It’s been fifty years to the day
Since Nixon brought havoc our way
He slammed down the sash
Where gold swapped for cash
That’s led to today’s disarray
Given the importance of this event, although it is often overlooked, I felt I had to mention the anniversary. In truth, it was yesterday, August 15, 1971, when President Nixon closed the gold window, ending the Bretton Woods agreement that insured (allowed?) every nation to convert their dollars to gold and ushered in the current framework of fiat currencies. Prior to his action, the global monetary system was based on the value of gold, which was exchangeable into US dollars (or perhaps the other way around) at $35.00/oz. Each nation’s gold sat in cages in the vault at the Federal Reserve Bank of NY and would literally be physically moved from cage to cage in order to satisfy national debts amongst the countries. The problem for the US was that most of the movement was out of the US cage into other countries’, which represented the massive trade and current account deficits the US was running. So, Nixon essentially told the world, holding dollars was the only choice.
Of course, the fiat currency regime has evolved into the current situation where the ability to print money is endless, and every government is happy for it to never end. The strictures of a gold-backed currency are far too confining for the social programs deemed essential by virtually every government in the world today, which is why we will never go back. The real question is, what lies ahead?
The ructions in China persist
As data last night, forecasts, missed
And President Xi
Continues to see
More targets that he can blacklist
As to the markets today, the single biggest story has been the release of Chinese data at significantly worse than expected levels. The key figures showed Retail Sales (8.5%, exp 10.9%), IP (6.4%, exp 7.9%) and Fixed Asset Investment (10.3%, exp 11.3%). The disappointing outcome has been attributed to the spread of the delta variant of Covid which has not only resulted in the closure of some key infrastructure points, notably two busy ports, but also weighed on many peoples’ willingness to travel during the typically busy summer vacation season. Given the Chinese propensity for draconian measures in their effort to stop the spread of the virus, people are concerned they will get stuck some place with no ability to return home if there is a sudden lockdown.
The Wall Street response was immediate, with a number of economic forecasts for China taken lower by between 0.5%-0.7% for 2021 as a whole. In addition, greater attention has been paid to the Chinese credit impulse (the amount of credit that is flowing into the economy from the banking system) which has been slowing rapidly since a peak in October. This statistic tends to lead the Chinese economy’s performance by between 6 and 12 months, so it should be no surprise we are starting to see reduced output there.
Interestingly, despite the slowing growth story, the Xi government continues to attack its bellwether tech firms, the ones that have been growing the fastest. It is becoming increasingly evident that President Xi is perfectly willing to sacrifice economic growth in an effort to consolidate his power even further. Last night we again saw key government editorials about the evils of online gaming and how it should be curtailed even further. Alibaba, one of the largest and most successful Chinese internet companies, remains squarely in Xi’s sights as he brings every potential threat to heel. In the end, this is unlikely to help the Chinese economy writ large which from this poet’s perspective means we are likely to see a very gradual depreciation in the yuan as the currency market becomes a relief valve for domestic economic pressures.
The only other headline news has been the fall of Kabul to the Taliban in a remarkably swift 72 hours, with numerous stories about the evacuation as well as the political failures that led to this outcome. Perhaps this is the impetus for today’s risk reduction, or perhaps it is the China story, or simply the ongoing spread of the delta variant; but whatever the reason, we are definitely seeing a bit of risk-off attitude across markets.
For instance, equity screens are all red with Asia ((Nikkei -1.6%, Hang Seng -0.8%, Shanghai 0.0%) and Europe (DAX -0.6%, CAC -1.0%, FTSE 100 -1.1%) clearly under pressure. I’m sure Friday’s very weak Michigan Sentiment number (70.2, weakest since 2011) did not help anyone’s mood, and despite the fact that all three major US indices crept higher on the day Friday, by 0.1% or less, to new record highs, this morning all three are pointing lower by about -0.3%.
Bonds though are a bit more circumspect here, as while Treasury yields have edged lower by 0.3bps, all of Europe’s sovereign markets are selling off with yields rising. Perhaps, investors have decided that the situation is so dire they don’t want any European paper at all! So, bunds (+1.0bps), OATs (+1.4bps) and Gilts (+1.2bps) are all lower along side their respective equity markets.
Commodities, too, are softer this morning led by oil (-1.35%) and gold (-0.2%) with base metals (Cu -1.6%, Al -0.2%, Sn -0.3%) falling as well. In fact, the only part of this bloc holding up is foodstuff, where the big three, corn, wheat and soybeans are all firmer.
Where, you may ask, is everybody putting their money if they are selling both stocks and bonds? It seems the dollar is finding support against most currencies, except for the havens of JPY (+0.25%) and CHF (+0.2%). Otherwise, the rest of the G10 is softer vs. the dollar, notably the commodity bloc where AUD (-0.5%), NOK (-0.45%) and CAD (-0.3%) are the laggards. Similarly, in the EMG bloc, it is the commodity currencies that are under the most pressure with RUB (-0.3%), ZAR (-0.2%) and PHP (-0.35%). In fact, the only currency with gains is TRY (+0.6%) which continues to benefit from the highest real yields on the planet.
The data story this week brings Retail Sales and Housing data as well as the FOMC Minutes on Wednesday.
Retail Sales and the FOMC Minutes are likely to get the most attention, although any really big miss, like Friday’s Michigan data, could lead to further movements, so beware. As well we hear from a few Fed speakers, with Chairman Powell talking tomorrow, but the subject does not appear to be the economy, then uber-dove Kashkari and his counterpart, the hawkish Kaplan later in the week.
At this point, risk remains under pressure and I sense that it has some room to run lower. It has been more than 9 months since there has been a 5% drawdown in the equity market, an inordinately long period of time for pressures to build up. This is not to say that a drawdown is coming, just that there is real instability underlying the market, so one is very possible. And I sense that this risk-off event would be classic with the dollar gaining real ground against virtually everything.
Good luck and stay safe