 although the other major indices are in the green. Overnight saw Tokyo (+0.4%) rally a bit as did Australia (+0.7%) and New Zealand (+1.0%), but they were the only markets open. The rest of Asia was on holiday. In Europe, only the UK (-0.5%) is open today with a lackluster performance on weaker banking profits and forecasts.
In the bond market, Treasury yields (+2bps) have moved a bit higher as have UK gilt yields (+2bps) with the rest of Europe closed. One of the interesting things about the bond market is the fact that US economic activity continues to prove remarkably resilient as yesterday’s data showed strong Personal Income and Spending data (0.6% and 0.9% respectively), with GDP growing 2.0% and Initial Claims falling to 189K, its lowest print since 1968! Meanwhile US energy exports have been growing to record levels, and the US economy is benefitting massively from the relative abundance of energy available here, especially with NatGas prices still one-sixth their price in Europe. I must admit it doesn’t feel like the data points toward the need to cut rates.
Turning to commodities, oil (-0.6%) has not been able to reverse the impact of the Japanese intervention yet as all eyes remain on Iran to see if the blockade will force them to concede soon. As well, the fact that the UAE has left OPEC, the 4th nation to do so in the past seven years, is an indication that OPEC has lost virtually all its pricing power. I remain medium term and longer term bearish on oil as the political constraints fall away with the war just accelerating that process. As to the metals markets, after a nice rally yesterday, gold (-1.0%) is backing off a bit while silver and copper are essentially unchanged.
Finally, the FX markets are also extremely quiet overall once you move away from the yen, which today is also little changed from yesterday’s closing level. In fact, the entire market has only moved +/-0.25% or less from yesterday. There is no story here.
And in fact, there is no story anywhere today. ISM Manufacturing (exp 53.0) and Prices Paid (80.0) are on the docket and that’s it. No speeches, and quite frankly I expect very little price action overall as most trading desks will take my advice and leave early.
Seems Jay is a narcissist too Refusing to leave when he’s through He claims he won’t try To stop the new guy But sticking around is the clue
Meanwhile, in his last vote as Chair The poll, for his views, didn’t care As one wanted cuts And three said that’s nuts Seems politics is in the air
Starting with the FOMC meeting, as universally expected, they left policy on hold with the Fed funds rate target 3.50% to 3.75%. However, in an extension of the last meeting’s three dissents, this time there were four, so the vote was 8-4 to leave rates on hold. However, that seems a bit disingenuous to my eyes, as while Governor Miran wants a 25bp rate cut, as he has said all along, the other three ‘dissents’, regional presidents Hammack, Kashkari and Logan, “did not support inclusion of an easing bias in the statement at this time.”
However, after having read the statement numerous times, I challenge anyone to highlight where they expressed an easing bias. Here is the exact wording:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
But that is the narrative. Of course, the fact that there were four dissents led to much tongue wagging by the narrative set with some claiming that Powell had lost the room, while others claimed that this is a warning to Warsh that he will not be able to get his way.
During Warsh’s nomination hearing, one of the things he discussed in terms of the institutional changes necessary, was that there needed to be less communication by FOMC members as it didn’t do anything to help the process. I heartily agree with this approach, and perhaps this was all the regional presidents, who are looking ahead and seeing that they will not be able to move markets anymore, certainly a heady feeling I’m sure, trying to stake their turf.
Meanwhile, Chair Powell, the arch traditionalist as we have been told, will be breaking with tradition and remaining on the board in his governor’s role after his chairmanship has ended, although he claims this is to ensure the institution remains protected from politics. (🤣🤣🤣🤣🤣🤣🤣🤣🤣). Whatever. I am willing to wager that Mr Powell is a consistent dissent as long as he is on the board.
In the end, no policy changes were expected nor forthcoming. As of the close of yesterday’s session, the Fed funds futures market looks like this:
Source: cmegroup.com
Basically, market participants do not believe the Fed is going to do anything for nearly the next two years. I hope they are right!
Remember Monday? Ueda explained…nothing That’s what the yen heard
Early this morning Katayama, with a smile, Hinted at bold action
Monday’s BOJ meeting resulted in no policy changes, as was widely expected, but Ueda-san perfectly illustrated the futility of central bank chiefs trying to guide markets with their words instead of deeds. Basically, he fumbled around exhibiting no commitment to anything. And, one look at the chart below shows that traders continued to sell the yen in the wake of the BOJ meeting on the 28th. However, traders are nothing if not attentive to signals and while it took her a little while, Japanese FinMin Katayama livened things up a bit after Tokyo markets closed as follows [emphasis added]:“We are nearing the point where bold action on exchange rates will be necessary,” and more entertainingly, “I just want to remind everyone: whether you’re traveling or taking a break, don’t put down your smartphone.”
Source: tradingeconomics.com
One of the problems for them is that we are coming to Golden Week, with the first of the holidays already past yesterday. But Friday through next Wednesday are all Japanese holidays with no markets open. On the one hand, lack of liquidity can suit the BOJ as any intervention may have a much larger than normal impact. On the other, holiday activity is very rare. The term ‘bold action’ is, I believe, step 6 in the 7 steps to intervention and as you can see from the above chart, traders are listening. The problem Katayama and Ueda have is that the fundamentals remain negative for the yen. Is it really speculative to respond to weakening Japanese economic data that is worsened by the current energy situation vs. surprisingly strong US economic data where the energy situation is a benefit for the US?
If history is any guide, the dollar is likely to trade below that 160 level for a little while as traders may not want to test things during the Golden Week lack of liquidity, but ultimately, I suspect that dollar can push higher and the BOJ will be in. Their problem, though, is fundamental, and until the fundamentals change, the yen will be under pressure.
Speaking of fundamentals, let’s take a quick look at GDP figures and ask ourselves about the prospects for currencies in the future. The below chart from tradingeconomics.com shows annual GDP for the US (grey bars), Germany (blue bars), France (red bars) and Italy (black bars). See if you can tell the difference! The US number for Q1 is to be released this morning and expected at 2.3%.
Yesterday’s US data surprised on the high side with strong Durable Goods and Housing data. This follows stronger than expected Retail Sales data as well, which is the opposite of the situation in Europe. In fact, a look at the Citi Surprise Index below shows just how surprisingly bad things are in Europe relative to the US.
Again, please explain to me the case for the euro’s strength.
Ok, on to markets. Bonds were the big tell yesterday as yields in the US rose sharply, up 8bps at their peak, although have since retraced -3bps to 4.40%.
Source: tradgineconomics.com
While that is not the highest yield we have seen since the war began, it is near the upper bound, but I suspect that has more to do with the fact that the US economy, as demonstrated above, is anything but weak right now. Maybe the dollar should be considered a petrocurrency going forward! European sovereign yields tracked Treasury yields and this morning, they too are lower by between -2bps and -4bps. One noteworthy aspect is that ahead of the BOE meeting this morning, 10-year Gilt yields are above 5.0% for the first time since 2008, higher even than during the Liz Truss inspired liability management crisis.
Of course, the other thing weighing on bonds is the oil price (+0.1%) which while it is little changed this morning has climbed steadily and is higher by nearly 12% in the past week. The entire discussion here is about the naval blockade and whether it will be able to force Iran to capitulate soon. Certainly, President Trump is doing all he can to apply increased pressure on the Iranians with more secondary sanctions on all the banks that have surreptitiously handled Iranian money in the past. WTI remains below the spike highs from the first night of the war, but it has been climbing steadily of late. There is no doubt that there has been material damage done to the oil infrastructure in the Middle East and it will take time to repair once the fighting is done. As the blockade continues, it appears some of that destruction is being priced in. However, with the UAE out of OPEC and Venezuela likely to leave as well, there will be a race to see who can pump oil fastest. I remain convinced that there is a firmer cap than floor over time.
Perhaps the biggest surprise today is that gold (+2.0%) and silver (+3.2%) have rebounded sharply despite oil’s continued rally. That inverse correlation had been quite strong, although I continue to have a difficult time understanding its underlying cause. Nonetheless, commodities across the board are in demand today.
In the equity markets, yesterday’s US performance was lackluster ahead of the big earnings releases, two of which were quite strong (GOOG and AMZN) while two were less optimistic (MSFT and META). Asian markets were broadly negative as rising oil prices continue to weigh on the region with the Nikkei (-1.1%) and Hang Seng (-1.1%) leading the way lower amid mostly poor outcomes throughout the region. Only Singapore (+1.1%) and New Zealand (+1.0%) managed to buck the trend, after better-than-expected PMI data. Meanwhile, in Europe the picture is mixed with France (-0.5%) and Spain (-0.3%) softer while Germany (+0.3%) and the UK (+1.0%) are in better shape. The BOE just announced no policy change but seemed to sound more hawkish as they are going to try to use monetary policy to prevent higher oil prices. Historically, that has been a catastrophic central bank error, but I will not be surprised if they go down that road. As to US futures, at this hour (7:15), they are pointing higher across the board by between 0.3% and 0.6%.
Finally, the dollar is softer this morning, with the yen (now +2.0%) leading the way, although that is hardly a dollar story and decidedly limited to the yen. But, vs. the G10, the greenback is universally softer (EUR +0.3%, GBP +0.35%, AUD +0.6%, CHF +0.7%). Frankly, this doesn’t make sense to me, but markets will do that to you. Versus the EMG bloc, the dollar is also softer across the board with KRW (+1.0%) the leader as it follows the yen higher, and the rest of the block showing gains of between 0.25% and 0.5%. I still stand by my view that the dollar benefits over time, but apparently not today.
And while I fear I have gone on too long already today, there is a lot of data coming out as follows: Personal Income (exp 0.3%), Personal Spending (0.9%), Q1 GDP (2.3%), PCE (0.7%, 3.5% Y/Y) and Core PCE (0.3%, 3.2% Y/Y), Initial Claims (215K), Continuing Claims (1820K) and then later this morning, Chicago PMI (53.0) and Leading Indicators (-0.1%). With the Fed ostensibly showing a hawkish bias, all eyes will be on the Core PCE data. But really, my take is the combination of position liquidation in the yen and the twists and turns in the war are going to be today’s drivers. While you cannot catch a falling knife, I do see this dollar downtick as quite temporary.
For OPEC, the times are a changin’ With membership now rearrangin’ Thus, looking ahead They’ve nowhere to tread With more nations set for estrangin’
The proximate cause is the war Which Gulf members rightly deplore Meanwhile the blockade Will keep throwing shade On all their decisions before
One of the key features of the Fourth Turning, as so ably described by Neil Howe and William Strauss in their 1997 book of the same name, is that it is a time when institutions that have been part of the global system are torn down as they are no longer fit for purpose. By the end of the turning, new institutions have arisen to take over those roles going into the future.
I will be the first to say that I don’t have any idea what may replace OPEC, but with the UAE’s announcement that they are exiting the group as of Friday, May 1st, OPEC is in a world of trouble. OPEC was founded in 1960 as Gulf states sought to establish control over oil markets that had been developed by the “Seven Sisters” major global (and notably foreign) oil companies. Of course, the 1973 oil embargo and the follow on in 1979 cemented their power for two generations. Thus, Saudi Arabia and friends punched far above their weight on the global stage because of their oil reserves.
But the fracking boom in the US in the 2010’s laid the groundwork for OPEC’s demise as suddenly, not only was there a major producer outside the group (there had always been a few like Norway and the UK), but there was a major producer that had power in its own right. Thus, the seeds were sown back in 2014 or so, as fracking in the US took off, for the end of this organization. And that’s where we stand today. The US is the largest producer of hydrocarbons in the world by a long shot these days, as not only do they dominate oil production, but, too, natural gas and associated liquids.
So, now the world’s last standing superpower is no longer reliant on imported energy, and in fact, is a major energy exporter. Remember, energy = life, or put another way, energy = economy. Arguably, this is the biggest geopolitical shift the world has seen in decades, since the end of the Cold War.
Returning to the thesis of institutions being torn down and rebuilt, I cannot foresee what type of institution is even necessary to replace OPEC. Arguably, it will slowly disintegrate as it has lost all its coercive power, and each nation will simply pump as much oil as they can going forward. For everyone who believes there is a long-term shortage of oil, and that oil prices are heading higher, I will take the other side of that bet. History has shown that every shortage is followed by a glut, and this one will be no different.
There are many commentaries that Iran can withstand the US naval blockade longer than President Trump can stand the political heat. I disagree with that on both sides of the equation. First, as a second term president, Trump is not seeking re-election and just doesn’t give a f*ck about a lot of things. Second, any stress Iran has felt in the past occurred while the government and infrastructure there were completely intact. Now, Ahmad Vahidi, the effective leader of the nation, lives in a series of holes in the ground with no electronic communications because he knows that his days are numbered if he becomes public, and that’s a hard way to govern. Second, the extraordinary damage that has been inflicted on the nation from the bombing campaigns has resulted in much less tolerance for additional stress. Add to that the blockade is starving Vahidi and the IRGC of money to pay their proxies and soldiers, and the fact that at some point soon, Iranian oil wells are going to start to be shut in risking permanent damage, and Iran’s options are few and shrinking.
Right now, oil prices (+3.3%) are continuing to trade higher, although have not yet returned to the initial spike levels from the opening night of the attacks and they could climb higher still in the short-term. But I am highly confident that by autumn, they will be much lower as the roughly 1 billion barrels that are around in floating storage and stuck in the Persian Gulf come back to the market.
Source: tradingeconomics.com
In the meantime, this will continue to lead the news, but my view is this is already a fait accompli. However, until such time as it ends, we must deal with the daily twists and turns. Personally, I think it is healthy that there is another topic of interest, AI and the associated companies and their stocks, which has captured a growing share of the market’s collective mindshare. We need more than one thing lest every X-pert who previously knew about Covid, Ukraine, Russia and now Iran, would suck up all the air in the room.
Touching quickly on AI, Torsten Slok, the Chief Economist at Apollo, posted an interesting, and I believe very useful, take on AI and its future impact on employment, calling it The Jevons Employment Effect. In essence, as William Stanley Jevons explained for coal in 1865, the more efficient use of a resource results in increased demand for that resource. So, Slok’s idea is that as workers become more efficient, there will be more demand for efficient workers which will expand economic output as productivity is enhanced. Worth a thought to counter the entire black pill view that AI is going to take all the jobs.
Ok, I’ve gone on too long, so let me quickly tour markets here. The inverse relationship between precious metals and oil remains in place with gold (-0.6%) and silver (-0.4%) both softer this morning. We did learn that central bank purchases of gold in Q1 rose to 244 tons as they took advantage of the decline in prices post the peak. Considering my view that oil’s price is going to fall sharply going forward, I think that may bode well for gold then.
In equity markets, yesterday’s declines in the US were followed by a mixed session in Asia with Japan the perfect symbol as the Nikkei (-1.0%) fell while the TOPIX (+0.6%) rose along with most other Japanese indices. China (+1.1%), HK (+1.7%), Korea (+0.7%) and India (+0.8%) were all in fine fettle although other regional exchanges were less optimistic overall. Turning to Europe, though, red is today’s color, with the UK (-0.8%), Spain (-0.7%) and France (-0.6%) all under decent pressure after inflation data showed continued stickiness which will prevent any central bank easing tomorrow by either the BOE or ECB, although the idea that either will hike rates remains ludicrous in my eyes, but they are error-prone, I will give them that. As to US futures, at this hour (7:30) they are hanging around unchanged ahead of the FOMC meeting this afternoon.
In the bond market, yields are creeping higher across the board with virtually every market currently open in Europe and the US showing yields higher by 1 basis point. It is hard to get excited here.
The dollar, too, is dull and boring today with little movement broadly. NOK (+0.65%) is responding to the ongoing rise in oil prices, as is BRL (+0.4%) which is also benefitting from the idea that rising inflation will prevent the BCB from cutting rates much further. On the flip side, ZAR (-0.4%) is under pressure on the back of gold’s weakness and rising oil prices as they import the bulk of their energy. But the G10 is a bit boring with the exception of AUD (-0.3%) and NZD (-0.4%), both of whom released CPI data last night that while high, was not as high as forecast.
And that’s really it for today. I chuckled at an article in Bloomberg discussing Chinese companies and their needs in the FX market as they explained it could move the CNY between 6.80 and 6.85, which given the current rate is 6.836, means it’s not moving at all!
On the data front, before we hear from Powell at 2:00, hopefully for the last time, we get Housing Starts (exp 1.4M), Building Permits (1.39M), Durable Goods (0.5%, 0.4% ex Transport) and the Goods Trade Balance (-$87.0B), with the FOMC statement and comments clearly the most important thing. Then, this evening after the close we get earnings reports from MSFT, META, GOOG and AMZN, which has the market on tenterhooks.
The clock is ticking in Iran and that remains the biggest unknown, its timing, for the market and the world writ large. Let’s hope it ends soon.
Some mornings the quiet is real With limited news of appeal But traders still need Their families, to feed, A story far less than ideal
Yes, oil prices have traded a bit higher overnight and this morning, albeit amid extremely low volumes. In fact, it is the volumes that speak to how little people seem to care about markets right now. We are seeing extremely low volumes across oil, gold, stocks, bonds and even FX markets are quiet. It’s not that they haven’t moved a bit, it’s just that there is no conviction amongst the trading community as to where things should be heading.
Of course, this is never true of the narrative community, who will spin up something to get clicks, but frankly their stuff, which is often the thinnest of gruel, has even less traction now. Arguably, reading through as much as I could this morning, the most noteworthy thing was the following clip I saw on X (and it is a worthwhile use of 13 seconds, I assure you) showing Representative Ilhan Omar discussing World War Eleven. I wish there was more to say, but since there is not, let’s head to the markets.
The most relevant argument in markets right now is how long can Iran hold out while their revenue stream is stopped by the US naval blockade and correspondingly, how long before they have to start shutting in production? How full is their storage? I have seen estimates from what I believe are credible sources of between half full and 80% full which would mean, even in the best case for them, they have about another 2 weeks before shut-ins begin. And if that happens, they are looking at the permanent destruction of upwards of half their current output. In other words, this war is not merely existential for the IRGC and their grip on power, but potentially for Iran’s longer-term future as an economy.
In the meantime, oil prices (+3.3%) continue to grind higher on limited volumes as you can see in the chart below with the lower bars indicating volumes.
Source: finance.yahoo.com
As consumers, we are all feeling the pain of this price action, but BP just reported record profits, and we can expect similar outcomes from all the oil majors, making hay while the sun shines as all corporates do. At the same time, gold (-1.6%) and silver (-3.2%) continue their direct negative correlation to oil. This relationship seems quite robust at this point. It appears that the ongoing dollar strength on the back of the rise in oil prices is undermining the status of gold as a haven asset. I continue to believe this is a temporary phenomenon, but for those long gold, it is nonetheless a painful reminder of how markets can remain perverse.
Speaking of the dollar, yesterday’s modest declines have been reversed this morning with the greenback gaining on the order of 0.25% this morning across the board. The biggest news here was the BOJ meeting last night where, as expected, Ueda-san left policy unchanged, although the vote was 6-3, with the three dissents seeking a rate hike. From what I can tell, Ueda-san prattled on for an hour in his press conference without giving any clear direction as to the future, confusing one and all by explaining they may not reach their objectives but may raise rates anyway. You can see in the chart below when Ueda started speaking as it initially sounded hawkish, but here we are, 7 hours later and it was as though he never opened his mouth.
Source: tradingeconomics.com
The overriding concern in the yen is whether it will weaken through (dollar above) the 160 level, which it briefly touched back in late March, but has since been trading just below. That is perceived by many as the ‘line in the sand’ regarding intervention. However, if we go back to the summer of 2024, when the BOJ last intervened, USDJPY was pushing 162 before they pulled the trigger as you can see below. It certainly suits them that the market is afraid of pushing this envelope, but my take is it will happen before too long.
Source: tradingeconmics.com
As to the rest of the FX space, zzzzz is the story. Perhaps the other interesting thing is that NOK (-0.15%) is weaker despite oil’s climb. Everything else is softer vs. the dollar by -0.2% and -0.4% with no real outliers. FX is just not that interesting, like most markets these days.
In the equity space, yesterday’s US performance was uninspiring, but we saw more weakness (Tokyo -1.0%, HK -1.0%, China -0.3%, India -0.5%, Australia -0.6%) than strength (Korea +0.4%, Malaysia +0.7%) across Asia. However, there are no new stories to drive things here with the Iran war and energy prices the only topic of note. In Europe, markets are feeling better this morning with gains across the board led by Spain (+1.0%) and the UK (+0.6%). I must admit I am confused by the Spanish performance as the only data point of note released this morning was Spanish Unemployment which jumped to 10.83% (such precision), far above last month’s 9.93% and a full point above economists’ forecasts. But I guess if you look at the longer-term history of Spanish Unemployment, this is still far better than it has been in the past and the trend remains intact.
Source: tradingeconomics.com
Meanwhile, US futures are pointing lower at this hour (7:25) with OpenAI having missed its own targets for user acquisition undermining the overall AI thesis thus far this morning. Plenty of time for that to change though, at least based on how buying remains the default position.
Finally, bond markets have sold off with yields continuing to edge higher across the board. While it’s not really a rout, as you can see from the Bloomberg screenshot below, every European sovereign yield is higher along with treasuries, although JGB’s managed to remain unchanged overnight.
Certainly, there is nothing new in the bond market right now, although I imagine as the Iran war drags on, we will see increased government borrowing across the board which ought to pressure yields higher.
And that’s it, really, for this morning. We see the Case-Shiller Home Price Index (exp 1.1%) at 9:00 this morning and Consumer Confidence (89.0) at 10:00. Neither of these is going to matter to traders anywhere, not even algos.
Until there is a change in the situation in Iran, it is hard to see more than lackluster interest across most markets. I imagine that if this extends for weeks, the offsetting forces of reduced supply and demand destruction will find an equilibrium point, which may well have already been found around $100/bbl. Remember this with respect to the dollar, since oil is priced in dollars almost universally, there is going to continue to be demand for the greenback everywhere in the world. It is hard for me to make a significant bearish case for the dollar right now, at least in the medium or long-term. In the short term, who knows?
The third time, it wasn’t a charm As thankfully, Trump saw no harm But it’s disconcerting The left keeps on flirting With killing Trump by firearm
But absent more news on the war Investors, most stocks, still adore And there’s still a call The dollar should fall Though so far, they’re down on that score
It is certainly disconcerting that there have been three bona fide assassination attempts on President Trump in the past two years, something I fear speaks loudly about his opponents. Fortunately, this one also failed. Interestingly, as this occurred at the White House Correspondents Dinner, the entire Washington press corps, who largely detest the man, were there. I wonder if this experience will alter their rhetoric, which I would argue has been the key driving force behind these attempts. Alas, I fear that will not be the case, at least not for more than a few days at best.
But that was a far more exciting weekend than anybody imagined as there is no new news regarding the Iran war with potential talks never occurring over the weekend. Neither have the marines moved in on Kharg Island, so the status quo, a US naval blockade, remains the primary situation. This leads to two questions; first, how long can Iran withstand the lack of revenue with the government, or more accurately the military, still operating effectively? And second, how long before Iran’s oil wells need to be shut in, which is likely a death sentence on those wells, and by extension, on Iran’s long-term revenue stream?
Frankly, that’s what the weekend brought, so let’s turn to markets. While the DJIA lagged on Friday, both the NASDAQ and S&P 500 rallied to yet further new all-time highs as US corporate earnings remain robust and the market looks ahead to this week where 5 (MSFT, GOOG, AMZN, META, AAPL) of the Mag7 report earnings this week on Wednesday and Thursday. As well, Wednesday brings the FOMC decision, with no change expected. As to US futures this morning, as I type (6:50), they are essentially unchanged.
Overnight, Asia’s session was mixed with Japan (+1.4%) putting in a nice performance along with Korea (+2.15%), India (+0.8%) and Taiwan (+1.8%) although there were laggards (HK, Australia, Indonesia, Singapore) as well, with much smaller declines. China was basically unchanged. Perhaps the biggest news was that an oil tanker from the US arrived in Japan for the first time, although certainly not the last time. European bourses are all a bit firmer this morning, seemingly responding to decent earnings throughout many nations there. Thus, Germany (+0.6%) is leading while Spain, France and Italy (+0.5% each) lag slightly and the UK (+0.1%) brings up the rear as King Charles prepares to visit President Trump and the US starting today, ostensibly trying to resurrect the once special relationship that has deteriorated over time.
In the bond market, nothing continues to happen with Treasury yields higher by 1bp this morning and similar price action across all of Europe. JGB yields (+4bps) were the big mover as market participants await three key central bank meetings this week, the Fed, ECB and BOJ. But here’s the thing, of all the major economies around, Japan’s is the only one where the bond market is offering any real signal. The below chart from tradingeconomics.com shows US (blue line), German (tan line) and Japan (green line) 10-year yields over the past 5 years.
While we all remember the pain in markets when the Fed, and then all other central banks, figured out that the Covid policy inflation wasn’t going to be as transitory as they hoped and pushed rates up at a historically fast pace in 2022, since then, it is pretty easy to make the case that neither US nor Germany (and by extension the rest of Europe) have seen any substantive change in their bond markets. I am speaking in a big picture reference here, not the day-to-day noise that we see. Meanwhile, Japan has finally begun to feel the pressure of a massive debt/GDP ratio and rising inflation.
Contrary to popular belief, Treasury bonds remain the reserve asset of choice around the world as every nation needs to hold a certain amount of USD simply to function in the world today (which is why there is so much recent discussion regarding USD swap lines for numerous countries). While it sounds great for the panican set to discuss how Chinese “official” holdings of Treasuries have collapsed and that is a signal they are selling bonds, the reality is they have switched their custodians from the Fed to Clearstream and Euroclear in Brussels and Luxembourg while many of those assets are now held in large Chinese ‘private’ banks rather than on the PBOC’s balance sheet.
Source: @Brad_Setser
Notice the large grey bar at the right, foreign assets of the state banks. Which brings us to the central bank meetings this week where no major central bank is expected to change policy. Japan seems the diciest call, but the word was put out last week that June is the likely date. As well, the ECB’s own market watching website is now looking at June as a probable rate hike as per the below from ecb-watch.eu.
For the FOMC, no change today and now that the DOJ has referred the cost overrun investigation to the IG at the Fed, the hold on Kevin Warsh by Senator Tillis has been lifted. I expect he will be confirmed in time for Powell to leave on his scheduled date. It remains to be seen if Powell will stay on the FOMC (his term technically runs until January 2028), but historically, once a Fed chair leaves that role, they step away completely. Ultimately, until the markets begin to understand that inflation is going to be structurally higher than in the past, I suspect bond yields are going to remain range bound.
In the commodity space, oil (+0.7%) is a touch higher as the market seems to be becoming increasingly concerned that the impacts of the closure of the Strait of Hormuz are going to be longer lasting than previously assumed. However, the futures curve remains steeply backwardated as per the below chart form tradingview.com.
Personally, I see this as confirmation of my own view that oil prices are likely to decline over time as more and more supply becomes available with new projects. If anything, this war has accelerated that process. Meanwhile, metals prices are essentially unchanged this morning, biding their time for the next big piece of news.
Finally, the dollar is under modest pressure this morning, down about -0.2% across the board as risk appetites continue to build with the war receding in traders’ collective mindset. But here, too, just like in the bond market, it is difficult to make the case that anything of note has happened to the dollar, writ large, over the past year. I know I show this chart frequently, but it is simply to hammer home the idea that the dollar is not collapsing. It has basically had a 3.5% range 96.50 – 100.00 for the past twelve months. I’m sorry, that is not a death omen!
Source: tradingeconomics.com
On the data front, there are a total of 5 central bank meetings with no changes expected anywhere, and then PCE data later on.
Tonight
BOJ Rate Decision
0.75% (unchanged)
Tuesday
Case-Shiller Home Prices
1.1%
Consumer Confidence
89.2
Wednesday
Housing Starts
1.4M
Building Permits
1.39M
Durable Goods
0.5%
-ex Transport
0.4%
Goods Trade balance
-$86.0B
BOC Rate Decision
2.25% (unchanged)
FOMC Rate Decision
3.75% (unchanged)
Thursday
BOE Rate Decision
3.75% (unchanged)
ECB Rate Decision
2.0% (unchanged)
Q1 GDP
2.2%
Personal Income
0.3%
Personal Spending
0.9%
Initial Claims
215K
Continuing Claims
1820K
PCE
0.7% (3.5% Y/Y)
Core PCE
0.3% (3.2% Y/Y)
Chicago PMI
53.0
Leading Indicators
-0.1%
Friday
ISM Manufacturing
53.0
ISM Prices Paid
80.0
Source: tradingeconomics.com
It remains difficult to get too excited about the data, though, as war stories remain top of mind. Until something changes there, I suspect we will see equities continue to rally on earnings data with the rest of the markets doing very little overall, data be damned.
While nothing is terribly clear It seems there’s more worry and fear The war’s gonna start To blow things apart Once more, thus risk gets a Bronx cheer
At this point the navy is set With carriers, three, as the threat Meanwhile, Iran’s leaders Are fighting seceders It could be they made a bad bet
As the week draws to a close, there is no clarity regarding the potential for a peace deal to end the war as both sides continue to claim the other is the problem with respect to getting to talks. There continues to be a massive amount of propaganda from both sides and maritime traffic remains at a standstill in the Strait of Hormuz. Arguably the most noteworthy occurrence was that the USS George H.W. Bush has arrived in theater, bringing the navy armada up to 19 ships, I believe. That is an enormous amount of firepower. In fact, there is a theory that the entire purpose of the ceasefire was to allow the US to move all its assets into theater to ensure that the next action completes the process.
But there has been a change amongst the views of market participants about how things are going to proceed as evidenced by the price of oil. Arguably, there is no better barometer of the situation than that price and as you can see from the below chart, crude oil’s price (+1.6%) has traded higher consistently all week.
Source: tradingeconomics.com
Too, the fact that we are approaching the weekend has me thinking that the next step in this war is about to kick off. President Trump has shown that he favors military action when markets are closed and I am pretty certain that view hasn’t changed. So, keep alert for the news when you wake up tomorrow morning.
However, until such time that the situation on the ground there changes, we are left with a great deal of pontification (present company included, although I try to simply focus on the markets and how their price action offers indications of current events). Beyond the war, there is precious little new news of market import, though, right now. Data continues to be a secondary consideration for traders and investors as everything is being distorted by the sudden impacts of the sharp rise in energy prices. Politics is always a long-term phenomenon, with the daily machinations rarely having a market impact. Which leaves us with speculative activity, which never rests!
With that in mind, let’s look at the markets and see what they are telling us (or me at least). Having already highlighted the fact that oil has been creeping higher all week, which I reiterate, implies to me that market participants have begun to believe further military action is imminent, we cannot be surprised that gold (-0.4%) and silver (-0.7%) are slipping as the correlation between the metals and oil has turned negative since the war began about 2 months ago. Historically, this had almost always been a positive correlation, but right now, that relationship has clearly inverted as you can see in the below chart.
Source: tradingeconomics.com
It certainly remains an enigma that what many perceive to be the ultimate safe haven, gold, is performing so relatively poorly during the greatest strife we have seen in a number of years. But there you go.
Of course, for risk appetite, the most consistent place to look is the equity market. Yesterday saw US markets slip a bit, about -0.5% or so across the board, but they remain within spitting distance of their all-time highs. Certainly, no panic yet. And this morning, as I type (7:05), the futures markets show the NASDAQ firmer by nearly 1.0% while the DJIA is lagging, -0.2% and the SP500 is in between (+0.3%). Last night, Tokyo (+1.0%) had a strong session after inflation data was released right at expectations and has not yet shown signs of running away higher. At the same time, market participants are increasingly certain the BOJ will remain on hold next week, although there is now a 60% probability priced for a 25bp rate hike at the June meeting. The rest of the region was mixed with China (-0.35%), India (-1.3%) and Indonesia (-3.4%!) all under pressure, the latter suffering after 4 major banks there were downgraded by Fitch, while Taiwan (+3.2%) soared after positive earnings data and economic data showing IP exploding higher by 28.7% in March.
In Europe, though, there are no happy faces with Spain’s IBEX (-1.4%) leading the way lower for the entire continent (CAC -1.1%, DAX -0.4%, FTSE 100 -0.6%). It is a bit surprising as the only data of note was German Ifo Business Climate (84.4 and the grey line) and Expectations (83.3 and the blue line), both of which printed at their lowest levels since August 2023 and are both clearly trending lower.
Source: tradingeconomics.com
Bond yields are doing very little this morning, with Treasury yields lower by -1bp while European sovereign yields are all higher by between 1bp and 2bps. Bond investors remain quite concerned about energy driven inflation but are also looking at the negative impacts on economic activity and so remain uncertain which way to go. One thing to remember is that yields have really done very little over the past 6 months, at least, and that Treasury yields continue to be the global driver. You can see the similarity in the shape of the price curves for both Treasuries and Bunds below, and both lines are pretty flat to my eye with one blip higher at the beginning of the war.
Source: tradingeconomics.com
Finally, the dollar is softer this morning, which is not in accord with its usual relationships to other assets. Although it turns out that in the course of the hour I have been writing, things have changed and I cannot see a reason. So, oil is now lower by -1.6%, gold is higher by 0.2%, and the dollar is softer across the board by 0.2% or so. For me, I’m happy the relationships still hold, but I would love to be able to offer a catalyst for the change in sentiment. And yes, US futures are higher across the board now.
Regarding the dollar, though, I couldn’t help but notice the Bloomberg article regarding the carry trade and how it has come back into favor as implied volatilies have fallen over the past month. What this tells me is that there are no long-term views in the FX market despite all the dollar is going to collapse pap that comes from the FinTwit (FinX?) community. Shorting yen remains the favored funding vehicle and the discussion is how BRL, MXN and TRY are the asserts favored to be held. The thing about the carry trade is, it is great until it isn’t, but they don’t ring a bell before things change. It is also a very different thing to short JPY and be long USD against it, with the USDJPY market amongst the most liquid markets in the world. But if you are long BRL and short JPY, be prepared for a pretty wide spread on a forced exit because things have changed. And if that is TRY or ZAR, the spread will be even wider! Just sayin’.
On the data front, this morning brings Michigan Sentiment (exp 47.6) unchanged from the preliminary reading which was the lowest in the 84-year history of the series. Are things really that bad? Maybe, but that certainly doesn’t jibe with the Retail Sales and PMI data. The problem with survey data is there is an element of politics that distorts the reading and President Trump is such a polarizing figure, it exacerbates the situation. Nobody likes high gasoline prices, but it is hard to reconcile gasoline prices, which by the way, remain lower than what we saw in the immediate wake of Russia’s invasion of Ukraine as per the chart below, with such a dramatic decline in confidence, hence my view of the political angle.
Source: tradingeconomics.com
Personally, I am on the lookout for the next military incursion or a deal this weekend, with diametrically opposed market impacts on Monday morning. Once again, my advice is risk mitigation is the way you stick around to play again next week.
The clock has been wound and rewound And meantime stock buyers dumfound The good and the great Who mostly, Trump, hate And fear that their power’s southbound
But still the blockade is in force And info depends on your source Will Trump send marines To take Iran’s means And break them as matter of course?
Another day and nothing has changed in the Persian Gulf or the Strait of Hormuz. The US’s naval blockade is still in force with several Iranian tankers being stopped on outbound routes. As well, Iranian small gunboats have attacked several freighters seeking to exit the Gulf. No negotiations are on the calendar, although Pakistan, Egypt and Turkey are ostensibly working to get the two sides together. This has become a waiting game, it seems, to see if Iran can suffer the loss of 90% of its revenue for longer than President Trump can suffer the political damage that higher oil prices are inflicting on the economy.
The funny thing is the economy doesn’t seem to be that bad overall. Clearly, nobody is happy to pay more for a tank of gas, but the data has yet to show a major disruption in the US economy. And in fact, this morning’s Flash PMI data from around the world has shown a pickup in manufacturing activity as per the below table (data from tradingeconomics.com):
Country
Actual
Previous
Australia
51.0
49.8
Japan
54.9
51.6
India
55.9
53.9
France
52.8
50.0
Germany
51.2
52.2
Eurozone
52.2
51.6
UK
53.6
51.0
US
52.5 expected
52.3
The narrative on this improvement centers on the idea that people/companies are trying to get ahead of the future where price hikes and shortages of goods become extant, similar to the front-running of the tariffs in Q1 last year and that is certainly part of the story. But it also appears that, in the US at least, there is real manufacturing growth occurring.
Freightwaves is a company that tracks trucking and freight movement around the US, and its latest data show solid increases in activity along with a tighter market (rising costs) as demand rises. Too, this activity is emanating from the center of the country not the West coast, indicating this is domestic production and not imports. Anecdotally, I have a friend in the trucking business, and I asked him about this situation yesterday. He confirmed that the trucking business is booming.
Remember, too, that in the last NFP report, Manufacturing employment rose 15K, far surpassing expectations. I make these points to highlight that the US economy continues to perform pretty well despite the angst over the war and rising gasoline and diesel prices. One last tidbit is Retail Sales, which rose a greater than expected 1.7% last month, and 0.7% in the control group which excluded gasoline. Those numbers do not confirm economic weakness.
And you know what helps confirm that the US economy is ticking over nicely? The continued equity market rally. Since the war began, after the initial fears that rising oil prices were going to collapse the global economy, the market has completely reversed course as you can see in the below. Chart.
Source: tradingeconomics.com
From the nadir on March 30th, the S&P 500 has rebounded 12.5% to new all-time highs. Earnings data that has been released for Q1 thus far has shown significant growth, upwards of 18% profit growth, again not a sign of a struggling economy. And perhaps the key feature of my argument is the following cover of The Economist magazine, which seems to have an almost perfect track record in terms of its cover articles, it is wrong nearly 100% of the time.
There continues to be a great deal of doom porn available if you like that type of stuff, but I am having a hard time seeing the depth of the damage that many claim. Certainly, things can get worse if Iran lashes out in final death throes of the regime and seeks to destroy as much GCC infrastructure as possible, but right now, I don’t see that outcome. My belief is the marines go for Kharg island shortly and are better than even odds to be successful. If that is the case, then we will be in the final stages of this conflict and people will move on. After all, who remembers Venezuela as a major crisis today? Most people have very short attention spans.
Ok, let’s see how things stacked up overnight after yesterday’s continued US equity rally. This morning, feelings are not as buoyant although it is not clear why. Equity markets in both Asia and Europe were broadly lower although that could simply be a bit of profit taking after some strong runs all around. Tokyo (-0.75%), HK (-1.0%) and China (-0.3%) all slipped as did Australia (-0.6%), India (-1.1%) and Taiwan (-0.4%). But Korea (+0.9%) bucked the trend along with Malaysia (+0.6%) while the rest of the region was weak. The Korean economy showed surprising strength in Q1 with GDP last night released at 3.6% annualized in Q1 supporting the market there.
As to Europe, despite the solid Manufacturing PMI data, Services data has been under more pressure and equity markets seem to be following that with Spain (-1.3%), the UK (-0.9%) and Germany (-0.5%) all slipping although France is unchanged this morning. As to US futures, they are softer as well at this hour (6:55), down by -0.5% or so across the board.
In the bond markets, Treasury yields have backed up 2bps this morning with European sovereign yields higher by between 1bp and 3bps. The outlier here is UK gilts (+5bps), which seems to be responding to general financing concerns in the UK as the budget deficit there continues to grow faster than forecast. JGB yields also backed up 2bps.
Oil (+1.2%) is beginning to get concerned again about the Iran situation as we are currently in the midst of a 3-day rally. While the WTI price, at around $94/bbl, is sitting in the middle of its range since the inception of the war, clearly there is some concern.
Source: tradingeconomics.com
The EIA inventory data showed a build in crude inventories but a pretty large draw of gasoline and distillates. Perhaps it was the latter that is the driver. As to the metals markets, the negative correlation between oil and gold is back with the barbarous relic (-0.8%) slipping while silver (-3.8%) is really having a rough session. It is key to remember, though, that silver is an inherently more volatile commodity than gold given the market’s much smaller size. In truth, looking at the chart over the past six months, it is hard to get the sense that it is doing too much at all right now.
Source: tradingeconomics.com
Finally, the dollar is rebounding a bit this morning, with the DXY (+0.2%) continuing to trade in its broad range from the past year as per the below chart.
Source: tradingeconomics.com
While the death of the dollar and de-dollarization narratives remain popular amongst a broad set of analysts, data outovernight from SWIFT shows that the dollar’s portion of international transactions rose to a record 51.1% in March, its highest level since SWIFT revised its procedures.
Source: Bloomberg.com
I regularly read analysts who are very smart explaining all the reasons why the dollar is destined to collapse amid concerns over the unsustainable debt and the use of the dollar as a political tool, and those things are true as far as they go, but for the foreseeable future, TINA is the rule. No other fiat currency is going to be an effective substitute because no other nation has the heft and strength of capital markets to do so.
The dollar’s strength today is pretty universal with nothing terribly noteworthy regarding specific moves. Perhaps the one surprise is NOK (-0.3%) which is not following oil higher.
On the data front, this morning brings the weekly Initial (exp 212K) and Continuing (1820K) Claims data as well as the above-mentioned Flash PMI data. Again, despite all the teeth gnashing, the labor market seems to be holding in quite well overall. Perhaps my glasses are tinted rose and I don’t see that, but the data releases that we continue to see do not point to an imminent collapse in the US economy. Rather, continued strength seems the most likely result. With that in mind, I do not see the dollar falling sharply under any scenario and suspect that a test of 100 on the DXY and 1.15 in the euro may be on the horizon.
Last night it appeared a reprieve Was offered, though I don’t believe That Trump will delay Much more than a day Ere US Marines, wins, achieve
But as of last night, markets think That peace will come in an eye blink Thus, futures have rallied While bond prices dallied And oil has started to sink
This is the Tuesday night look, which is subject to significant change by the time I wake up tomorrow morning. But here are the futures prices at 9:30pm:
Source: tradingeconomics.com
As you can see, US futures are higher and the Nikkei 225 is also modestly higher with no indication that there is concern over the US landing on Kharg Island and other Iranian key strongholds. All this comes after news has filtered out that Ahmad Vahidi, who appears to be the senior most IRGC leader left, has arrested the civilian government members who were scheduled to meet with the US and hammer out a deal. To my eyes, and from what I have read from what I believe is an excellent source, marines will be on Kharg Island before the week is out. It strikes me if that is the case, the current equity rally, which has been impressive, will get challenged.
As to bonds, last night they were essentially unchanged with 10-year yields at 4.29%. Again, this is not the stuff of major concern. And oil? Modestly lower and back below $90/bbl.
The early results are confusing With recent attacks Iran’s choosing But elsewhere there’s hope That peace is in scope Despite lots of, others, accusing
As of 6:20 this morning, although there have been several ships fired upon by Iranian gunboats, the US has not escalated, and the President has indicated he is waiting for news today on the situation. One of the takes is that the Iranians are going to come to the table and seek a deal, although it is difficult for me to believe that Vahidi is ready to cede power. But like virtually everybody else, nobody really knows what is happening.
However, markets appear to have made up their mind that the worst is over and there is no reason to panic any further. In fact, it appears they are getting excited about the opportunities that will come about because of all the post-war reconstruction that will be necessary and will certainly be profitable for those companies engaged.
The other story from yesterday was the confirmation hearings for Fed Chair nominee Kevin Warsh. I imagine it went about as largely expected with every Democrat despising him and every Republican liking him, but until the DOJ case against Powell regarding the reconstruction of the Eccles Building is finished, Senator Thom Tillis has said he will not allow a floor vote. Warsh did consistently explain that the Fed has lost its way and has not achieved its goals so it is time to start thinking of new approaches. And it is certainly true, as the below chart shows, that the Fed has been a failure with respect to its inflation target of Core PCE at or below 2.0%, a number last seen in February 2022 (the left=most bar on the chart).
Source: tradingeconomics.com
And with that in mind, let’s turn to markets this morning and see how things played out overnight and are evolving right now at 7:00. US futures are virtually in the same place they were last night as per the below screenshot from tradingeconomics.com
Asian markets were mixed overall with Tokyo (+0.4%), China (+0.7%) and Taiwan (+0.7%) all having a decent day while HK (-1.2%) and Australia (-1.2%) led the way lower for those regional exchanges that were under pressure. But in truth, it was about 50:50 with respect to gainers and losers. Certainly, there was no strong theme. Meanwhile, in Europe, markets have drifted a bit lower, but the CAC (-0.3%) and Spain’s IBEX (-0.3%) seem to be the worst of it. Net, it is hard to get too excited about anything in the equity space right now.
Similarly, bond markets are somnolent with Treasury yields edging lower by -1bp and similar price action in European sovereigns with the entire continent, and the UK, showing small yield declines of between 0bps and -2bps. Overnight, JGB yields were unchanged as well. While we continue to get inflation reads that include the war and the sharp rise in energy prices, there is no indication prices are running away yet. For example, the UK (3.3% headline, 3.1% core) released CPI this morning as did South Africa (3.1% headline, 3.2% core). Frankly, if you look at the chart below showing headline CPI for both nations (South Africa in blue, UK in grey), you would be hard-pressed to attribute any price pressure to the war given what has been going on in both places for the past three years.
Source: tradingeconomics.com
Turning to the commodity markets, oil (+0.8%) has rebounded from last night’s levels, but not that much, although WTI is back above $90/bbl, barely. NatGas (+1.15%) remains the absolute bargain in the energy world with US prices at $2.72/MMBtu, vastly cheaper than oil on a per unit basis of energy. Interestingly, in the metals markets, the recent negative correlation between gold and oil has broken down this morning with the shiny stuff rallying and taking all its friends along for the ride (Au +0.8%, Ag 2.0%, Pt +2.5%, Cu +0.7%).
Finally, the dollar doesn’t really care about anything right now, virtually unchanged against most of its counterparts this morning. There are a few outliers, notably NOK (+0.9%) which continues to benefit from the oil story, CLP (+0.3%) which is higher on copper’s rally and NZD (+0.3%) which continues to gain on rising expectations of higher rates there. One other amusing thing was a story in Bloomberg this morning about CNY and how its recent strength, it has gained more than 6% over the past year as the below chart highlights, is causing problems for Chinese exporters.
Source: tradingeconomics.com
Of course, this has been a US (and global) complaint for a long time, that the renminbi has been manipulated to remain excessively weak to provide a competitive advantage for Chinese exporters. In fact, according to the OECD, the CNY’s PPP value is approximately 3.303 vs. its current level of 6.82, meaning it is trading in markets at half its appropriate value.
Source: ceicdata.com
My sense is that TEMU would not be able to sell all that sh*t so cheaply if that was the exchange rate, just saying. In fact, this is something President Trump has been bashing the Chinese on for years. But Bloomberg managed to offer a sympathetic tone for those “poor” Chinese companies who have seen the CNY gain 6% in a year.
Off the soap box and on to data where the only releases are the EIA oil inventories with a modest expected crude oil draw. This comes after the API indicated a 4.1-million-barrel draw last week. There are no Fed speakers on the docket with the FOMC meeting coming up next week, so my take is today will be all about the ongoing earnings releases, which thus far have been quite positive, and waiting for President Trump, who ostensibly will be speaking at 3:00pm this afternoon. It is hard to have a strong opinion in this market, that’s for sure. Unchanged seems to be the best bet absent a major headline announcement.
Iran has implied they will skip The coming Islamabad trip But if they don’t show The risks of war grow For them it’s high stakes gamesmanship
Meanwhile markets blithely ignore The likely resumption of war But can it be true That conflict, part two Will open the next rally’s door?
Ostensibly, a second round of peace talks are due to get underway today in Islamabad, Pakistan, but whether they will remains an open question, at least as of right now at 6:20am in NY. As always, it is difficult to know what comments are true or were even made by the players involved as propaganda remains Iran’s largest current export. I have seen comments allegedly from Iranian sources that claim they both will not attend, and that they will attend. I guess we will know before the day ends as none of the negotiators is named Schrödinger.
As well, President Trump has indicated he is uninterested in extending the cease-fire even one more day if they do not attend. At this point, it appears that the hardest line members of the IRGC that have survived are the ones in charge over there, and my take is they are not very interested in negotiating as any result would likely end their grip on power. After all, if they are prevented from having nuclear weapons capability to destroy their sworn enemies of Israel and the US, what exactly is their raison d’etre?
Thus, my fear is that fairly soon, the second stage of this conflict is going to ignite. If this is the case, the recent market insouciance over the situation seems likely to change dramatically, at least for a little while. This implies that oil prices will spike higher again along with the dollar, while equities and gold will slump. I assume bond yields, too, will rise somewhat. Looking at a chart of yields, though, the current level is right in line with where they were for much of 2025 and at the beginning of 2026, and I am left to wonder if the move lower in yields in January and February, was the anomaly, not the return to current levels.
Source: tradingeconomics.com
I remain suspect of the thesis that inflation is going to decline dramatically because of AI implementation and have felt that way since far before the war began. Over a long period of time, as AI utilization increases, I do believe it will improve productivity significantly (I see what it has done for me with just limited uses, none of which involve the wordsmithing this note!), but it is difficult for me to foresee a significant deflationary impulse absent a significant reduction of money in the system, and I don’t see that on the horizon any time soon. The point is, yields don’t seem to be wrong overall in my eyes.
Now, Kevin’s about to sit down In front of each Senate assclown They’ll ask him ‘bout rates But whate’er he states The Dems will vote no with a frown
The other noteworthy story is that Fed Chair nominee, Kevin Warsh, is having his hearings at the Senate Finance Committee today. There is a great deal of discussion in the press regarding whether he will simply be a Trump puppet, or become a Trump whisperer, or be an independent voice. As well, there has been a recent conversion from Fed chair worship amongst the mainstream media, to encouragement for FOMC dissent to anything he wants to do, simply because he was appointed by Trump, so they seek his failure. It is really quite tiresome. Frankly, whatever he says is likely to be irrelevant as we already know that every Senate democrat will vote against because…Trump, and most Senate republicans will vote for and when it comes to the floor, he will be confirmed.
That said, it is a tough job to take right now, regardless of the president, given the goals he has stated, the current situation with respect to the Fed’s monetary stance, and the potential for dramatic changes in economic outcomes because of the war. I know I wouldn’t want the job!
Ok, let’s analyze that insouciance from overnight. While yesterday started off with a negative tone, by the end of the day, US equity markets were little changed with the NASDAQ and S&P slipping just -0.25% while the DJIA was unchanged. Futures this morning are pointing higher by 0.5% at 7:20am. Overnight, Asian markets were mostly higher, some by a significant amount (Korea +2.7%, Taiwan +1.75%) which continues to baffle me given the impending energy crisis that is about to hit the region. The larger markets were also firmer (Tokyo +0.9%, HK +0.5%, China +0.2%) with the rest of the region +/- 0.3% or so. Fear is not evident here.
As to Europe, there is also no fear with Germany (+0.7%) leading the way higher despite the worst ZEW Expectations result since December 2022.
Source: tradingeconomics.com
But Spain (+0.6%), France (+0.3%) and the UK (+0.15%) are also higher this morning. Fear is not an option.
In the bond market, yields this morning are basically unchanged across the board and nobody is paying attention to this market right now. The only remotely interesting news is that Nikkei News reported the BOJ is not going to raise rates at their meeting next week, and they apparently have a 100% accurate track record in this situation. Nobody cares about this right now.
Oil (-0.2%) is hanging around awaiting the next story from the Persian Gulf and Strait of Hormuz, sitting between the level seen when it was declared the Strait was reopened and the level it touched when that was denied. As you can see from the chart below, not only has oil been hanging around, but trading volumes (the light grey bars below the price chart) also appear to be sinking. Everybody is holding their breath for the next thing here.
Source: finance.yahoo.com
Meanwhile, metals are under some pressure this morning (Au -0.7%, Ag -0.9%, Pt -0.2%, Cu 0.0%) but volumes here are also muted. It’s not just the oil market waiting for the next steps, that’s for sure.
Finally, the dollar is a bit firmer this morning, with DXY (+0.1%) pretty representative of the entire space. One outlier is NZD (+0.3%) after inflation data released last night was higher than expected and market participants started pricing in another rate hike there. But otherwise, this market is also bored and boring. There was a Bloomberg article this morning explaining that hedge funds are starting to layer in bets on a rising euro given how low implied volatility is in the options market, but the very fact that implied volatility is so low, around 6%, tells me that nobody really cares.
On the data front, Retail Sales (exp 1.4%, 1.4% ex-autos, 0.2% control group) is due. The big jump is because the data measured is nominal terms, so the dramatic jump in gasoline prices will have raised Retail Sales a lot, hence the focus on the control group that doesn’t include gas.
And that’s really it. The Warsh hearings will get headlines right up until something happens in either Pakistan from the talks, or Iran because there were no talks. There are many known unknowns right now, and that explains the lack of trading volume. But real price movement in every market will rely on unknown unknowns, which by definition are opaque, at best. Once again, my advice remains, play things close to the vest.
It wasn’t all that long ago That if people wanted to know The news, they would turn To TV to learn The latest events blow-by-blow
But now TV news when it airs Has reached the point nobody cares ‘Cause it’s been on X Without any checks For networks, the stuff of nightmares
Which brings us to info this morning That claims, Tehran, talks have been scorning But also, we hear A framework is near For risk takers, this is a warning
I wonder if all of you face the same situation I do, which is answering the question, what is real? The fog of war is truly a descriptive term for the inconsistencies in the information that comes out of the Trump administration, the mainstream media that covers it with their own spin, the Iranians (who seem to be fighting aggressively among themselves) and then looking at prices in financial markets as well as economic data, much of which seems to be inconsistent. How exactly are we to gain an understanding of the big picture, let alone the intricacies of particular markets, given the overwhelming volume of noise we absorb every day.
The below table shows the prices of key markets when I last wrote compared to this morning:
Market
April 14
April 20
Oil
$97.35
$88.50
Gold
$4778
$4796
10-year yields
4.295%
4.267%
S&P 500 futures
6906
7090
DXY
98.04
98.24
Source: tradingeconomics.com
I know this is an incomplete listing of things, but I just wanted to touch on the basics. A quick look shows that oil has had, by far, the largest move, nearly a 10% decline, but after that, very little net activity. Sure, there has been some volatility in the interim as you can see in the following charts from tradingeconomics.com, but markets always have a certain amount of inherent volatility, it is the nature of the beast.
In the same order as above:
Oil
Gold
10-year Treasury
S&P 500 Futures
DXY
Of course, much of the movement came after Friday’s announcement by President Trump that the Strait of Hormuz was now open, and the overnight reversals have been a response to the Iranians contradicting that statement and firing on several ships.
It appears that as of now, the Strait is not yet open for free navigation, although apparently there are going to be a second round of talks tomorrow in Islamabad. An interesting story I read indicated that the internal divisions between the IRGC and the secular government in Iran are huge, which is one reason we seem to be hearing multiple things regarding negotiations and goals. We also must remember that all sides in a conflict like this issue propaganda for their own populations that may have nothing to do with their stance in the negotiating room.
The net of all this is, reading about things, no matter how well-read you are, doesn’t really capture the reality on the ground in my view. However, someone else made the point that focusing on the actions, not the words, may be a better tell of the situation, and the action of note is that US troops continue to move into the region, not out of it. I fear there is much more to come here, and the general lack of market volatility is not a sign of calm, but a sign of ignorance on the part of market participants, i.e. nobody really knows what to do!
With that in mind, let’s see how markets have behaved in the wake of the Iranian rejection of the statement the Strait was open. Starting in equities, apparently, Asian investors didn’t care as we have seen gains in Tokyo (+0.6%), China (+0.6%), HK (+0.7%) and Korea (+0.4%). In fact, if I look across the entire region, the only notable decline was in Indonesia, and that was only -0.5%. Otherwise, generally speaking, equity investors in the region are sanguine about the current situation. This seems a bit odd to me as Asia is the region that is most negatively impacted by everything going on, but then, I’m just an FX guy.
In Europe, though, things are not as happy with all major indices lower this morning. Germany (-1.4%), Italy (-1.4%), Spain (-1.4%) and France (-1.2%) have set the tone while the UK (-0.8%) is not quite as negatively impacted. I continue to read a great deal about the European rearmament efforts, but net, it doesn’t appear investors are flocking to the continent right now. Uncertainty as to energy availability remains a key impediment, at least in my mind, with respect to a strong investment thesis here. As to US futures, despite the Iranian denial regarding the Strait, the major indices are only lower by -0.6% across the board.
In the bond market, Treasury yields have edged higher by 2bps since Friday, but as you saw above, remain essentially unchanged from last week. European sovereign yields are higher by between 3bps (Germany) and 6bps (Italy) as concerns continue apace regarding the future for European inflation as well as economic activity. JGB yields slipped -2bps overnight amid news that the BOJ is reportedly not considering a rate hike at their meeting next week. In addition, I must note a strong earthquake, measuring 7.4 on the Richter Scale, occurred a few hours ago, so we shall watch closely for how things evolve. Recall it was Fukushima that set off the European madness to end their nuclear power efforts. Hopefully, regardless of the outcome, nothing so incredibly stupid will come of this.
In the commodity space, oil (+5.9%) is obviously higher, but not even back to $90/bbl. There are many conflicting narratives regarding the availability of oil, how much is in storage, how much inventory is around and whether we are going to see production increases outside the Middle East. No market is more directly impacted by the Strait than oil, and since we have no idea how that will evolve, it is hard to see into the near future. Ultimately, I remain of the view that there is loads of oil around and over time, it will come to market keeping prices in check. But it is going to be a bumpy ride. Turning to metals, as has been the case lately, oil and gold (-0.9%) have maintained their negative correlation with the barbarous relic taking silver (-1.7%) and copper (-1.5%) along for the ride.
Finally, the dollar remains an afterthought to traders right now, barely moving against most of its counterparts as the opportunities elsewhere for outsized gains remain far larger. Looking across the major currencies, they are all within 0.2% of Friday’s close, although the direction is uniform with a modest dollar rally.
On the data front this week, perhaps the most interesting thing will be Fed Chair nominee, Kevin Warsh, and his senate confirmation hearings. But here is what the data looks like.
Tuesday
Retail Sales
1.4%
-ex autos
1.4%
Control group (ex-gasoline)
0.2%
Business Inventories
0.3%
Thursday
Initial Claims
212K
Continuing Claims
1820K
Flash Manufacturing PMI
52.5
Flash Services PMI
50.0
Friday
Michigan Sentiment
47.6
Source: tradingeconomics.com
Much has been made lately about the dichotomy between the Michigan sentiment survey printing its lowest level in the 84-year history of the index while the S&P 500 is making new, all-time highs. As I mentioned at the top, what should we believe?
If pressed, my own view is that the US is going to increase the military activity, but that oil prices are already anticipating that action. Much will depend on the success of that situation which remains unknown although I remain positive regarding our military’s capabilities to complete their mission. That will define risk appetite, which I anticipate would be reduced initially, although any signs of success would see that reverse. But again, I’m just an FX guy, so take it for what it’s worth.
Good luck
Adf
PS, this is where I have been the past several days which prevented (?) me from writing, if you care.
fxpoetry 