Though war in Iran keeps on going
The impact is not really showing
Risk assets seem fine
And oil’s benign
So, bubbles still need some more blowing
As I often say, markets are perverse and recent price action is a perfect example of this reality. As the US struck Iranian targets for the 10th consecutive day, and risk appetite during yesterday’s US session clearly waned such that all three major indices closed slightly in the red after solid openings, it was easy to expect a continuation of a risk-off attitude this morning. But as you can see from the tradingeconomics.com screenshot below at 6:45 this morning, only Australia last night did not get the memo.
So, for now, it appears that everything is just fine. The big banks all reported blow-out earnings last week and next week we are looking forward to the big tech names’ earnings reports. Now, recent price action has shown that companies that miss their estimates are punished severely, so there is ample opportunity for more fireworks this week. But so far, a look at the chart of the NASDAQ below shows the line in the sand that must hold in many market technicians’ eyes to keep the party going, and it continues to hold.
Source: tradingeconomics.com
It’s funny, yesterday afternoon I was considering buying some QQQ puts as my concern was that we were about to break down and a 5%-8% correction would be quite reasonable. My read on the sentiment was turning decidedly negative, although I didn’t pull the trigger, deciding to wait for the actual break before acting. And last night I wrote the following limericks, expressing my sense of things.
The mood is decidedly iffy
With stock market bulls getting miffy
And now we’ve heard calls
For much further falls
With bears’ attitudes, oh so sniffy
So, two things have risk-takers tense
The first is the increasing sense
That war in Iran
Has no master plan
And may cause, more problems, immense
The second is whether AI
Has peaked, or has further to fly
If we’ve seen the top
The ensuing drop
Will bring a Wall Street hue and cry
In fact, I think it is instructive to help understand just how quickly sentiment can change without any obvious catalyst. For the life of me, reading through the headlines this morning, there is nothing I have seen that would cause me to believe things are so much better today than at the close yesterday. But perhaps this is a case of less market activity allowing a bit more volatility in markets. After all, it is summer and there are many market participants on vacation on any given day. According to Grok, in the past 5 trading sessions, average volume for NASDAQ shares was about 7.6 billion, but as large as that is, it is well below the YTD average of around 9.0 billion. In reduced volume markets (no matter how large they are) there can be large, unexplained moves based on individual flows. I’m grasping at straws here!
Regardless, this is where we stand this morning. There are headlines dueling between further military action and further efforts at peace talks, with markets clearly preferring the latter rather than the former. Oil prices (+0.9%) remain within their recent range although are creeping higher this morning. Is this a prelude to a move back to $100/bbl?
Source: tradingeconomics.com
The problem with that story is that there continues to be a massive supply of crude oil around. And Ukraine’s success in attacking Russian refineries has actually brought more crude to market as the Russians can no longer refine their own in the same volumes thus are shipping it to anyone who will buy it.
Products, though, are a different story as the lack of refining capacity (US refiners are running at about 98% capacity) has led to record high crack spreads. (The crack spread is the value of the products created from crude; gasoline, jet fuel and diesel largely, compared to the price of a barrel of crude. The higher that spread the more profitable the business is for refiners, and the more we pay at the pump). Referring back to the chart above, the blue line is gasoline futures in NY, which as you can see are much closer to their early war highs despite the more dramatic decline in oil (green line).
In fact, this chart may be the best metaphor for the current sentiment in the US with the population suffering from rising gasoline prices while the government touts the decline in crude prices.
Net, I am having trouble finding a single coherent narrative that is widely believed. So, let’s look at how other markets behaved overnight, having already seen equities and oil. Bond yields rose yesterday with Treasury yields higher by 5bps and a further tick up this morning. Similar price action was seen in Europe although more of these markets are +2bps this morning, rather than the +1bp in Treasuries. And JGB yields rose 3bps overnight.
Speaking of Japan, you may recall the story from about two weeks ago where Japanese FinMin Katayama expressed the idea that Japanese pension funds should consider investing more domestically, bringing home some of their massive $3+ trillion in assets. The market got quite excited about that and as you can see in the below chart, the yen immediately rallied.
Source: tradingeconomics.com
Well, that was sooooo two weeks ago! This morning, the yen is just 5 pips, as I write, from breeching the peak seen before the last intervention scare. As you can see in the chart, the move is extremely gradual, but in this case, the tortoise is being played by the yen. I saw more discussion on this pension story this morning but while I think it is highly probable to play out over time, I think the timeline is better measured in years, not weeks, or even months. As such, the gradual depreciation of the yen seems likely to continue. Elsewhere, it remains very hard to get excited about the dollar vs. any currency right now. Sure, NOK (+0.6%) is rallying on the oil rally, and perhaps the real surprise today is ZAR (+0.5%) which despite higher oil has seen higher gold prices help sustain it. But if we look at the dollar writ large, the ‘breakout’ from its year-long range seen back in mid-June has been a damp squib as per the below chart of the DXY.
Source: tradingeconomics.com
Perhaps the big surprise this morning is the metals (Au +1.2%, Ag +4.2%, Cu +3.1%) are all higher despite the rise in oil prices and yields. While I remain long term constructive on the metals sector, it is very difficult to understand what is driving today’s price action at this point.
And that’s really it today. There are no frontline data points to be released so I expect that oil sentiment will continue to lead markets although there will certainly be excitement about equities if they can maintain the rally today. As to the dollar, nobody seems to care.
Good luck
Adf
fxpoetry 