Monthly Archives: November 2025

A Day to Give Thanks

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Today is a day to give thanks
To those who flew planes and drove tanks
In multiple wars
And too many tours
No matter which service or ranks
 
Now, turning to markets at hand
The bulls, yesterday, had command
So, risk assets rose
While pundits compose
A narrative, things are just grand

 

It was certainly a positive day in markets yesterday, with equities and commodities rising sharply while bonds sat in the corner with the dollar, neither one trying to rain on the parade.  The imminent end of the government shutdown had everyone feeling euphoric.  But that is so yesterday. It appears that reopening the US government is not enough to keep global markets rallying.

And the thing is, there is just not that much new of note to discuss this morning.  As it is Veteran’s Day here in the US, banks and the bond market are closed, although equities and commodities markets are open.  But the news cycle overnight was led by the fact that Softbank sold their NVDA stake for a $5.8 billion profit.  And that’s pretty thin gruel for someone who writes about market activities.  Everything else is about who won/lost regarding the shutdown and frankly, that is something markets tend to ignore.

With that in mind, and given the absence of any substantive data, let’s go right into market activity overnight.  Asian equity markets were mixed although I would say there was more red (Japan, China, Taiwan, Australia, Indonesia, Thailand, Philippines) than green (HK, Singapore, Malaysia, Korea, India) but it appears most of the activity had limited volumes and there are few stories of note as drivers.  

In Europe, though, things are looking better with all the major bourses higher this morning, led by the UK (+0.8%) where bad news was good for stocks as the Unemployment Rate ticked higher, to 5.0%, which has markets now pricing an 80% probability of a rate cut by the BOE next month.  This has been enough to help most European markets higher (CAC +0.65%, IBEX +0.5%) except for the DAX (0.0%) which is lagging after the ZEW Sentiment Index was released at a weaker than forecast 38.5, which was also down from last month’s reading.  

I think it might be worthwhile, though, to take a longer-term perspective on this sentiment survey.  As you can see from the chart below (data from ZEW.de), the current level is very middle of the pack.  In fact, the long-term average reading is 21.3, but of course, that includes numerous negative readings during recessions.  I might argue that things in Germany are not collapsing, but nowhere near robust.  My concern, if I were a German policymaker, is that it appears the survey has peaked at a much lower level than history, an indication that the best they can hope for is still mediocre.

Finally, US futures are pointing slightly lower, -0.2% or so, at this hour (7:50), arguably a little hangover from yesterday.

In the bond market, of course, Treasury yields aren’t trading, but European sovereigns are essentially unchanged as well, except for UK Gilts, which have seen yields slip -7bps on that higher Unemployment data driving rate cut expectations.  Given the ongoing fiscal issues in the UK, where they cannot seem to come up with a budget and all signs point to a worsening debt position, I’m not sure why yields there would decline, but that’s what’s happening.

Turning to the commodity markets, oil (+0.5%) continues to trade either side of $60/bbl, making no headway in either direction.  I listened to an excellent podcast yesterday with Doomberg, who once again highlighted his view that the long-term direction of the price of oil is lower.  The case he makes is that on an energy basis, NatGas, even though it is up 48% in the past year, remains significantly cheaper than oil, one-quarter the price, and that the arbitrage will close driving the price of oil lower and the price of NatGas higher.  Remember, politics is far more impactful on oil drilling than geology.  Ask yourself what will happen to the price of oil if Venezuela’s government falls and is replaced by a pro-US government allowing the oil majors in to help tap the largest oil reserves on the planet.  I assure you that is not bullish for the price of oil.

As to the metals markets, after yesterday’s very impressive moves, they are continuing higher this morning, at least the precious metals are with gold (+0.5%), silver (+0.8% and now over $50/oz) and platinum (+0.75%) all extending their gains.  These are the same charts in the metals, and my take is we had a blowoff run which has now corrected, and we could easily see another leg higher of serious magnitude.

Source: tradingeconomics.com

Finally, the dollar is mostly drifting lower this morning, although not universally so.  While the euro (+0.15%), CHF (+0.6%) and Scandies (NOK +0.6%, SEK +0.4%) are all firmer, the pound (-0.2%) and Aussie (-0.2%) are suffering a bit.  Yen is unchanged along with CAD.  In the EMG bloc, it is also a mixed bag with INR (+0.25%) and PLN (+0.25%) having solid sessions although KRW (-0.6%) is going the other way and the rest of the bloc is +/- 0.1% or so different.  Again, the dollar is just not that exciting in its own right.

There is a new data point coming out, ADP Weekly Employment change, seemingly in an effort to fill in gaps until the BLS gets back to work.  However, given its newness, it is not clear what value it will have to markets.  There is also a speech by Governor Barr but tomorrow is when the Fedspeak really hits.

It is shaping up to be a quiet day, and I suspect absent a major equity move, or some White House bingo, FX markets are going to drift nowhere of note.

Good luck

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Like a Fable

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It seems there’s a deal on the table
To end the shut down and enable
The chattering classes
To force feed the masses
A story that’s quite like a fable
 
Both sides will claim they have achieved
Their goals, though they were ill-conceived
But markets will love
The outcome above
All else, and we’ll all be relieved

 

While the shutdown is not technically over as the House of Representatives need to reconvene (they have been out of session since September 19th when they passed the continuing resolution) and adjust the bill so that it matches the one the Senate agreed last night and can be voted on in the House, it certainly appears that the momentum, plus President Trump’s imprimatur, is going to get it completed sometime this week. 

The nature of the deal is unimportant for our purposes here and both sides will continue to claim that they were in the right side of history, but the essence is that there appeared to be some movement on health care funding so, hurray!

As you can see in the chart below, while the story broke late yesterday afternoon and futures responded on the open in the evening session, the reality is the market sniffed out something was coming around noon on Friday.  In fact, the S&P 500 has rallied 2.4% since noon Friday.

Source: tradingeconomics.com

So, everything is now right with the world, right?  After all, this has been the major topic of conversation, not just by the talking heads on TV, but also in markets as analysts were trying to determine how much damage the shutdown was doing to the economy.  While I have no doubt that there were many people who felt the impact, my take is there were many, many more who felt nothing.  After all, the two main features were air travel and then SNAP benefits.  Let’s face it, on average (according to Grok) about 2.9 million people board airplanes in the US, well less than 1% of the population, although SNAP benefits, remarkably, go to 42 million people.  However, those have only been impacted for the past week, not the entire shutdown.

I’m not trying to make light of the inconveniences that occurred, just point out that from a macroeconomic perspective, despite the fact that the shutdown lasted 6 weeks, it probably didn’t have much of an impact on the statistics as all the money that wasn’t spent last month will be spent next month.  Different analyst estimates claim it will reduce Q4 GDP by between 0.2% and 0.5% with a concurrent impact on the annual result.  I am willing to wager it is much less.  However, it appears it will have ended by the end of the week and so markets are back to focusing on other things like AI, unemployment and QE.

Now, those three things are clearly important to markets, but I don’t think there is anything new to discuss there today.  Rather, I would like to focus on two other issues, one more immediate and one down the road, which may impact the way things evolve going forward.

In the near term, as winter approaches, meteorologists are forecasting a much colder winter in the Northern Hemisphere across both North America and Europe, something that is going to have a direct impact on NatGas.  Bloomberg had a long article on the topic this morning with the upshot being that the Polar Vortex may break further south early this year and bring a lot of cold weather along for the ride.  This is clearly not new news to the NatGas market, as evidenced by the fact that its price has exploded (no pun intended) higher by 43% in the past month!

Source: tradingeconomics.com

While oil prices have remained stuck in a narrow range, trading either side of $60/bbl for the past 6 weeks amid a longer-term drift lower as you can see in the below chart, oil is only utilized by ~4% of homeowners for heating with 46% using NatGas.

Source: tradingeconomics.com

Ultimately, I suspect that we are going to see this feed through to inflation as not only are there the direct costs of heating homes, but NatGas is also the major source of generating electricity, with 43% of the nation’s electricity using that as its source.  We have already seen electricity prices rise pretty sharply over the past months (I’m sure you have all felt that pain) and if NatGas prices continue to climb, that will continue.  Remember, the current price ~$4.45/MMBtu is nowhere near significant highs like those seen just 3 years ago when it traded as high as $10/MMBtu.  With all this price pressure, will the Fed continue down their path of rate cuts?  Alas, I believe they will, but that doesn’t make our lives any better.

Which takes me to the second, longer term issue I wanted to mention, European legislation that is seeking to effectively outlaw the utilization of cash euros.  This substack article regarding recent Eurozone legislation is eye-opening as the ECB and Europe try to combat the coming irrelevance of the euro.  For everyone who either lives in Europe or does business there, I cannot recommend reading this highly enough.  There are many changes occurring in financial architecture, and by extension financial markets.  Keep informed!

Ok, enough of that, let’s see how markets have responded to the Senate deal.  Apparently, US politics matters to the entire global equity market.  Green is today’s color with Japan (+1.25%), HK (+1.55%) and China (+0.35%) all performing well, although not as well as Korea (+3.0%) which really had a good session.  Pretty much all the other regional markets were also higher.  In Europe, the deal has everyone excited as well with gains across the board (Germany +1.8%, France +1.4%, Spain +1.4%, UK +1.0%).  As to US futures, at this hour (7:45) they are higher by about 1% across the board.

I guess with that much excitement about more government spending, we cannot be surprised the yields have edged higher.  This morning Treasury yields are up by 3bps, which is what we saw from JGB markets last night as well, although European sovereign yields are little changed on the day.  I suspect, though, if equities continue to rally, we will see yields there edge higher.

In the commodity space, oil (+0.5%) continues to trade in its recent range.  The most interesting thing I saw here was that the IEA is set to come out with their latest annual assessment of the oil market and for the first time in more than a decade they are not going to claim that peak fossil fuel demand is here or coming soon.  The climate grift is truly breaking down.  But the commodity story of the day is precious metals which are massively higher (Au +2.5%, Ag +3.3%, Pt +2.6%) with copper (+1.6%) coming along for the ride.  The narrative here is that with the government shutdown due to end soon, President Trump talking about $2000 tariff rebate checks and the Fed likely to cut rates in December (65% probability), debasement is with us and metals is the place to be!

Interestingly, the dollar is not suffering much at all despite the precious metals story.  While AUD (+0.6%), ZAR (+0.6%) and NOK (+0.6%) are all stronger on the commodity story, the euro is unchanged, JPY (-0.4%) continues to decline and the rest of the G10 is not doing enough to matter.  In truth, if I look across the board, there are more currencies strengthening than weakening vs. the greenback, but overall, at least per the DXY, the dollar is little changed.

There is still no data at this point, although it will start up again when the government gets back to work.  Actually, there has been much talk of the weakness in Consumer sentiment based on Friday’s Michigan Index which fell to 50.3, the second lowest in the history of the series with several subindices weakening substantially.  However, that was before the news about the end of the shutdown, so my take is people will regain confidence soon.  As well, we hear from 9 Fed speakers this week, with 5 of them on Wednesday!  Both dissenters from the October meeting will speak, so perhaps things have changed in their eyes, but I doubt it.

At this point, all is right with the world as investors anticipate the US government getting back to work while the Fed will continue to support markets by easing policy further.  In truth, the dollar should not benefit here, but I have a feeling that any weakness will be short-lived at best.  Longer term, I continue to believe the dollar is the place to be.

Good luck

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Cracks Have Shown Through

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A shift in the narrative view
On AI has started to brew
What folks had thought certain
From behind the curtain
Seems like, now, some cracks have shown through
 
For stock markets, this is bad news
‘Cause AI has been the true fuse
Of recent price action
And any distraction
Could well, bullish thoughts, disabuse

 

While equity markets around the world continue to trade near record highs which were set just weeks ago, there has been a subtle change in the narrative, at least based on my perusal of FinX.  Although there are still many in the ‘buy the dip’ camp who strongly believe that it is different this time and AI is the future, there has been an increase in the number of voices willing to say that things have gone too far.  One of the stories getting a lot of press is the fact that Tesla’s shareholders voted to give Elon Musk a pay package that could amount to $1 trillion if the company meets its milestones over the next 10 years, including having the company’s market cap rise to $8.5 trillion from the current $1.5 trillion.  This certainly has a touch of excess attached to it.

But more broadly, I couldn’t help but notice this graph, originally created by the Dallas Fed, but more widely disseminated by the FT showing the potential future of AI’s impact on humanity.  Under the standard of a picture is worth a thousand words, I might argue the information in this picture falls some 985 words short.  Rather, they simply could have said, ‘AI could be amazing, it could be catastrophic, or it might not matter at all.’ 

However, aside from the inanity of this chart, and more importantly for those paying attention to markets and their portfolios, things look a bit different.  There has been a lot of discussion regarding the everything bubble which has been led by the massive increase in value of the Mag7 stocks.  Recently, it set some new valuation records with the Shiller CAPE (Cyclically Adjusted Price Earnings) ratio now trading at its second highest level of all time, at 41.2, exceeded only during the dotcom bubble of 2000.

Source: @DavidBCollum on X

Added to this is the fact that only about half the companies in the S&P 500 are trading above their 200 day moving averages, a key trend indicator, which implies that the uptrend may be slowing, and the fact that we have had seven down days in the past eight sessions (and US futures are lower this morning by -0.2% as I type at 7:15) indicates that perhaps, a correction of some substance is starting to take shape.

Source: tradingeconomics.com

As of this morning, the S%P 500 is merely 3% below the highs seen on October 29th, so just a week ago.  The conventional description of a correction is a 10% decline, and a bear market is a 20% decline.  I am not saying this is what is going to happen, but my spidey sense is really starting to tingle.

Source: giphy.com

Remember, I’m just a poet, and an FX one at that, so my takes on markets are just one poet’s views based on too many years in markets.  This is not trading advice in any way, shape or form.  But what I can say is, be careful with your investments, things are changing.

So, let’s move on to the overnight session to see how things played out following the selloff yesterday in the US.  Let me say this, it wasn’t pretty.  Pretty much all Asian markets were lower to end the week led by Korea (-1.8%) which has seen its market race higher than the NASDAQ this year, but there was weakness in Japan (-1.2%), China (-0.3%), HK (-0.9%), Taiwan (-0.9%) and Australia (-0.7%) with most other regional exchanges flattish to lower by -0.5%.  Given the tech story is critical to Asia overall, if that is starting to falter, we can expect these markets to slip as well.  Too, there was news from China showing its Trade Surplus shrank slightly, to $90.7 billion, but more ominously, exports actually declined -1.1% while imports rose only 1.0%.  Arguably, the reason President Xi was willing to make a deal with President Trump is because the domestic economic situation in China is troublesome and he knows that more trade problems will be a domestic nightmare for him.

In Europe, red is the dominant color on screens as well with the IBEX (-0.9%) leading the way lower, but the DAX (-0.9%), FTSE 100 and (-0.7%) and CAC (-0.5%) all fading as well and losses the universal story on the continent.  Now, we know that it is not a tech story since, arguably, Europe has no tech presence.  So the problems here are more likely a combination of following the global trend lower and ongoing soft Eurozone data implying that economic growth, and hence corporate profits, are going to continue to be weak.  With the ECB taking themselves out of the equation for now, claiming rates are at the correct level and turning their focus to the idea of a digital euro (which will never be important), if we continue to see the US market slip, you can be certain that European bourses will follow.

In the bond market, it is hard to get excited about anything right now as Treasury yields, which slipped a basis point yesterday, are higher by 1bp this morning.  We remain right at the level from the immediate aftermath of the FOMC meeting, which tells me that traders are awaiting the next major piece of news.  European sovereign yields are also higher by 1bp across the board with only the UK (+3bps) the outlier here today while JGBs overnight slipped -1bp following yesterday’s Treasury price action.

In the commodity space, both oil (+0.8%, but below $60/bbl) and gold (+0.5% but below $4000/oz) continue to trade in a range and basically have not moved anywhere of note over the past 2+ weeks as you can see in the chart below.

Source: tradingeconomics.com

There have certainly been some choppy moves, but net, nothing!  Silver (+1.0%) however, has gotten a boost after the US designated it a critical mineral implying government support.  It would not be surprising to see silver outperform gold for a while going forward.

Finally, the dollar remains an afterthought to markets.  The DXY rallied to above 100 briefly, but has now slipped back below that level into its multi-month trading range as per the below chart.

Source: tradingeconomics.com

Looking at the major currencies today, +/-0.2% describes the price action, which means nothing is happening.  The only notable difference is KRW (-0.7%, which has continued to decline on the back of growing outflows of capital, perhaps anticipating the flows that will come with Korea’s promises for investing in US shipbuilding and semiconductor manufacturing.  But the won has been tumbling since early July, down 8% in that period.

Source: tradingeconomics.com

And that’s really it this morning.  Looking at the KRW, though, we must really consider what I mentioned yesterday about the Supreme Court’s tariff ruling, whenever that comes.  If the tariffs are overturned, it’s not the repayment of those collected that is the issue, it is the change in the investment flows, and that will be a very good reason to turn negative on the dollar.  But until such time, while risk managers need to stay hedged, traders have carte blanche.  If tech stocks really do correct, a risk off scenario is likely to support the dollar, at least for a while.  Hopefully, that won’t be today’s outcome.

Good luck and good weekend

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Buy or Go Short?

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The question on tariffs today
Is what will the Court, Supreme, say
Will they agree Trump
Has power to pump
Up taxes with no Senate sway?
 
Or otherwise, will the top court
Decide to, Trump’s tariffs, abort?
And if they decide
That Trump is offside
Is it time to buy or go short?

 

As testament to the idea that no matter the shock to a system, if it is a dynamic system, it will manage to adapt to the new reality, today’s existential question is, what happens if the Supreme Court decides that President Trump’s tariffs are unconstitutional?  Let’s forget for a moment, the fact that they have generated approximately $200 billion in government revenue since their imposition and are forecast to generate upwards of $300 billion next year and $2.5 trillion in the next decade, at least according to the Tax Policy Center (see chart below from taxpolicycenter.org).  Obviously, this is a good chunk of change for a government that has been running $2 trillion annual deficits.

Rather, let us consider the features that have accompanied the tariff negotiations, notably the promised inward investment to the United States.  Although there are several figures that have been mooted, with President Trump claiming $10 trillion, it appears that a fair estimate of the number is half that, so $5 trillion, to be invested in the US, notably in manufacturing capabilities, over time.  That, my friends, is a lot of money.

Now, we all remember what happened when Mr Trump announced those tariffs on Liberation Day back in April, but here is a chart of the S&P 500 to remind us of the size of the initial decline in equity markets.

Source: tradingeconomics.com

The decline from the close on April 2nd to the low on April 7th was ~12%, at which point, things were put on hold for 90 days and a series of furious negotiations began.  But we saw similar dramatic moves across all markets.  For instance, 10-year Treasury yields fell 33bps during that time, before rebounding sharply.

Source: tradingeconomics.com

Oil also collapsed on the news, falling from nearly $72/bbl to $56/bbl in that stretch as the announcement shook up virtually all financial markets around the world.

Source: tradingeconomics.com

Perhaps the most surprising outcome was that the dollar actually fell about 3% during that period despite every economist and every textbook explaining that the impact of tariffs on currency markets would be that those countries whose goods were tariffed would see their currencies decline while the one imposing the tariffs would see strength.  (Yet another reason to pay little heed to economists and their theories which sound great but rarely seem to describe reality.)

Source: tradingeconomics.com

I highlight all this movement because the market behavior since then has been nothing but positive.  Equity markets have decided that things are great and rallied dramatically.  Bond markets have absorbed the information and decided it doesn’t matter that much or perhaps priced in the new revenue model as part of finding a new equilibrium around 4%.  Oil markets have other things about which to worry, with the current theme the alleged glut of oil that is around, and the dollar, while it continued to decline a bit further over the ensuing three months, has now seemingly found a bottom, and if anything looks like it is preparing to climb.

But…what if the tariffs must go?  And what if the government must repay those already collected?  If you recall, the narrative about tariffs back in April was that they were the end of the US economy and a disaster.  Obviously, that has not turned out to be the case.  Is the new narrative that the end of tariffs will be a disaster?  That feels like a pretty big reversal of opinion.    

To my thinking, one of the keys to the recent optimism for the US economy, at least for those who are optimistic, is that the inward investment is going to have very positive medium- and long-term impacts on the economy.  They are going to be critical in the reshoring of American manufacturing, whether Japanese investment into US Steel, or Korean investment into shipbuilding or Taiwanese investment into semiconductor manufacturing.  All these things are unalloyed positives for the nation and its future.  But if the tariffs are revoked, will the investments disappear?  That is the $5 trillion question, and one that I believe would be incredibly detrimental to both the nation and its financial markets.  Stocks would fall sharply and so would bonds as growth prospects would shrink and the fiscal imbalance likely grow even further.  The dollar would suffer between the capital outflows, and the fiscal problems and oil would likely fall amid a dramatic reduction in US demand.  Arguably, the only thing that would prosper would be gold, the historic safe haven.  

Which brings the question back to the Supremes (not these Supremes, although the sentiment is right!), will they unleash that chaos?  Or will they find a way to avoid it?  

With so much to consider, let’s do a brief twirl around the world overnight.  Yesterday saw a solid US equity rally across the board which was followed by strength throughout most of Asia (Nikkei +1.3%, Hang Seng +2.1%, CSI 300 +1.4%) with generally lesser gains elsewhere in the region.  Europe, though, is on its back foot with modest declines (UK -0.4%, Germany -0.1%, France -0.4%) after weaker than expected Construction PMI data across the board.  As to US futures, at this hour (7:00) they are very slightly firmer across the board, 0.1% or so.

In the bond market, yesterday saw US yields climb about 6bps after the ADP Employment data was released at a stronger than expected 42K with modest revisions higher to the previous months.  Remember, last month’s revisions lower were for an entire year, not specifically the past two months, so it appears that job growth is still decent, just not quite as strong as last year.  That data helped push yields up around the world, notably with JGB yields higher by 3bps.  But this morning, yields have backed off -3bps in the US and are unchanged across the entire continent and UK.  As to the UK, they left rates on hold at 4.0%, as expected, but the vote was 5 – 4 with 4 votes looking for a cut, so a more dovish signal.

In the commodity markets, oil (+0.8%) is rebounding after a decline yesterday based on a much larger than expected build in EIA inventories while NatGas also climbed on forecasts for colder weather and increased LNG demand in Europe and Asia.  Gold (+0.9%) and silver (+1.4%) continue their rebound from recent lows and seem like they are getting comfortable in their new “homes” of $4000 and $48.00 respectively.

Finally, the dollar is under modest pressure this morning, with the DXY slipping barely below the 100.00 level (currently 99.94) while the euro (+0.25%) and pound (+0.2%) both edge higher.  It appears that the dollar’s recent strength is on hold for today, although my take is it will resume shortly.  While a negative Supreme Court ruling on tariffs is likely to really undercut the greenback, I don’t see anything else in the near term to do the job.

There is no data of note to be released today, but we have an onslaught of Fed speakers, six in total starting at 11:00 this morning.  The Fed funds futures contract is now pricing just a 65% probability of a rate cut next month, as the ADP number encouraged some folks to change their views.  My take is we are going to hear a lot about caution given the absence of data, but I might contend the market is already somewhat cautious, at least the bond market is.

The thing about the tariff issue is it won’t be decided for at least several weeks, if not months, so may hang over the market like the Sword of Damocles.  I have no idea how they will rule, and the commentary from observers of the hearing gave different views based on their political biases, so it is hard to know.  But it is going to matter a lot.  In the meantime, I expect the recent trends to remain in place, so equity strength, little bond movement, little oil movement and dollar strength.

Good luck

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Turned to Sh*t

Posted on by

While headlines are all ‘bout elections
And some have discussed stock corrections
The dollar keeps climbing
As some think pump priming
By Jay will find no real objections
 
The punditry, though, remains split
One side claims things have turned to sh*t
The other side, though
Is really gung-ho
And weakness they will not admit

 

The Democrats had a good election, sweeping the big three races in NYC, NJ and Virginia and many down ticket ones as well.  One spin is this is all a vote against President Trump but given that those three venues are all heavily Democratic to begin with, that may be an exaggeration.  Of the three, my concern turns to NYC as having lived there prior to Mayor Rudy Giuliani’s cleanup of the city, I can tell you, things were not fantastic.  Mayor-elect Mamdani’s stated plans have failed every time they have been tried around the world and I suspect that will be the situation here as well. Alas, that will not prevent him from trying.  Ironically, regarding high rents, it is possible that the increased outmigration from the city by those in the center and on the right will reduce housing demand and arguably housing costs.  We will all watch as it unfolds.

But will that directly impact markets?  Of that I am far less concerned.  I read that JPMorgan already had more employees in Texas than NY prior to the election and given that the concept of a physical exchange has basically disappeared, trading can relocate quickly.  My take is, this will get the talking heads quite excited for a while but will have a minimal impact on markets.

Which takes us to yesterday’s price action and its drivers.  First off, one might have thought that we experienced another Black Monday based on some of the hysteria in commentaries, but in the end, US equity indices only fell between -0.5% (DJIA) and -2.0% (NASDAQ).  In fact, using the S&P 500, a look at the chart shows that the decline over the past several sessions amounts to just -2.3% there, hardly calamitous!

Source: tradingeconomics.com

I continue to read about the K-shaped economy with the massive split between the top 10% of income/wealth representing 87% of spending and enjoying life while the bottom 90% struggle immensely.  This has been made possible by the ongoing support of financial assets by the Fed (and other central banks) which has accrued to asset holders, i.e. the top 10%.  In fact, this is a far more likely rationale for Zoran Mamdani’s victory yesterday, he has promised to help those who are struggling by freezing rents, offering free stuff and taking over the grocery stores to remove the profit motive and lower prices.  And when it comes to elections, the bottom 90% have a lot more votes!

Here is as good an explanation of the forces driving this narrative as any:

While equity and asset prices continue to climb, the working class is finding life increasingly difficult as job opportunities seem to be shrinking.  This latter issue seems only to be exacerbated by the growth in AI spending and the announcements by numerous companies that they will be reducing staffing because of the efficiencies created by AI in their operations.

Arguably, the reason we have seen such a large dichotomy between analyst views is that some are focused on data that represents the bottom leg of the ‘K’ and see a recession around the corner, if not already upon us.  Meanwhile, others see the arm of the ‘K’ and see good times ahead.  Certainly, if we look at the broad-based GDP readings, at least based on the Atlanta Fed’s GDPNow forecast, Q3 was remarkably strong at real GDP growth of 4.0% annualized (see below chart).  Calling for a recession with that as backdrop is a very difficult case to make, in my view, but that won’t stop some analysts from trying.

Net, while nobody likes to see their portfolios’ value shrink, the declines so far have been very modest.  It is entirely reasonable to expect a correction of 10% – 15%, especially if we look at the chart at the top showing a 36% rally with limited drawdowns over the past 6 months.  It feels too early to panic.

And with that in mind, let’s see how markets behaved overnight.  Asian markets followed US ones lower with Tokyo (-2.5%) leading the way, although that was well off the early session lows which touched -4.0%.  Korea (-2.9%) and Taiwan (-1.4%) both suffered as well although the rest of the region was far less impacted.  Both China and HK were little changed and other gains and losses were on the order of +/-0.5% or less.  European bourses are all in the red as well this morning, although the one thing of which we can be sure is it is not related to the tech selloff given Europe has no tech industry of which to speak.  But Spain (-0.9%) and Germany (-0.75%) are both down despite reasonable Services PMI data from both nations and better than expected German Factory Orders (+1.1%).  UK equities are unchanged, and the rest of the continent is somewhere between unchanged and Spain.  Negative sentiment has clearly carried over, but there have been no strong reasons to sell aggressively.

In the bond market, Zzzzzz is today’s message.  Every major government bond is within 1bp of yesterday’s close, and yesterday’s price action was only worth 1bp to 2bps.  In fact, as you can see from the chart below, since the FOMC and Powell’s hawkish press conference, nothing has changed.  This is true from Fed funds futures as well, with a 71% probability still price for a December cut.

Source: tradingeconomics.com

In the commodity space, oil (-0.3%) seems to be lower every morning when I write, but continues to trade in a narrow range around $60/bbl.  Perhaps the most interesting thing I read this morning was Javier Blas’ op-ed in Bloombergregarding the rationale for a US-led regime change in Venezuela given it is the nation with the largest known oil reserves.  If you are President Trump and seeking to get oil prices lower, that could be a very effective source of the stuff.  As to the metals markets, yesterday saw a sharp decline in precious metals and this morning they are rebounding with both gold and silver higher by 0.9%.  Copper (+0.25%), too is rising a bit, although remains well off the highs seen when gold peaked.

Finally, the dollar continues to impress.  While this morning it is little changed against most of its counterparts, it is, apparently, consolidating its recent gains.  The DXY remains above 100.00, which many have seen as a key resistance level.  The pound (+0.2%) while bouncing slightly this morning is hovering just above 1.30, a level last seen on Liberation Day, and certainly appears to be working its way lower from its summer peak.  If I consider the fiscal problems and the energy policy in the UK, it is very difficult to expect a significant amount of demand for the pound.

Source: tradingeconomics.com

Elsewhere, ZAR (+0.4%) is responding to the rise in gold prices and otherwise, +/-0.2% is today’s trading story.  Over time, given the promised investments into the US based on trade deals that have been signed, I expect there will be consistent demand for the greenback.  And as I wrote yesterday, the idea of a two-currency world in the future cannot be dismissed.

We do have data today with ADP Employment (exp 25K), ISM Services (50.8) and then the EIA oil inventory data where limited net change is expected although the API data yesterday showed a large build of 6.5mm barrels.  Remarkably, there are no scheduled Fed speakers, but that story remains caution but a tendency toward cutting.

For all the election hype, I don’t perceive that things have changed very much at all.  Perhaps the Supreme Court hearings on the legality of President Trump’s tariffs are the real story today, but regardless of the hearings, no verdict will be rendered for many weeks.  Which leaves us with a world in which tech is still dominant in equity markets and the US is still dominant in tech.  With the perception of the Fed being somewhat more hawkish, I don’t see a good reason to sell dollars.

Good luck

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Filled With Chagrin

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The vibe in the market is fear
As equities get a Bronx cheer
Commodities, too
Most traders eschew
The dollar, though’s, getting in gear
 
So, what has the catalyst been
To drive such a change in the spin
No story stands out
But there is no doubt
Investors are filled with chagrin

 

Ladies and gentlemen, boys and girls, this morning things just feel bad.  As I peruse the headlines around the major publications, there is no obvious story that is driving today’s weakness in risk assets, but there is no mistaking the vibe.  Certainly, there are several issues outstanding that might be seen as a negative, but none of them are new.  

  • The government has been shut down for 35 days as of today, and it doesn’t sound like the Senate Democrats are ready to vote to reopen it.  Granted, the problems of the shutdown increase with time, but there has been no apparent change in tone for at least the past two weeks, so why is today the day when things look bad?
  • The war in Ukraine continues apace with no obvious timeline to ending, but this has been ongoing for nearly 4 years, so what is it about today that may have changed?
  • Concerns over fraud have increased after the recent bankruptcy filings by First Brands and Tricolor, as well as accusations by banks of other situations, but again, no new story broke overnight.
  • Perhaps it is the fact that today is Election Day in the US, and there is concern that Zoran Mamdani, a self-described Democratic Socialist, could become the next mayor of NYC, which given it is still home to so many financial markets, has those market participants unnerved.

Some days, it’s just not clear why markets move in the direction they do, and there can be far less dramatic drivers.  For instance, we have seen a major rally in equity markets, and risk assets in general, over the past 5 years, with an acceleration over the past 6 months and they are simply taking a breather.  Whatever the driver, the movement is clear.

Source: tradingeconomics.com

So, given the absence of obvious drivers to discuss, let’s simply recap the damage. After yesterday’s mixed session in the US, Asia was under significant pressure led by Tokyo (-1.75%) with HK (-0.8%) and China (-0.75%) slipping as well.  But Australia (-0.9%) fell after the RBA left rates on hold, as expected, although Governor Bullock sounded a touch more hawkish than expected, and the rest of the region saw almost universal weakness with Korea (-2.4%) the worst of the bunch, but declines everywhere (India, Taiwan, Indonesia, Singapore, Thailand) except New Zealand, which managed a small gain, to reach yet another record high, on solid earnings numbers from key companies.

Meanwhile, European bourses are all sharply lower as well (DAX -1.3%, CAC -1.2%, IBEX -1.1%) as the overall market vibe weighs on these markets, all of which recently traded at new all-time highs.  Ironically, the UK (-0.6%) is about the best performer despite a speech from Chancellor of the Exchequer, Rachel Reeves, which explained…well, it is not clear what it explained.  The UK has major budget problems and has discussed raising taxes, but given growth is lagging, there is a lot of pushback, even within the Starmer government, on that subject.  As with virtually every G10 economy, the government is spending far more than they take in and they don’t know how to address the deficit.  Unfortunately for the UK, the pound is not the global reserve currency and so they are subject to market discipline, unlike the US…so far.  But, in this space, US futures are all lower this morning, down -1.0% or so as I type at 7:10am.

Now, your first thought might be that bonds have rallied nicely on all this risk aversion, but while they have, indeed, moved higher (yields lower) I don’t know that nicely would describe the movement.  Rather, barely is a better description as 10-year yields are lower by -2bps in the Treasury market and between -1bp and -2bps in all European sovereign markets.  In fact, despite the weakness in Japanese stocks overnight, JGB yields are unchanged.  The message is, bonds are not that appealing, even if stocks aren’t either.

Turning to commodities, oil (-1.4%) is having a hard time this morning alongside the equity markets, with virtually all energy prices lower across the board.  Given there has been no announcement of a major energy breakthrough, this has the feel of growing concern over economic activity going forward.  With that in mind, though, WTI is still trading right around $60/bbl, which seems to be its “home” lately.

In the metals markets, gold (-0.15%) continues to trade around the $4000/oz level, which seems to be its new “home” as traders await the next catalyst in this space.  Silver (-0.3%) is similarly fixated on its level of $48/oz and seems likely to follow gold’s lead going forward.  However, copper (-2.3%) seems like it is more in sync with oil lately, as the two are both so intimately linked with economic activity and changes thereto.  It’s funny, despite the risk asset weakness, I have not seen anything new on a pending recession in the US, nor globally, although there continues to be a steady stream of analysts who have been explaining we are already in one.

Finally, the dollar is today’s winner, rising against every one of its counterparts except the yen (+.45%) which responded to a second round of verbal intervention from FinMin Katayama, who once again drew from the MOF seven-step playbook with a half-step overnight: “I’m seeing one-sided and rapid moves in the currency market. There’s no change in our stance of assessing developments with a high sense of urgency.”  

But away from the yen, it is merely a question of which currency looks worst.  The pound (-0.65%) has traded down to levels not seen since Liberation Day, as it appears the FX market did not take Chancellor Reeves’ comments that well.

Source: tradingeconomics.com

For those who view the DXY as the key indicator, it has traded above 100 for the first time since August, and I know many technicians are looking for a breakout here.  The fact remains that the Fed’s recent seeming mildly hawkish turn is out of sync with most of the rest of the world and will support the dollar for now.  Of course, the futures market is still pricing a 72% probability of a rate cut in December, so traders are taking the ‘hawkish’ comments by Chair Powell at the press conference last week with a grain or two of salt.  In fact, one of the things weighing on the pound is the idea that the BOE may cut this week despite still high inflation.

But wherever you look in this space, the dollar is sharply higher.  ZAR (-1.0%), NOK (-0.9%), MXN (-0.85%) and SEK (-0.9%) lead the way, but declines of -0.5% are rampant across all three regional blocs.  Today is a straight up dollar story.

And that’s all we have today.  Yesterday’s ISM data was a touch weaker than forecast, and last month, slipping to 48.7 with Prices Paid (58.0) slipping as well.  Weirdly, the S&P PMI was a better than expected 52.5, rising from last month and beating expectations.  It seems a mixed message.  Yesterday’s Fed speakers didn’t tell us anything new, with Governor Cook explaining that December is a “live” meeting.  I’m not sure what that means.  Is the implication they may not cut there?  That would not go down well in either markets or the White House.

Given how far equity prices have come in the past 6 months, it would not be a surprise to see a more substantial pullback.  In fact, it would be healthy for the market to remove some of the excesses that abound.  The fraud stories are concerning as they tend to flourish at the end of bull markets, and while they are not yet flourishing, they are starting to become more common.  In the end, while I expect the Fed will cut in December, and then again in January, I don’t see a reason for the dollar to decline sharply.

Good luck

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Woes and Scraps

Posted on by

The PMI data is in
And so far, it’s not really been
A sign of great strength
When viewed from arm’s length
No matter the punditry’s spin
 
That said, we are not near collapse
Despite many trade woes and scraps
And stocks keep on rising
So, t’will be surprising
For all when we see downside gaps

 

It was a quieter weekend than we have seen recently in the global arena with no new wars, no mega protests and no progress made on any of the major issues outstanding around the world.  Thus, the US government remains shut down, the war in Ukraine remains apace and the AI buzz continues to suck up most of the oxygen when discussing markets.

With this as background, arguably the most interesting market related news has been the manufacturing PMI data released last night and this morning.  starting in Asia, the story was some weakness as Chinese, Korean and Australian data all fell compared to last month, although India and Indonesia continued along well.  Meanwhile, in Europe, the data improved compared to last month, but the problem is it remains at or below 50 virtually across the board, so hardly indicative of strong economic activity.

                                                                                                      Current         Previous               Forecast

Source: tradingeconomics.com

I don’t know about you, but when I look at the releases this morning, I don’t see a European revival quite yet, not even if I squint.

I guess the other thing that has tongues wagging is Election Day tomorrow with three races garnering the focus, gubernatorial contests in New Jersey and Virginia and the mayoral race in New York City.  The first two are often described as harbingers of a president’s first year in office and I think this time will be no different.  But will they impact market behavior?  This I doubt.

So, let’s get right into markets this morning.  Friday’s further new record highs in the US were followed by strength through much of Asia (Tokyo was closed for Culture Day) with China (+0.3%), HK (+1.0%), Korea (+2.8%) and Taiwan (+0.4%) leading the way with only the Philippines (-1.7%) bucking the regional trend as earnings growth in the country continues to disappoint relative to its peers around the region.  Europe, too, has seen broad based gains with the DAX (+1.2%) leading the way higher and gains in the IBEX (+0.45%) and CAC (+0.3%) as well.  I guess the PMI data was sufficient to excite folks and despite Europe’s status as a global afterthought, at least in terms of geopolitical issues, their equity markets have been rising alongside the rest of the world’s all year.  And you needn’t worry, US futures are all higher at this hour (6:50), with the NASDAQ (+0.7%) leading the way.

Perhaps more interesting than equities though is the fact that government bond markets are doing so little.  Treasury yields jumped ~10bps in the wake of the FOMC meeting and, more accurately, Chairman Powell’s ostensible hawkishness.  However, as you can see in the below tradingeconomics.com chart, since then, nothing has happened. 

Recall, the probability of a December rate cut by the FOMC also fell from virtual certainty to 69% now.  In fact, if you think about it, that 30% probability decline translates into about 7.5bps, approximately the same amount as 10-year yield’s rose.  It appears that the market is consistent in its pricing at this point, and when (if?) data starts coming back into the picture, we will see both these interest rates rise and fall in sync.  As to European sovereigns, they continue to track the movement in the US and this morning, this morning, the entire bloc has seen yields edge higher by 1bp, exactly like the US.

Commodities remain the most interesting place, although the dollar is starting to perk up a bit.  Oil (-0.3%) slipped overnight after OPEC+ indicated they were increasing production by another 137K bbl/day, although there would be no more increases for at least three months given the seasonality of reduced oil demand at this point on the calendar.  Something I have not touched on lately is NatGas, which traded through $4.00/MMBtu late last Thursday, and is now up to $4.25.  in fact, in the past month it has risen nearly 27%, which given it is massively underpriced compared to oil (on a per unit of energy basis) should not be that surprising.  Nonetheless, sharp movements are always noteworthy, and this is no different.

Source: tradingeconomics.com

Certainly, part of this is the fact that winter is coming and seasonal demand is rising in the US. 

Combine that with the European needs for LNG, of which the US is the largest provider, and you have the makings of a rally.  (I wonder though, did the fact that Bill Gates changed his tune on global warming no longer being an existential threat signal it is now OK to burn more fossil fuels?)

Turning to the metals markets, the ongoing fight between the gold bugs and the powers that be continues as early in the overnight session, gold was lower by nearly -1% but as I type, just past 7:00am, it is slightly higher (+0.1%) compared to Friday’s closing levels.  Silver (+0.1%) has seen similar price action although copper (-0.5%) appears more focused on the economic story than the inflation story.  

Which takes us to the dollar and its continued rally. Using the DXY (+0.1%) as our proxy, it is higher again this morning and pushing back to the psychological 100.00 level.  Now, I have made the case several times that the dollar has done essentially nothing for the past six months, and the chart below, I believe, bears that out.  We have basically traded between 96.5 and 100 since May.

Source: tradingeconomics.com

You will also recall that there is a narrative around about the end of the dollar’s hegemony and how nations around the world are trying to exit the USD financial system that has been in place since Bretton Woods, or at least since the fiat currency world took off when President Nixon closed the gold window.  And there is no doubt that China is seeking to become the global hegemon and thus wants a renminbi-based system to use to their advantage.  However, let’s run a little thought experiment. 

The Trump administration has embraced the cryptocurrency space, and especially the use of stablecoins.  Legislation has been passed (GENIUS Act) to help clarify the legal framework and the SEC has been solicitous in its willingness to ensure that these creations are not securities, thus placing them outside the SEC’s oversight.  When looking at the world of stablecoins, their current total value is approximately $311 billion (according to Grok) of which only ~$1.2 billion are non-USD.  

Now, if stablecoins represent the payment rails of the future, an idea that is readily believable, and the stablecoin market is virtually entirely USD, with massive first mover advantage, is it not possible that economies around the world are going to find it much easier to dollarize than to maintain their own native currency?  While there are calls for Argentina to dollarize, what would the world look like if the EU fell apart (an entirely possible outcome given the inconsistencies in their current energy and immigration policies and the stress within the bloc) and the euro with it?  Would smaller nations opt for their own currency, or would they see the value of having a dollarized economy given the many efficiencies it would present, especially for their export industries?

While I have no doubt that China will never accept that outcome for themselves, is the future a world where there are two currency blocs, USD and CNY, and everything else simply disappears?  Remember, we are merely spit balling here, but if that is the outcome, demand for dollars will continue to rise, and the value of other currencies will continue to decline until such time as they succumb.

Again, this is a thought experiment, but one that offers intriguing possibilities for the future.  And one where the foreign exchange market may ultimately meet its demise.  After all, if there are only two currencies, that doesn’t make much of a market.

One other thing I must note, in the stablecoin realm, there is a remarkable product, USDi (usdicoin.com), which tracks US CPI exactly, yet can fit within those same payment rails.  If you are looking into this space, USDI is worth a peek.

Ok, back to the markets, looking across the FX space, +/-0.2% is today’s theme virtually across the board, with the more important currencies slipping against the dollar (EUR, GBP, JPY, CHF, CAD) than rising vs the greenback (MXN, CLP, NOK, CZK), although the magnitudes are similar.

With the government still closed, there is no official data, but we do get ISM Manufacturing (exp 49.5) with the Prices Paid subindex (61.7) released at the same time.  There are two Fed speakers today, Daly and Cook, and then 9 more speeches throughout the week.  We also get the ADP Employment data on Wednesday (exp 24K), but I imagine that will get more press after the election results are learned Tuesday evening.

It is hard to get excited about things today, but nothing points to a weaker dollar right now.

Good luck

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