The war in Iran’s getting hotter
With tankers now under the water
So, oil is climbing
Which right now is priming
A stock market starting to totter

Meanwhile, Scotty Bessent is crowing
Take care ‘bout the shade that you’re throwing
Now, I am the house
And while you may grouse
In markets, I now am all-knowing

Remember back at the end of July when the MOF/BOJ intervened in the FX markets and the US Treasury was ostensibly right alongside them, selling €13 billion vs. yen, give or take a nickel.  And then, for the next month, the yen behaved as it ordinarily does after an intervention, it slowly crawled lower (dollar higher) as per the chart below.

Source: tradingeconomics.com

So far, so normal.  But something changed a week ago as there has been another significant leg lower in the dollar with no sign of official activity.  The story at the time, which has been neither confirmed nor denied, was that the GPIF was moving funds back into Japan to the tune of several billion dollars’ worth, and that certainly fit the price action.  But that was a one-day event.  And yet, here we are this morning with USDJPY plumbing new lows for the move, more than 2% below levels reached last week.  Something else is happening.

Which brings us to Secretary Bessent.  Yesterday, speaking at an event at SMU in Dallas, he made the following comments, “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do.  And you can bet against me if you want.”   On the one hand, those are pretty arrogant comments to come from any politician, especially one who knows exactly the limits of power governments have when it comes to markets.  (Remember, he was instrumental in the trade that broke the pound back in 1992 and forced it out of the Exchange Rate Mechanism).  On the other hand, not only does he understand markets extremely well, he also has a setup where one of the key drivers of the market he is pushing against has been increasing leverage, and leverage is very fragile.  

If we look at futures positioning as our proxy, you can see in the below chart from cotsignal.com that there are still quite a few net short JPY futures positions, although those positions have been reduced over the past month.

Remember, too, when looking at currency futures positions, they represent a tiny fraction of the market, <1%, but they do offer directional views.  The point is that the net short JPY trade remains quite large, and if Japanese investors are truly starting to bring their money home, the yen can strengthen quite a bit further.  As an aside, while this may correlate with a sell-off in risk assets, it is important to understand that the causality in this case would be reversed, so yen strength would be the driver, not the risk-off response.  As I wrote yesterday, my take is 140-145 is a viable target, a level that would offer a solid adjustment without necessarily resulting in a major negative response in other risk assets.  We shall see.

Turning to oil (+2.3%), over the past two months, we have seen WTI rally from a low of $67.0/bbl to today’s price of $95.17/bbl, a 42% climb as per the below chart.

Source: tradingeconomics.com

Clearly things are not getting better in Iran, or Russia/Ukraine, but the former appears to be the proximate cause for this move.  Ostensibly, the US sank three Iranian oil tankers near Kharg Island after the Iranians fired ballistic missiles at two US warships.  The Iranians claimed they hit the ships, the US claimed they didn’t and that is what you would expect to hear.  I have no idea what is true, although it appears to be true that those tankers are sunk.

My two cents, if they are worth even that, is that Iran has decided that if it can force gasoline and diesel prices high enough ahead of the midterm elections, that can serve to weaken President Trump and his resolve in this war if the Republicans lose power.  Maybe yes, maybe no.  Today is the beginning of the Republican mid-term convention in Dallas, a new idea designed to excite the Republican base to get out and vote.  From what I have read, polls remain close in several key states where senatorial elections are going to take place, and both the House and Senate are up for grabs.  This will certainly be the main story for the next two months.

Which takes us to action in other markets.  Equities remain under pressure almost universally.  After yesterday’s weak US performance, Asia had a more subtle performance with only a few markets showing substantial strength (Korea +1.4%) or weakness (India -1.1%, Singapore -0.7%) while the rest of the region saw movement of just +/-0.2% or so.  However, the same cannot be said for Europe, where substantial declines are the order of the day (Spain -2.3%, France -1.7%, Germany -1.5%, UK -0.8%) as rising oil prices, Brent is over $100/bbl, have weighed heavily on profit prospects there.  Too, US futures at this hour (7:10) are pointing lower with declines on the order of -0.5% or so.

In fact, Europe is having a rough day overall as bond markets there are all under pressure as you can see in the below Bloomberg screenshot.

While the ECB is almost certain to hike rates tomorrow by 25bps, it appears bond investors in Europe are seeking a greater commitment to fight inflation.  Alas for Madame Lagarde, the fact that Eurozone growth is hovering just below 1% per annum makes it hard for the Keynesian view of how to fight inflation (raise rates) to help the economies there.  As to Treasury yields, they continue to creep higher, up 2bp this morning at 4.81% and the recent winner continues to be JGB markets, with the 10yr yield there slipping -1bp.  However, before we get too enamored of the JGB price action, a quick look at the chart for the past 6 months shows that we have seen this type of movement, a move higher with a several session retracement, at least eight times during this period.  It could be nothing more than ordinary trading here.

Source: tradingeconomics.com

Looking briefly at the metals markets, gold (+1.1%) is rallying this morning despite the rise in oil, a break from that recent negative correlation, and it is dragging silver (+0.9%) along for the ride.  Copper (-0.8%) however, is not playing the same game.

Finally, the dollar…well away from the yen, the dollar is doing nothing.  The DXY is still hovering either side of 99.0 and other than the yen’s move today, +0.3%, there are really no currencies that have moved more than 10 basis points in either direction.  Right now, FX is secondary except USDJPY.

On the data front, there are no releases and as we are in the Fed’s quiet period, there are no Fed comments on the calendar.  For now, markets are going to maintain their focus on Iran and oil prices and on the yen story.  Absent more headlines in either of those, I see no reason for major excitement today.  But remember, we do get CPI on Friday, so there is still something critical on the near horizon.

Good luck

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