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No One Can Kill

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Remarkably, metals are still
The story that no one can kill
The rally refuses
To stop, as gold cruises
And silver gives traders a thrill

The funny thing about financial markets is that it goes through periods where a single story dominates the narrative so completely that everything else gets viewed through the lens of that story.  We have seen this happen many times with recent situations like tariffs, the Fed, Covid, Brexit, Russia, etc.  Well, these days, precious metals are the story through which everything else is defined.

Consider, for those who are inherently bearish the dollar, the remarkable rally in precious metals serves as proof positive of the theory.  For those who have been antagonistic to the equity rally, and let’s face it, there has been a huge amount of discussion about the equity bubble and overvaluation of the Mag7 stocks, it is a huge relief that precious metals have now outperformed equities on numerous timescales, whether looking over the past week, month, quarter, year or decade.  You see, they will claim, metals have been the best investment.

Source: tradingeconomics.com

In the above chart, I have randomly selected Oct 2, 2022, as it appeared to be a local low over the past 5 years in both the S&P 500 and gold.  Since then, while the S&P has gained very impressive 190%, gold is up an even more remarkable 300%.

The bond story is more interesting as, usually, throughout history there has been an inverse relationship between yields and metals as higher yields foregone were an additional ‘cost’ of holding metals and traders generally sought to prevent that outcome.  Yet, if we go back to that same random date, the relationship has essentially broken down.  In fact, as you can see from the chart below, yields have edged modestly higher while gold has exploded.  And if we turn to JGB yields, which we all know are rising sharply, they are almost following gold’s trajectory directly.

Source: tradingeconomics.com

My point is, these days you cannot read an analysis about anything, whether the markets or the global economy, without the framework entailing the price of gold and silver.

As such, the major question facing all market participants is what is driving this extraordinary performance.  At this point my take is gold, and silver, have essentially become a Rorschach test for the viewers investing and political framework.  So, we are going to see a lot of different explanations as to the cause of this movement.

FWIW, my take, which is all that you get here, is there are a few things combining to juice this move.  First, the overriding theory of fiat currency debasement continues to gain adherents, not that economists are moving from the Keynesian to Austrian school of economics, but with M2 around the world growing at 12% while global GDP grows at 3%, the fundamental of too much money chasing too few goods has even broken through the Keynesians’ armor.  This leads to the natural next step that, those who are aware and are charged with maintaining the real value of their holdings, see gold as a better long-term investment given its history.  Enter central banks, who were, of course, further encouraged once the US froze Russian assets after their invasion of Ukraine.

This has bled into an increasing discussion of the overall geopolitical situation, notably tensions driven by the US interdiction in Venezuela, the uprising in Iran and the ongoing stress between the US and Europe and Canada over trade.  All these things have forced many to consider that traditional haven assets, notably Treasuries, may not be so haven-like after all.  Yet another reason to like gold.

And when any story gains traction like this has, we then get inundated with the ‘tourists’ who flood social media with their views, especially as to whether this is a blow-off top and the move is over, or whether there is much further to run.  I particularly like the below chart as an encapsulation of the market.

It is remarkable to me that the same folks who have demonstrated their expertise on Venezuelan oil production and the legality of Trump’s tariffs are now so clearly expert on the price of gold and silver, why they haven’t moved like this in the past and whether this is, or isn’t the top of the market.  Thank goodness we have them all!!

In the meantime, let’s turn to the market price action to see how things have behaved overnight.  starting, sensibly, with the precious metals, despite a late day pullback from its highs yesterday, gold (+1.3%) and silver (+6.7%) show no signs of stopping yet.  Personally, I remain in the camp that structural industrial shortages combined with China’s gating of exports of silver are likely to maintain a bid under the stuff for quite a while yet.  The fact that the US has listed it as a strategic metal is something not widely discussed nor remembered but is quite important as a demand signal.  Copper (-2.1%), however, is backing off its recent highs, although remains within spitting distance of its recent all-time highs.  As to oil (-0.15%) which used to be the belle of the commodity ball, it is stuck around $60/bbl with no obvious driver in the short-term in either direction.  Don’t forget NatGas (-4.8%), which is higher by 65% this week on the back of the polar conditions forecast to remain at least through the end of the week.

Turning to equities, yesterday’s US gains were followed by gains almost everywhere else in the world.  Tokyo (+0.85%), HK (+1.35%), Australia (+0.9%), Korea (+2.7%), India (+0.4%) after they signed their FTA with Europe, and Taiwan (+0.8%) were all in fine fettle last night.  Only China (0.0%) missed the boat, although there was no obvious reason for that outcome.  In Europe, too, we see almost all green on the screen with only Germany (0.0%) not taking part in the fun.  Otherwise, modest gains of 0.3% are the order of the day elsewhere in the UK and on the continent.  As to US futures, they are also pointing higher, about 0.5% at this hour (7:35).

In the bond market, JGB yields (+5bps) are the story, as the leadup to the election and its potential outcome dominate discussion.  My take is higher yields implies the market is anticipating PM Takaichi to win and improve her margin in the Diet, thus allowing more unfunded spending.  But in the US and Europe, yields have edged higher by 1bp to 2bps amid lackluster trading.

Finally, the dollar is under pressure yet again with the DXY (-0.3%) slipping, and as you can see in the below chart, now approaching a double bottom, a break of which seems likely to open up a more substantial decline.

Source: tradingeconomics.com

The dollar weakness is broad based this morning, with most currencies gaining by that 0.3% amount and only CHF (+0.75%) showing real leadership.  The yen (+0.4%) has been hanging around the post ‘rate check’ levels and I would contend today’s movement is about the dollar writ large rather than the yen in particular.  I did read that option traders are bidding up short-dated USD puts across numerous currencies as either fear is growing, or they think that DXY break is going to open a major move.  We shall see,

On the data front, yesterday say a huge Durable Goods print, another sign of economic strength.  This morning, we see Case Shiller Home Prices (exp 1.2%) and Consumer Confidence (90.9).  As well, the FOMC meeting starts with current expectations of no policy change at tomorrow’s meeting.

Gold and silver continue to dominate the conversation and I freely admit, I have been along for the ride and am getting nervous, at least in the short term.  As to the dollar, it does look awful right now, and if DXY breaks that line at 96.22 with any impetus, we could be in for another sharp leg lower.

Good luck

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Totally Wrecked

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The chaos is starting to spread
As traders, when they look ahead
Have come to the view
More debt will accrue
And fear that the dollar is dead
 
So, gold and its ilk rise unchecked
While fiat is totally wrecked
Most bonds have a pox
But hope lives for stocks
And crypto? They’re still circumspect

I cannot possibly cover all the things ongoing in the markets right now as it would take a 5000 word note to do so adequately.  As such, I will try to give a high level take in far fewer words.

Headlines – 

  • Minneapolis continues to consume most of the domestic press, but is only tangentially, if at all, related to markets.  Perhaps it questions President Trump’s authority and that is a negative for US assets and the dollar.  
  • Xi Jinping purges his most senior military leader, accused of spying and selling state nuclear secrets to the US. Xi has removed virtually his entire military leadership, probably reducing near term risk of a Taiwan invasion, but ignores economic issues

Currencies – 

  • JPY (+1.2%) remains the top story as speculation remains rife that the BOJ stepped into markets on Friday (I don’t think so) and questions arise as to how soon they will do so. 

Source: tradingeconomics.com

 There is a great deal of talk of joint intervention with the US, but I remain skeptical there.  It is critical to understand exactly what joint intervention is and what it represents.  Joint intervention means that the US Treasury is selling its own dollars alongside those of Japan.  That is very different than the Fed, acting on behalf of the Treasury-MOF-BOJ connection executing sales for the MOF.  The former implies a US effort to change the dollar; the latter is simply assisting an ally in our time zone.  I can only think of two times the US intervened, 1985 and 1998.  In the second chart, I highlighted the shape of the move from 1998, which was obviously far sharper than anything we have seen so far. 

Source: finance.yahoo.com

  • DXY (-0.5%) is falling as well, obviously dragged lower by the dollar’s decline vs. the yen, but the dollar’s weakness is universal today.  As you can see from the chart, the DXY has fallen through the bottom of the trading range at 98.00 and the bears are celebrating the end of the dollar.  But just looking at the chart below, we need to see a more substantial extension, in my view, before concluding the dollar is dead.

Source: tradingeconomics.com

Precious Metals – 

MetalPriceDay%WeeklyMonthlyYTDYoY
Gold5090.47101.85+2.0%8.9%17.6%17.95%85.85%
Silver110.347.38+7.2%16.7%53.15%55.05%266.2%
Copper5.99420.048+0.8%1.6%8.4%5.45%42.2%
Platinum2867.20128.8+4.65%21.75%35.2%39.7%205.3%

Source: tradingeconomics.com

I think this table tells the entire story eloquently.  The combination of supply shortages in trading venues, as well as for industrial users, and fears over the collapse of fiat currencies as every government in the world runs it hot and issues massive amounts of debt, has an increasing number of both individuals and institutions looking for someplace to maintain their purchasing power.  Precious metals earned their name and reputation for this very reason.  If anything, the fear is that the speed of the move has been so extraordinary that it must slow down at some point, but so far, that has not been the case.  As you can see in the chart below, the moves in all three have become parabolic, or certainly in silver and platinum.  Historically, prices like this do not continue in this vein, but that doesn’t mean they cannot continue to rise further for a while yet.

Source: tradingeconomics.com

As to energy, oil (-0.2%) is trading above $60/bbl, but doesn’t show a great deal of interest in breaking in either direction right now.  I imagine a US action in Iran would push prices higher, but do not discount a breakthrough on the Russia/Ukraine war that could have the opposite effect.  However, NatGas (+14.6%) continues to be in massive demand as the 15° temperature outside my window this morning is indicative of what is happening across most of the country.  As well, it seems Germany, which is now hugely reliant on US LNG exports, has run their storage down to a dangerously low 40% or so, far below normal for this time of year.  Until this cold-snap ends, demand will remain exceedingly high.

Stocks – the biggest mover overnight was Tokyo (-1.8%) as the much stronger yen weighed heavily on Japanese exporters like Toyota.  Too, both South Korea (-0.8%) and India (-0.9%) slipped with the former showing concern that there would be intervention in the KRW market and negatively impact Korean exporters while the latter continues to see international capital outflows, with another $3 billion coming out so far this month (which has undermined the INR as well).  But otherwise, not much price action in China, HK or elsewhere in the region.  In Europe, most major bourses are little changed, although there have been modest gains in Spain (+0.5%) and Italy (+0.4%).  The only data of note was German Ifo Business Climate (87.6) which remained unchanged, falling below expectations for a modest gain.   And at this hour (7:45), US futures are virtually unchanged.

Bonds – yields have slipped modestly this morning with Treasuries (-1bps) not really showing signs of serious degradation.  European sovereign yields have fallen further between -3bps (Germany) and -5bps (France) with the latter benefitting from the idea that France would actually pass a budget soon.  JGB yields (-2bps) also slipped as polls show Takaichi-san’s approval ratings are slipping and some are assuming she won’t be able to run it quite as hot if she wins the election in two weeks.

Data this week is dominated by the Fed meeting on Wednesday, although as I have said from the beginning of the year, I think the Fed’s importance has waned relative to the market overall.

TodayDurable Goods3.7%
 -ex Transport0.3%
TuesdayCase Shiller Home Prices1.2%
 Consumer Confidence90.9
WednesdayFOMC Rate Decision3.75% (unchanged)
ThursdayInitial Claims205K
 Continuing Claims1860K
 Trade Balance-$42.1B
 Nonfarm Productivity4.9%
 Unit Labor Costs-1.9%
 Factory Orders1.7%
 -ex Transport0.3%
FridayDec PPI0.2% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Chicago PMI43.8

Source: tradingeconomics.com

And that’s pretty much what we have right now.  Clearly, the biggest signal comes from the precious metals space and indicates, to me at least, that there is huge concern over the way of the world right now.  I guess this is what the 4thTurning looks like.  As I said, if the Treasury is actually going to intervene of their own accord, working alongside the Japanese, that is a distinct negative for the dollar against all currencies and needs to be carefully assessed.  However, if the Fed sells dollars on the BOJ’s behalf, that is likely to have just a temporary impact on the FX markets.  Keep that in mind as we go forward.

Good luck (we all need that right now!)

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Yen Reprobates

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On Friday we questioned what stage
The BOJ reached for to gauge
If yen intervention
Would soon get a mention
And could Katayama assuage
 
The markets, without spending dough
Since Friday, we’re now in the know
That Bessent checked rates
With yen reprobates
Now anxious to deal a deathblow

On Friday, I asked the question whether the movement seen in Tokyo after the BOJ meeting was finished consisted of step six, rate checks, or step seven, intervention.  Of course, my comments preceded the NY session and then in the afternoon, as you can see from the below chart, something much more substantial occurred.

Source: tradingeconomics.com

At this point on Sunday evening, it appears that about 11:00 Friday morning in NY, as Europe was heading home for the weekend, the Fed rang into major dealers around the Street and asked for prices where they could buy yen / sell dollars.  This is the very definition of ‘rate checks’ and the market response was exactly what you would expect.  The sequence of events was almost certainly that the Japanese MOF reached out to the Treasury department who then rang up the Fed and asked them to act. (Remember, currency policy is a Treasury function, not a Fed one). As you can see from the chart above, the initial move when Asia opened was a continuation of the yen’s strength, and in truth dollar weakness against most currencies, but we have already seen the initial bounce (the green bars to the right.)

Here’s the thing about rate checks, and in truth, every monetary policy, the law of diminishing returns is in effect here, so the next time they try it, and I would not be surprised to see something again tonight or tomorrow in NY, it will have a smaller impact.  Now, perhaps they are comfortable at 155 instead of pressing 160 and if USDJPY stabilizes here, things will go on much as before.  But I doubt that without further efforts, including direct intervention, things are going to change.  And even then, as history has shown time and again, intervention’s impact typically wears off after a few months.  The only way to truly change this trajectory is to change policy in Japan, and by all accounts, as the country heads into an election where PM Takichi’s platform is ‘run it hot’ that seems unlikely.  

It may not be a fade today, but at 150 or so, I expect that the risk/reward of selling yen is going to be extremely attractive again.

Have a good evening

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Six or Seven?

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History has shown
It takes seven steps before
The BOJ acts
 
Inquiring minds ask
Was last night six or seven?
FinMin’s lips are sealed

 

I must admit, when I went to bad last night, I thought this morning’s lead discussion would be about gold as it crested $5000/oz given it was trading at $4967 and nothing seemed likely to stop it.  But something did, probably some profit taking into the weekend, given it has rallied more than 7% this week.  

Thus, since there are no new geopolitical stories of note, with everyone still trying to figure out what the past several days means, we look toward the East this morning and start with Japan.  The BOJ left policy rates on hold, as widely expected, but Ueda-san also raised the BOJ’s forecasts for inflation (see below from BOJ policy statement).  

The latter move has been interpreted as offering more flexibility for the BOJ to hike rates further with expectations for a hike next month rising above 60%.  But of more interest was the price action seen in the immediate wake of the Ueda comments as seen in the below chart.

Source: tradingeconomics.com

While some have asked if the BOJ intervened last night, I would categorically answer, No.  The fact that the dollar’s decline was so short lived indicates that something else was likely the catalyst.  On the 7-step road to intervention, step 6 is checking rates.  This occurs when the BOJ calls the FX trading desks at banks in Tokyo and asks for prices where they could buy yen, but don’t actually execute the transaction.  However, it is a powerful signal that the BOJ, on behalf of the MOF, is growing concerned.  The thing is, historically when this happens, it is widely circulated within the market that the BOJ is checking rates.

Thus far, we have not heard that at all from either the banks or the MOF.  Rather, FinMin Katayama once more explained, “We’re always watching with a sense of urgency.”  (As an aside, I assume this comment is a result of a translation of Japanese that doesn’t fit the English language well as I do not understand how one can watch something ‘urgently’).  But that urgency is classic step 5, not step 6, so it is not clear that we are closer to intervention at this point.  After all, the dollar’s high last night was not as high as we had seen just 9 days ago, when they first took step 5, and historically, a new high is needed before the next step is taken.

But, getting away from the minutiae of their intervention process, I believe last night’s activities tell us that there is growing concern about the yen’s level and its impact on rising inflation.  If Governor Ueda is priming markets for a rate hike sooner than previously anticipated, it tells me that inflation data coming up is going to be higher than previously forecast, and he wants to be prepared.  Interestingly, JGB markets did not see the same type of price behavior as you can see below.

Source: tradingeconomics.com

My conclusion is there was no rate checking, but FinMin Katayama’s comments were sufficient to convince some that it was coming soon to a screen near you.  Remember, last month, Japanese CPI slipped to 2.1%, its lowest level since March 2022.  Given the next release is still nearly a month away, there is no clear consensus as to its reading, but I suspect a rebound is in order.   If forecasts start indicating a substantial rise, I expect the yen to initially weaken, and perhaps that will be sufficient for the BOJ to take the 6th step.

But other than that, there seems very little new news to discuss.  WEF is over and while there are still numerous analyses about what happened, and how things will evolve from here, consensus conclusions are few and far between.  So, let’s see how the rest of the financial markets fared overnight.

Yesterday’s solid US equity performance was followed by a generally solid one in Asia as well.  Tokyo (+0.3%) was nonplussed by the intervention discussion, while HK (+0.45%), Korea (+0.8%) and Taiwan (+0.7%) all followed the US higher.  However, there were some laggards with China (-0.45%) and India (-0.9%) suffering on what appeared to be some profit taking on the previous day’s gains.  Overall, there were more gainers than laggards here.  In Europe, the picture is also mixed as the IBEX (-0.4%) and CAC (-0.3%) both suffer after weaker than expected Flash PMI data was released while Germany (+0.1%) and the UK (+0.2%) are benefitting from modestly better numbers there.  We continue to hear German Chancellor Merz explain all the things that Germany is going to do to make things better going forward, but the nation has so totally hamstrung itself with its energy policy of the past decade, it is not clear to me they have any opportunity to be successful in the short run.  As to US futures, at this hour (7:40), they are pointing slightly lower, -0.15% or so.

In the bond market, yields around the world are within 1 to 2 basis points of yesterday’s closing levels with France (-4bps) the outlier after the weak data and the news that PM LeCornu has survived the first of two no-confidence votes and appears set to get a budget passed, albeit with a 5% deficit forecast.  Otherwise, not much here with yesterday’s PCE data unable to move the needle given it was right on forecasts.

In the commodity market, oil (+1.9%) is rallying after President Trump hinted at further Iranian activities when he indicated an armada of US naval vessels is heading there.  That has traders nervous, but, of course, with President Trump, it is always difficult to determine his strategy, even if we know the end game is to remove the theocracy if possible.  NatGas (-1.6%) is giving back some of its recent gains but given the forecast for a massive arctic blast this weekend, with single digit temperatures and up to two feet of snow on the East coast, I suspect it will maintain its recent gains for a few more days.

In the metals markets, gold is unchanged on the session, although continues to sit tantalizingly close to $5000/oz.  Just as remarkable is that silver (+3.1%) is now trading above $99/oz and certainly seems like it is going to crest $100/oz in the very near future.  This has helped all metals with both copper (+2.5%) and platinum (+5.2%) to rally with the latter now trading at an all-time high as well.

Finally, the dollar is…doing nothing.  While the DXY has sipped -0.07%, we are seeing a mixed picture with the euro slightly softer while the pound (+0.2%) has rallied on the stronger PMI data.  In fact, scanning my screens, nothing has moved more than 0.3% (NOK, AUD on the plus side, PLN, INR on the minus side), but indicative that FX remains an afterthought for now (except for the yen).

On the data front, we see the Flash PMI data (exp 52.0 Mfg, 52.8 Services) and Michigan Sentiment (54.0) and that’s it.  Given all the excitement from the president’s WEF visit, I think most traders and investors will be happy if we have a quiet session to head into the weekend.  As well, if the weather forecasts prove correct, I expect that Monday will be very quiet as many traders will be unable to get into the office.

I don’t know about you, but it is certainly exhausting trying to keep up with the world these days.  Hedging remains an important strategy regardless of your asset class, but right now, both equity and metals trends do not appear to be breaking while the dollar and bonds remain trendless.

Good luck and good weekend

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What We’ve Learned

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It wasn’t but three weeks ago
That pundits who felt in the know
Were sure the attack
On Vene would crack
The world, and more chaos bestow
 
But that news, so quickly, has faded
While Greenland fears have been upgraded
The pundits were sure
That war was the cure
And Europe would soon be invaded
 
Now as it turns out, what we’ve learned
Is NATO, which had been concerned
Has ‘greed to a deal
Which stopped Denmark’s squeal
As Trump, to the US, returned

 

It is certainly difficult to keep up with current events these days, especially for the punditry who feel it is critical they demonstrate expertise on every issue, given the speed with which the issues change.  All that effort to understand the geopolitics behind ousting Nicholas Maduro has been forgotten in less than 2 weeks as they needed to pontificate on Greenland and its importance.  If, as the president’s TruthSocial post below is the current lay of the land, by Monday, Greenland will return to its historic obscurity as President Trump will move on to the next issue of his choosing.  In fact, this morning, the WSJ is claiming Cuba is next on the list, which, while it wouldn’t be that surprising, has to date only been mentioned in passing by Mr Trump.

Here’s the thing about all the pontification regarding President Trump, nearly, if not all of it, is simply that, pontification by outsiders who have no idea about what is really happening.  These folks are not sitting in the Oval Office when the President is meeting with his advisors discussing strategy and are generally wishcasting their views and creating a narrative around that.  As I am also an outsider, all I can do is observe and try to ascertain how things might impact markets, but if you are not hearing it from the president or Secretary Rubio or someone like that, it is all speculation.  However, one must admit, it is entertaining!

As I don’t know what the next ‘global crisis’ is going to be ahead of time, let’s turn our attention to markets and how they responded to the president’s speech in Davos as well as the news of the deal framework.

Equities were quite happy.  After the sharp decline seen Sunday night, when the tariff threats were made, the S&P 500 has recouped nearly all of the losses as per the below chart.  Yesterday saw US market gains of 1.2% across the board and futures, this morning, continue to rally, up about 0.5% across the board.

Source: tradingeconomics.com

It should be no surprise that things were bright in Asia as well, with Tokyo (+1.75%) leading the way as almost every exchange in the region was higher by a decent amount (Korea +0.9%, India +0.5%, Taiwan +1.6%, Australia +0.75%) but interestingly, China (0.0%) and HK (+0.2%) were the laggards.  Perhaps good news for the West is not seen that positively there, although the story of regulators in China cracking down on possible stock manipulation by social media influencers has raised some concerns.  After all, one of the biggest issues with investing in China by outsiders is the capriciousness of President Xi and the CCP as they decide what they don’t like that particular day.  

As to Europe, it should be no surprise that there has been a collective sigh of relief from investors there given the removal of the threat of more tariffs and the promises of more defense spending by European nations.  So, gains across the board with the DAX (+1.2%) leading the way although the CAC (+1.1%) is right there as well with most of the rest of the nations seeing gains on the order of 0.5% to 0.75%.

In the bond markets, apparently the end of the world has also been postponed.  Yields declined yesterday and this morning, Treasury yields are unchanged at 4.24%.  In Europe, yields have slipped -2bps to -4bps on the continent although UK gilts (+2bps) are bucking the trend, which appears to be an ongoing impact from yesterday’s higher than expected inflation data which continues to point toward stagflation in the UK.  Interestingly, JGB yields (-4bps) have also fallen again, although they certainly remain near recent highs.  PM Takaichi is going to formally dissolve the Diet tonight and the election is slated for February 8th (wouldn’t it be wonderful if US election campaigns were just 2 weeks long!).  While nothing has changed in her fiscal planning, it seems that investors are awaiting the BOJ announcement tonight (no change expected) and have been modestly appeased by a substantial increase in exports although the trade surplus declined slightly.  

I think it is worth looking at the trade balance relative to the yen (-0.2%) as per the below chart.  Recall, historically, Japan ran major trade surpluses, which was always one of the tensions between the US and Japan dating back to President Reagan.  But as you can see below, the blue bars are the monthly trade numbers and since Covid, that situation changed dramatically.

Source: tradingeconomics.com

However, once the yen started to weaken substantially, the lagged effect showed up in trade data as can readily be seen above.  In fact, this is the real tension in Japan, I believe, that the weak yen helps exports significantly, but has become an inflation problem and the government is caught between the two issues.  This is why I believe we will see a weaker yen over time, especially if Takaichi-san comes out of the election with a solid majority.

As I’m on currencies, if we look elsewhere, the dollar, although we have been constantly assured it was collapsing, remains in its trading range.  This morning, the DXY (-0.1%) has edged lower after yesterday’s rebound.  As it happens, yen weakness has been offset by modest euro strength, but the real strength is in the commodity space with NOK (+0.8%), SEK (+0.36%), AUD (+0.6%) and NZD (+0.6%) all having solid sessions.  Now, my take is that the first two are more likely responses to the Greenland issue’s apparent resolution as NOK is rallying despite oil’s (-1.7%) sharp decline.  Remember, both those nations were in the crosshairs of Trump’s mooted tariffs.  On the other hand, last night, the employment situation in Australia perked up nicely which has helped raise market pricing for a rate hike by the RBA and given the strength in commodity prices and the apparent end of another global crisis, has helped support the currency.  Ironically, as I scan the EMG space, movements there have been much smaller overall.

Finally, turning to the rest of the commodity space, for the first time in a week, gold is not higher this morning, but rather essentially unchanged.  Silver (+0.25%) has bounced a tiny bit after selling off somewhat yesterday in NY.  I have maintained that trees don’t grow to the sky, and frankly, the price action here appears tired regarding ever larger gains.  I believe the fundamental story remains in place, but that doesn’t mean silver won’t chop around for a few weeks or months before starting higher again.   Copper (-0.6%) is also under modest pressure this morning and has retreated much further, about -6.3%, from its recent highs at $6.10/lb than the precious metals.  However, the red metal remains much in demand given the underlying electrification story. 

And lastly, a quick look at NatGas (+12%) shows what happens to commodity markets when there is the perception of insufficient supply for the current demand.  This is higher by 75% this week!  And while today in NJ, the temperature is a relatively balmy 34°, the forecast for the coming weekend is much colder and a huge snowfall.  It’s not often you see a movement of this magnitude so here is the chart for the past month.

Source: tradingeconomics.com

On the data front, today brings the final look at Q3 GDP (exp 4.3%) as well as Initial (212K) and Continuing (1880K) Claims.  Too, we get Personal Income (0.4%) and Spending (0.5%) for November and PCE (0.2%, 2.8% Y/Y) for both headline and core.  The EIA releases its weekly oil inventory data today, a day later than usual because of the holiday Monday, with a modest build expected.

Market participants in all markets appear to have found a comfort zone and are taking risk positions again, at least for now.  All the apocalyptic stories about the world rejecting the dollar and the rise of the BRICS will have to wait for another day.  While I don’t know what the next situation is going to be, I am highly confident we are going to have another geopolitical scenario that is going to result in more screaming, teeth gnashing and pearl clutching by those who continue to believe the rules-based order is the way things should be.  Alas for them, economic power and statecraft is the new world order, and my take is ultimately, the dollar benefits from this pivot.

Good luck

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Clearly Explained

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The warmups in Davos for Trump
With Howard and Scott on the stump
Quite clearly explained,
While WEFers complained,
The US was, no more, the chump
 
The globalist world that existed
Is no longer to be assisted
Instead, US goals
Align with Trump’s polls
No matter the words WEF has twisted

 

As we await President Trump’s address in Davos this morning, it is worth recapping the highlights from yesterday’s US speakers, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent.   Starting with Lutnick, he explained the White House view as follows; “The Trump Administration and I are here to make a very clear point—globalization has failed the West and the United States of America. It’s a failed policy… and it has left America behind.”  The video is linked above in his name.  It is hard to misunderstand what he is saying, and that is very clearly US policy.

Turning to Secretary Bessent, he explained that the US has spent $22 trillion more than the rest of NATO since 1980 on defense while Europe and Canada created their welfare states.  “The Europeans have been spending the money on social welfare, on roads, on education, and it’s time for them to pay more, which they’ve agreed to do.”  The video clip is linked to his name in the first stanza.  The below graph is telling:

At the same time, Europe continues to buy Russian oil, funding Russia’s war against Europe.

Needless to say, Europeans were unhappy with the commentary as they appeared to be coming under attack from the US.  The market narrative quickly framed around President Trump going too far and how it was going to destroy the US as nobody will want to invest in the US. That is the explanation for yesterday’s decline in US equities (although they fell around the world), the dollar and Treasury bonds (although bonds, too, fell everywhere, notably in Japan).  

Yesterday I sought to disabuse you of the notion that Europe is going to sell all their Treasuries to hurt the US as the results would likely be either irrelevant or horrific for Europe.  So, the narrative pivoted to Trump is bad and destroying the US.  

And yet, remarkably, the world did not end either yesterday or last night, despite what many have explained is inevitable.  This morning markets are somewhat less catastrophic.  It makes sense that markets are going to remain volatile as the underlying theses for international relations adjust to the new reality of power politics and economic statecraft from the previous “Rules Based Order”.  And at this stage, there is no way to know which outcomes are most likely.  The only thing of which I am confident is that we have not seen the end of this play out.  

I must admit, that while I don’t think President Trump cares much about France and President Macron’s comments seeking more Chinese investment in that nation, I suspect that PM Carney’s efforts to cozy up to President Xi will be less welcome based on the Donroe Doctrine of US dominance in the Western Hemisphere.  But I also believe that the power structure between the US and Canada is such that it will ultimately bend to the US’s will.

So, let’s review market activity overnight as we await President Trump’s comments, which I understand have been delayed until 11:30 EST this morning.  Yesterday’s sharp declines around the world have been followed by less dramatic activity last night and so far today.  In Asia, Tokyo (-0.4%) slipped a bit further, but hardly dramatically, as FinMin Katayama focused on the JGB market in comments made in Davos.  “Since last October, our fiscal policy has consistently been responsible and sustainable, not expansionary, and the numbers clearly demonstrate that.  I’d like everyone in the market to calm down.”  I’m sure she would.  And it worked with JGB yields slipping -8bps and 30yr yields falling -17bps.  Elsewhere in Asia, China was flat, HK (+0.4%) rallied a bit along with Korea (+0.5%) while Taiwan (-1.6%) led the way lower across numerous other regional markets.  

In Europe, red is today’s color led by Germany (-0.7%) and Spain (-0.5%) although France and the UK have both only ceded -0.1% so far during the session.  The discussion here continues to revolve around President Trump, the trade deal, and potential new tariffs on nations that try to prevent the US from its Greenland desires.  As to US futures markets, at this hour (6:45) they are slightly firmer, +0.1%, so not yet, at least, indicating the end of the American investment thesis.

As to the rest of the bond market, away from Japan, yields are basically -1bp lower across Treasuries and European sovereigns as investors await Mr Trump’s comments.  Again, the mooted collapse in the US bond market has yet to appear.  However, there is a popular meme about the Danish pension fund, Akademikerpension, which has announced that it will sell all its US Treasuries by the end of the month, a total of $100 million, due to its perception of increased credit risk.  This has been fodder, though, for those who continue to believe that Europe is going to ditch their Treasuries, and many are calling it a signal.  While certainly a trendy decision, I see it as noise, not signal.

Turning to commodities, one cannot be but impressed with gold’s consistency of late.  It has risen another 2.1% this morning and is now nearing $4900/oz.  I guess $5000/oz is right around the corner.  Looking at the long-term chart below, we have seen a monster rally for the past two years.  

Source: tradingeconomics.com

FWIW, which may not be much, I continue to see this as a commentary on all fiat currencies, not the dollar per se as evidenced by the table I created from data on goldbroker.com.  While you can see that the dollar has definitely underperformed during the past year (which we already knew given the early year 10% decline vs. the euro and pound, over time, it is hard to make the case that other currencies are any better.  In fact, I find it particularly surprising that the rand has performed so poorly given its seeming benefits when gold rallies.  And of course, it is no surprise that the yen which has been having a really tough time, is the worst of the lot.

 Historical Returns of Gold 
Currency1 Month1Year5 Year10 Year
EUR9.54%54.22%164.28%300.85%
JPY10.02%76.45%288.91%481.02%
USD9.62%73.45%154.49%331.44%
GBP9.13%59.31%160.26%357.37%
MXN7.04%47.93%127.14%305.03%
ZAR7.35%53.89%179.88%327.69%

As to the other metals, silver (0.0%) seems to be getting tired after its move and has done little over the past several sessions.  Platinum (+1.0%) seems to still have life as does copper (+0.75%).  Turning to energy markets, oil (+0.3%) is trying to figure out whether the geopolitics is going to blow up or fade away and remains right around $60/bbl.  But given the temperature here in New Jersey is 1° this morning, we cannot be surprised that NatGas (+21.5%) has exploded (no pun intended) higher.

Finally, the dollar is a touch softer this morning, but not very much.  The euro is unchanged, and the pound, after some lousy inflation data, has fallen -0.2%.  But JPY (+0.2%) is offsetting that, arguably responding to FinMin Katayama’s comments, although elsewhere, KRW (+1.1%) rebounded after comments from President Lee Jae Myung sought to sooth investors and explain that the government would continue to work to boost economic growth with new policies.   But once again, my recent favorite chart of the DXY shows that this is not a USD story.

Source: tradingeconomics.com

On the data front, aside from the President’s speech today, nothing but tomorrow brings the real data.

ThursdayQ3 GDP4.3%
 Q3 Price Index3.7%
 Initial Claims212K
 Continuing Claims1880K
 Personal Spending (Nov)0.5%
 Personal Income (Nov)0.4%
 PCE (Nov)0.2% (2.8% Y/Y)
 Core PCE (Nov)0.2% (2.8% Y/Y)
FridayFlash PMI Manufacturing52.1
 Flash PMI Services52.8
 Michigan Sentiment54.0

Source: tradingeconomics.com

Don’t forget that next week the FOMC meets, but on the Fed story, today Governor Cook’s case about dismissal will be heard at the Supreme Court, which is, potentially, a much bigger deal.  If the Fed is not protected from Presidential authority, that will certainly change many views on the future, and likely initially, see the dollar and bond markets decline while stocks rally.  But that decision won’t come for months, and remember, we are still awaiting the tariff decision.

There is much we don’t know and volatility remains the most likely outcome.  Be careful out there.

Good luck

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Most Enthralling

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Some fractures are starting to show
In markets, as Trump’s blow by blow
Attack on the Danes
And friends, really strains
The view ‘Twenty-Six will lack woe
 
So, equities worldwide are falling
While bond yields, much higher, are crawling
The buck’s in a rut
While oil’s a glut
Thus, gold is the thing, most enthralling

 

“Something is rotten in the state of Denmark.”  So said Marcellus, when Shakespeare introduced him to the world in 1603(ish) in one of his most brilliant works, Hamlet, and it seems true today, 423 years later.  By now, you are likely aware that President Trump has imposed 10% tariffs, to begin on February 1st, on Denmark, Norway, Sweden, France, Germany, Finland, the Netherlands and the UK as he presses his case for US ownership of Greenland.  This is not the venue to discuss the relative merits or pitfalls of the strategy, so I won’t bore you with my views on the subject.  

Rather, this is a venue to discuss the market impacts and how they may evolve, in one poet’s eyes, going forward given the new starting condition.  As I type this morning, investors around the world are extremely unhappy, at least holding paper claims on either assets or governments.  However, holding real assets, notably gold (+1.15% and at new all-time highs), silver (+0.9% and at new all-time highs) and platinum (+1.45%, not quite at new highs yet) are feeling much better.

It is interesting to me that the WEF is meeting this week, and likely no coincidence that President Trump escalated things ahead of the meeting where he is scheduled to speak tomorrow.  It seems that the protagonists in this latest drama are set to meet while in Davos as well, so all these views are subject to change at a moment’s notice.  But for now, since there really is no other story that matters, let’s look at how markets have (mis)behaved since we last saw them here in the US on Friday.

As you can see from the chart below combining the Nikkei 225, the DAX and the S&P 500 futures, the move has been consistent since the close in NY on Friday, with all three main indices lower by between -1.75% (Japan) and -3.1% (Germany), with the US (-2.1%) in the middle.  

Source: tradingeconomics.com

In fact, that price action has been widespread across the rest of the G10 markets and many EMG markets as well. Only China (-0.2% since Friday) has bucked the trend and remains little changed.  Of course, that makes sense given this spat has nothing to do with China, on the surface.  At this point, I expect that all equity markets are going to remain under pressure until there is some resolution.  While Europe has threatened to invoke its Anti-Coercion Instrument on the US if those tariffs come into being, one must wonder will that do more damage to the US or Europe?  FWIW, I expect some type of resolution to be achieved before the Feb 1 deadline but could easily be wrong about that.  One last thing about tariffs; remember last week when expectations were high that the Supreme Court was going to rule on the legality of the ones already imposed?  That has suddenly gone very quiet.  My take there is the longer we don’t hear anything, the more likely they are not going to stop them.

Perhaps, though, the bond market is the more interesting place to look this morning with government bonds around the world getting sold aggressively.  While all eyes have been focused on the US (+6bps and well above the top of the previous range) and Europe (Germany +5bps, UK +7bps, France +6bps) perhaps the real activity is happening in Japan (+9bps).  In fact, Japanese 30yr yields have exploded higher by 40 basis points since Friday’s close, and I’m confident that has nothing to do with Greenland!

Source: tradingeconomics.com

In fact, it appears that JGB holders are getting increasingly concerned that PM Takaichi is going to really run it hot, with more unfunded fiscal stimulus and are responding accordingly.  The latest Takaichi proposal for the upcoming election is that they are going to remove the GST (VAT tax) on food for 2 years to help alleviate inflation problems.  I certainly like that better than capping prices, but fiscally, it’s a tough road to follow.  

One other bond market story that is making the rounds is the idea that Europeans would attack the US by simultaneously unloading their US Treasury holdings.  We have heard this story before with respect to China, and if you look across all of Europe, between central banks and private investors, there are likely upwards of $2 trillion held there.  But the question I ask every time I hear something of this nature is…what will they do with the proceeds if they were somehow able to coordinate the sales?  First, in the worst case, the Fed would buy them to prevent the market from collapsing.  And second, now they would have a whole lot of dollars that need to be invested elsewhere.  Which markets can absorb that amount of flow?  US equities?  Sure, but would that achieve their goals?  I think not.  If they converted them into euros, a one-way flow of $2 trillion into euros in short order would pretty much render all European manufacturing uncompetitive right away as the euro rose to 1.50 or 1.60 or higher.  Gold?  Think $10k/oz or higher.  Ain’t gonna happen.

Let’s hit the dollar next, which is under pressure across the board.  As I type (7:20), the DXY has fallen -1.0% this morning, a very large move for that index, but remains within the trading range that we have seen since October.

Source: tradingeconomics.com

The sell-off in the dollar is almost universal, although interestingly, ZAR (-0.5%), MXN (-0.3%) and CLP (-0.3%) are all bucking that trend.  I understand the nervousness, but it strikes me that none of this conversation is a positive for Europe, excepting the idea they sell all their Treasuries and convert the dollars into euros and pounds, an idea I tried to squash above.  

Finally, let’s look at commodities where the metals, as discussed above are soaring while oil (+0.8%) is picking back up off its end of week lows and currently sits just below $60/bbl.  The Iran situation remains murky, at best, and my sense is we have not heard the last of the situation there, although from what I have seen on X, the rioting has been quelled to some extent.  However, I think there is still enormous pressure on the government there and would not be surprised to see some type of US intrusion. 

But I’m confident the one thing almost all of you are feeling this morning is the bitter cold that has enveloped most of the US as per the weather.com map below.

Given natural gas is the most common fuel for heating homes, we cannot be surprised that its price has skyrocketed today, jumping 24% in the session so far, although it is now simply back to where it was this time last year.  however, a key issue in this market is Europe, which since they virtually shut off Russian gas, is now highly reliant on US LNG to heat their homes.  It turns out that their storage has fallen to slightly less than 50% of capacity, well below their average storage level for this date of 60% – 65%.  European TTF gas, on a like for like basis, currently costs ~$12.25/MMBtu compared to $3.85/MMBtu in the US, even after the massive jump.  Again, Europe has some issues going forward.

On the data front, there is really nothing today or tomorrow of note although Thursday brings GDP amongst other things.  I will review them tomorrow because, after all, markets right now are far more beholden to President Trump and Europe than to data.

Fear is growing more widespread and will likely continue to do so until there is some type of resolution over Greenland.  But then, it will dissipate quickly as consider, two weeks ago we were all Venezuela experts and today, nobody even cares about that nation anymore!

As to the dollar, I expect that when the resolution arrives, the dollar will make up lost ground, but given we are in the midst of a White House bingo game, one needs to play things close to the vest.  Hedges are crucial here.

Good luck

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The Specter

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On the horizon
The specter of BOJ
Intervention climbs

 

For those of you who don’t know, the genesis of this note was a daily update during my time covering US corporates for their FX hedging needs.  The poetry was episodic… until it wasn’t.  At any rate, this is the reason I sometimes harp on particular currencies rather than markets more generally.  And right now, while the dollar, writ large, is not that interesting, as I have been explaining for months, the yen (+0.3%) is becoming interesting in its own right as its recent spate of weakness has opened the door to intervention.  Last night, I would say we took a half-step forward on this journey as, while the BOJ did not check rates, FinMin Katayama was more explicit in her discussion about the yen’s weakness, even discussing the fact that the ‘agreement’ that her predecessor made with Treasury Secretary Bessent has no restrictions on intervention if deemed appropriate.

Following are her remarks from last evening, “We can take decisive measures against sudden movements that do not reflect fundamentals. This refers to intervention, and there are no constraints or restrictions on this.  I have repeatedly stated that we will take bold action including all the different measures available.  We shared the view that recent moves have been excessive and do not reflect fundamentals.” Then, she followed that up by referring back to her discussions with Bessent in Washington on Monday. “For many years before I took office, the Treasury secretary has held the personal view that monetary policy has been behind the curve.”

The chart below shows that for now, jawboning is the preferred measure to prevent further yen weakness, but as jawboning is only ever a temporary solution, it seems clear to me that there will be intervention at some point.  In fact, given Monday is a bank holiday in the US, implying less liquidity as banks run skeleton staffs, that may be an ideal time to get the most bang for their buck.

Source: tradingeconomics.com

But remember, even if/when they intervene, the impact will only be temporary.  Perhaps keeping a floor underneath the currency for a month or two.  Ultimately, though, it will follow the fundamentals, and if those are such that the US continues to grow rapidly and receive investment flows, unless the BOJ raises rates dramatically to moderate those flows, the yen will ultimately weaken further.   Now, ask yourself if you think the BOJ can raise rates aggressively given the combination of Japan’s 250% debt/GDP ratio and the fact that Takaichi-san’s policy mix is to borrow more and run things as hot as possible.

Away from the mess in Japan
A story of note is Iran
But tensions have waned
And thus, it’s explained
The oil complex can, down, stand

Looking elsewhere for news of note, there continues to be an enormous amount of energy focused on Minneapolis, which has no market impact.  Remarkably, Venezuela has become an afterthought to the markets as the new narrative is their natural resources are not economically retrievable at current prices.  Iran remains a hot topic in the oil market, but the concerns registered by traders early in the week have ebbed overall, although this morning, Texas tea is higher by 1.5% and back over $60/bbl. 

Looking at other markets, bonds remain somnolent, with yields up 1bp this morning, reversing yesterday’s decline of -1bp but still firmly within the 4.00% – 4.20% range.  European sovereign yields have edged higher by 2bps this morning and overnight JGB yields rose 3bps.  However, it remains difficult to see any significant pattern over the past month as evidenced by the chart below of French and German 10-year yields.  Net movement has been a handful of basis points overall.

Source: tradingeconomics.com

Even the metals markets, which have been THE story for the past months, have calmed down a bit as they consolidate their recent remarkable gains.  This morning, gold (-0.25%), silver (-2.1%), copper (-1.5%) and platinum (-3.2%) are all softer, but all remain higher on the week and over the past month, with silver having gained 37% since this time in December, and sitting above $90/oz.

Equity markets in the US rebounded yesterday, seemingly on some decent earnings data, but overnight, there was little love with Japan (-0.3%), China (-0.4%) and HK (-0.3%) all slipping from recent highs.  Elsewhere in the region, though, there was much more positivity as Korea (+0.9%), India (+0.25%), and Taiwan (+1.9%) all rallied with the latter benefitting from the agreement of a trade deal with the US that cut tariffs on Taiwanese exports in exchange for a $250 billion commitment of investment into the US.

In Europe, France (-0.8%) is the laggard du jour as ongoing budget negotiations in the government are no closer to completion and showing signs of breaking down.  As to the rest of the continent, modest declines are the order of the day while the UK is unchanged.  US futures at this hour (7:40) are pointing higher, however, led by the NASDAQ at +0.7%.

While overall, the dollar remains dull, an underreported story is the CNY (0.0% today) which has been appreciating steadily for the past year and is now at its strongest level since May 2023.  In the beginning of the year my view was if Xi actually got Chinese consumers to raise their spending and back away from the mercantilism that has been the driver of the Chinese economy since the beginning, we would see CNY strength, calling for 6.50 by the end of the year.  Well, a look at the chart below helps keep things in perspective as while CNY has appreciated about 5% in the past year, it remains far below (dollar higher) levels seen post pandemic.  However, I need to see the data indicate Chinese domestic demand is growing before I become a true believer!  Note, too, that the pace of this move is hardly remarkable.

Source: finance.yahoo.com

And that’s all I got today.  Today’s data brings IP (exp 0.2%) and Capacity Utilization (76.0%) with a few more Fed speakers as well.  Remarkably, despite the Fed trotting out virtually every member this week, nothing of note has been said given the current focus on defending Chairman Powell regarding the renovations at the Eccles Building.  

One other thing I have been wondering, and this has been for a long time, is the meaning of the Capacity Utilization reading.  On its surface, it tells us that only three-quarters of the US currently available manufacturing, mining and drilling capacity is being utilized.  But that seems like a low count based on the economy and the narrative.  I wonder, how much of what is considered available capacity is actually obsolete?  Undoubtedly, as you can see from the chart below from the FRED database, the trend is falling.  

But do companies really build so much capacity they don’t use and it sits idle?  Seems a tough way to make a living in a highly competitive world.  I understand that globalization undermined US manufacturing ever since China entered the WTO in 2001.  And maybe that is all this reflects.  But given the dramatic buildout in AI infrastructure, as well as growth in LNG and power production of late, if nothing else, I have to believe this trend is set to reverse in the near future.  After all, isn’t that Trump’s goal?

Meanwhile, I feel like we are all awaiting the next headline to determine the next move.  The underlying trend in commodities remains in place, and mostly, bonds and the dollar have no reason to go anywhere.

Good luck and good long weekend

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Tired

Posted on by

Though recently there’s been a ton
Of news, which has led to much fun
The markets today
Have little to say
Though recent trends ain’t been undone
 
Sometimes traders simply get tired
And find, in a rut, they’ve been mired
But you needn’t worry
‘Cause soon they will scurry
To come back with ideas inspired

 

As much activity and new news that has been part of the process over the past several weeks, today is one of those days when it appears we may be able to step back and catch our collective breath.  One thing I have observed throughout my career on trading desks is that no matter the underlying news, narrative or data, traders, even algorithms, can only remain in a frenzy for so long.  Consider it has been nearly two weeks of nonstop news since the US exfiltration of former Venezuelan president Maduro, yet some markets have exploded.  Silver is probably the poster child for this price action and as you can see below, since markets reopened after that news, gold’s little brother has risen nearly 25%, including today’s modest -2.3% retracement.

Source: tradingeconomics.com

But all the precious metals, and base metals as well, have had massive runs and the narrative regarding supply constraints and increased strategic purchases by China along with the US labeling many as critical national defense requirements, has been enough to bring retail into the mix.  But a 25% move in less than two weeks is really exhausting for the folks who are in those markets every day.  

At the same time, the amount of energy that has been consumed regarding Greenland, Iran and Minneapolis (which even though it is not a market related issue, is so widespread in its reporting takes up space in one’s brain) seems to have reached a peak yesterday, at least a local maximum.  I don’t, for a minute, believe that these trends have ended.  But a few sessions of modest net movement as positions are adjusted is a normal response to dramatic movement.  We should welcome the rest!

Reading through as much as I could find this morning, there really is no new story on which to hang your hat, so without further ado, I will review overnight market activity and perhaps ponder how things may evolve going forward.

A key sign of the slower activity was yesterday’s US equity markets where modest declines were the order of the day.  That was followed by a mixed session in Asia with some gainers (China +0.2%, Australia +0.5%, Korea +1.6%) and some laggards (Tokyo -0.4%, HK -0.3%, Taiwan -0.4%, India -0.3%).  Other than Korea’s strong session, which was inspired by central bank and government efforts to get investment to come back home to support the won, it appears traders are now biding their time ahead of the next major event.

European bourses are also mixed (Germany -0.1%, France -0.3%, Spain -0.1%, UK +0.4%) with the UK benefitting from a stronger than expected GDP report where growth jumped to 0.3% on the month, well above expectations of a 0.1% increase.  But a look at the chart below indicates one ought not get too excited about the economic growth in the UK with 14 negative months in the past 3 years.

Source: tradingeconomics.com

As to US futures, at this hour (7:10) they are pointing higher, currently almost exactly offsetting yesterday’s declines.

In the bond market…ZZZZZZ is the story of the day week month past four months as evidenced by the chart below.

Source: tradingeconomics.com

There are a number of conflicting narratives here with one story that the economy is going into a tailspin as a look beneath the headline data shows weakness everywhere (housing, employment, manufacturing) and the result is rates will fall along with inflation because of the coming recession.  Another narrative is that the ongoing debt expansion to fund unending budget deficits in the US is going to lead to the collapse of the dollar and much higher long-term rates as investors require far more payment to hold this much riskier than previously assumed asset.

Right now, neither of these seem to be living up to their promises.  Yesterday’s Retail Sales print was much stronger than expected at +0.6%, which hardly portends a recession.  Now, the CPI data has been polluted by the missing October numbers and is biased downward based on the BLS methodology, but you can be confident that it will recoup those losses in a few months’ time.  Meanwhile, there is no indication the Fed is going to do anything in two weeks, and my take is there is significant uncertainty over the future direction of the economy, with both positive and negative pieces.  Until we get indications that growth is either truly cratering along with rises in unemployment, or that things are exploding higher, remaining in the range seems the most likely outcome.  Remember, too, the OBBB is going to goose economic activity right away and running it hot remains the mantra.  

As to European sovereign yields, they have edged higher by 1bp this morning with one outlier, Portugal (+13bps) which seems to be reacting to the prospect of a runoff in the presidential election this Sunday, in the race between a populist outsider and a Socialist party insider, with the populist seen a slight favorite.  As to JGB yields, they have slipped back -2bps as the market becomes accustomed to the idea of the snap election.

In the commodity space, oil (-3.6%) has ceded most of its recent gains after President Trump indicated that there would be no bombing by the US, and the Mullahs ostensibly promised no executions of protestors.  Added to that was a massive build in inventories reported yesterday and supply concerns have abated.  In the metals markets, we are seeing that breather across the board (Au -0.25%, Ag -2.3%, Cu -0.8%, Pt -0.6%) which is very clearly profit taking after we saw record highs in all metals yesterday.  Nothing has changed the fundamentals here, so higher is still the way, IMO, but a few days of chop ought not be surprising.

Finally, the dollar appears to have found a comfortable home at 99.00 in the DXY.  There has been limited movement across the board with even JPY unchanged on the day as traders wait before trying to push the currency lower again.  KRW (-0.3%) is the worst performer today as it has been weakening steadily for a year.  Adding to the discussion above, the Korean government is trying to internationalize the won to some extent in their effort to get Korea taken out of the emerging market bucket for markets.  This relaxing of restrictions has seen capital outflow, but my take is this will be temporary as the country remains in very good fiscal and economic condition and will attract investment in my view.  Otherwise, there is nothing of note.

On the data front today, we get the weekly Initial (exp 215K) and Continuing (1890K) Claims as well as Empire State Manufacturing (1.0) and Philly Fed (-2.0) all at 8:30.  We hear from 3 more Fed speakers and it seems the hymnal now contains a single talking point, Fed independence is crucial and the subpoenas to Powell are lawfare and inappropriate.  Only Steven Miran is not singing that tune, but given he is Trump’s appointee, that is no surprise.

As commodities, and really metals, have driven the entire narrative lately, if they are going to have a quiet day, look for quiet all over.  Longer term, nothing has changed, but nothing goes up in a straight line, and that is what we are witnessing today.

Good luck

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Step Five?

Posted on by

It takes seven steps
Ere intervention arrives
Was last night step five?

 

The yen continues to be in the crosshairs of traders as further weakness is anticipated based on several things I believe.  First, there had long been an assumption that the Fed was going to cut rates further, especially with President Trump haranguing Chairman Powell constantly on the subject.  In addition to that, there continues to be an underlying thesis amongst many pundits that the US economy is weakening dramatically to drive that rate decision.  Yet recent data belies those facts, notably the Atlanta Fed’s remarkable GDPNow jump, but also relative stability in other data, including employment.  The upshot is the futures market is now pricing a mere 3% probability of a cut at the end of this month and not pricing the next rate cut until June, after Chairman Powell is gone.  One key leg of the yen strength argument is weakened.

Source: cmegroup.com

Second, there continues to be a belief that the BOJ will continue to hike interest rates, and perhaps they will, but it appears that the pace of those hikes will be far slower than previously anticipated.  Currently, the market is pricing just 50bps of hikes for all of 2026.  At the same time, Takaichi-san is set to “run it hot” in Japan just like in the US, pumping up fiscal stimulus and forcing the BOJ to come along for the ride.  The implication here, which is what we are seeing in the markets right now, is that a larger fiscal deficit will lead to strength in equities but a weaker currency.  The second leg of the yen strength argument is failing here as well.

Which brings us to last night’s commentary from Satsuki Katayama, Japan’s FinMin, who explained, [emphasis added] “We won’t rule out any means and will respond appropriately to moves that are excessive, including those that are speculative. We’ve mentioned this to the prime minister today as well.”  The kind of sudden moves we saw on Jan. 9 have nothing to do with fundamentals, and are deeply concerning,” she added. Her message was soon backed up by Atsushi Mimura, the ministry’s top official in charge of the yen, who reiterated that no options were being ruled out.

The bolded words are all part of the Japanese seven-step plan toward intervention.  At this point, I feel like we have reached number five.  The market responded predictably, with the yen strengthening vs. the dollar (and all its counterparts), albeit not all that much.  Last night saw the yen trade at 159.45, its highest since July 2024 (the last time the BOJ intervened), before the comments helped bring it back a bit.

Source: tradingeconomics.com

But one other area which the MOF/BOJ follow closely is not just the USDJPY exchange rate, but also the yen’s rate vs. other major currencies.  If, for instance, the yen is only weakening vs. the dollar, that is one thing.  However, a look at the chart below showing USDJPY, EURJPY and GBPJPY shows us that the yen is weakening against all those currencies pretty much in sync.  In fact, this argues that the yen’s current weakness is a yen specific fundamental, not a speculative move, which should argue against intervention, as that will only be a temporary sop.  However, my take is when we get to 160 or 162, which I believe is coming, we will see the BOJ selling aggressively.

Source: tradingeconomics.com

Ironically, the one currency against which the yen has been weakening steadily that I’m sure delights the BOJ/MOF is the Chinese yuan.  Since Liberation Day in the US, the yen has fallen more than 17% and continues to slide vs. the yuan as it has been doing for the past five years.  It is not hard to believe there are voices in the Japanese government that see that move and recognize how much it helps the Japanese export sector and caution against trying to arrest the yen’s weakness too aggressively.

Source: tradingeconomics.com

I look forward to much more dialog on this subject and expect that soon, we will be hearing about the end of the carry trade, yet again.  To my eyes, until Japanese fundamentals change, or at least appear to be moving in the right direction, the yen will struggle.  So, let me know when the fiscal deficit shrinks, or GDP jumps to 4% or inflation slides back to 1%.  Until then, they yen is damaged goods.

As to the rest of the market, precious metals continue to be the shining stars with the whole sector higher this morning (Au +1.0%, Ag +4.2%, Pt +2.0%) and that move taking copper (+0.4%) along for the ride.  Last night the CME raised its margining requirement and changed its nature by requiring a percentage of the value, rather than a numeric amount per contract.  My friend JJ, who writes the Market Vibes substack wrote a brilliant piece last night explaining how the flows are evolving in the silver market.  To sum it up, at this point, there appears no end in sight for the demand as short positions are covered by new shorts.  Metal for delivery remains scarce and despite the extraordinary shape of the move, it appears to have more steam to drive it forward.  Markets like this are extremely difficult to trade, and history shows that movements in the shape seen below reverse very sharply.  But as Keynes explained 100 years ago, markets can remain wrong longer than you can remain solvent.  I am happy I have been long silver for quite a while but am having a hard time figuring out what to do now!

Source: tradingeconomics.com

Meanwhile, oil (+1.4%) continues to rally on concerns that the Iran situation will lead to one of two outcomes, either a substantial decline in production as the regime collapses, or an effort by the regime to close the Strait of Hormuz which will impede shipping and reduce supply as they try to inflict pain on the US and the rest of the world who are rooting for the uprising.

Heading back to paper markets, yesterday’s weakness in the US was followed by a more mixed picture in Asia with Japan (+1.5%) rallying on continuing hope for more fiscal stimulus.  HK (+0.6%) benefitted from news that China’s trade surplus hit a new record high of $1.2 trillion (remember when they were going to grow domestic demand?) but Chinese shares suffered (-0.4%) after the regulators there raised margin requirements to 100%.  As to the rest of the region, it was far more green than red, although India continues to be a laggard overall.  In Europe, mixed is also the best description with the DAX (-0.35%) lagging while we have seen modest gains in the UK (+0.3%) and France (+0.2%).  Otherwise, it is hard to get excited about activity here today.  There continue to be existential questions about the EU and which nations will enact EU directives given that Poland, Hungary, Italy and the Czech Republic seem to be ignoring the latest issues like the Digital Asset Tax.  As to US futures, at this hour (7:00) they are softer by about -0.25% across the board.

Bond markets (except Japanese ones) remain completely uninteresting.  Treasury yields have slipped -3bps this morning and European sovereign yields are lower by -1bp.  Despite all the sound and fury about specific issues in markets, fixed income investors remain nonplussed by everything for now.  If/when that changes, we will need to watch things carefully.

Finally, aside from the yen (+0.3%) there is little to discuss overall. The DXY is still trading right around 99 and there has been very little movement of note.  Relationships that we would expect (ZAR and Au, NOK and oil) remain intact, but despite the metals dramatic movement, the rand is just gradually appreciating.

On the data front, yesterday’s CPI printed slightly softer than market expectations, but it is hard to get excited that inflation is heading back to target anytime soon.  @inflation_guy, Mike Ashton, had an excellent write-up here explaining what is going on and why much lower inflation is unlikely.  Ultimately, despite a lot of discussion regarding rental rates, those figures are not representative of the rental market as a whole and shelter costs continue to climb.  Absent a serious decline in goods inflation, it will be virtually impossible to get back to 2.0% on any sustainable basis.

As to today, it is a hodge podge of current and old data with Existing Home Sales (exp 4.21M) the only December number.  We see November Retail Sales (0.4%, 0.4% ex-autos) and PPI for both October and November which seem unlikely to impact markets greatly.  We also see EIA oil inventory data where a small draw is expected for crude but a build for gasoline.  Last week saw a massive build in products which likely helped weigh on the price last week.  But this week, things are different.  

We also hear from five more Fed speakers including Steven Miran, who will undoubtedly make his case for aggressive rate cuts again.  Then at 2:00 we get the Fed’s Beige Book.

Drinking from a firehose seems an apt metaphor for market analysts trying to make sense of the current situation.  Stepping back, I have never understood the market pricing for more rate cuts given the economy’s resilience.  The twin stories, in my estimation, are a growing level of fear regarding the debasement of fiat currencies, hence the move in metals, and the fact that the US remains the cleanest dirty shirt in the laundry, hence my preference for the dollar vs. other fiat currencies.  But on any given day, be careful!

Good luck

Adf