All Goes to Hell

Posted on December 9, 2024 by fxpoet

The Turning is coming much faster
Than forecast by every forecaster
Now Syria’s fallen
And pundits are all in
Iran will soon be a disaster

However, the impact on trading
Is naught, with no pundits persuading
Investors to sell
As all goes to hell
Is narrative power now fading?

The suddenness of the collapse of Bashar Al-Assad’s control of Syria was stunning, essentially happening in on week, maybe less. But it has happened, and it appears that there are going to be long-running ramifications from this event. At the very least, the Middle East power structure has changed dramatically as Russia and Iran both abandoned someone who had been a key ally in their networks. Russia is clearly otherwise occupied and did not have the wherewithal to help Assad, but it is certainly more interesting that Iran did not step up. Rumors are that the government there is growing concerned that an uprising is coming that may change the Middle East even more dramatically.

I have previously discussed the idea of the Fourth Turning when events arise that shake up the status quo, and this is proof positive that Messrs. Howe and Strauss were onto something when they published their book back in 1997. The thing is, even those who believed the idea and did their homework on the timing of events have been caught out by the speed of recent activities. Most of the punditry in this camp, present poet included, didn’t expect things to become unruly until much closer to the end of the decade. And maybe it will be the case that the collapse of Syria is just an appetizer to a much larger conflagration. (I sincerely hope not!). But my take is these events were not on many bingo cards, certainly not in the financial punditry world.

Now, the humanitarian situation in Syria has been a disaster for the past 13 years, ever since the civil war there really took shape and fomented the European migration crisis. Alas, it seems likely to worsen for the unfortunate souls who still live there. But for our purposes, the question at hand is will this have an impact on markets?

Interestingly, the answer, so far, is none whatsoever. The obvious first concern would be in oil markets given the proximity to the major oil producing regions in that part of the world. However, while oil (+1.4%) is a bit higher this morning, it remains well below $70/bbl and while I am no technical analyst, certainly appears to be well within a downtrend as per the below chart.

Source: tradingeconomics.com

Next on our list would be the FX markets, perhaps with expectations that haven currencies would be in demand. Yet, the dollar is sliding against most of its counterparts this morning, with the notable exception of the yen (-0.3%) which is the one currency under more pressure. That is the exact opposite behavior of a market that is demonstrating concern over future disruptions. As to securities markets, they are much further removed from the situation and while US futures are edging lower at this hour (6:20), slipping about -0.15%, overnight activity showed no major concerns and European bourses are mixed, but all within 0.3% of Friday’s closing levels.

Finally, bond markets are essentially unchanged this morning, with Treasury yields higher by 1bp and European sovereigns almost all unchanged on the day. We did see yields slip a few bps in Asia, likely on the back of the weaker than forecast Chinese inflation data, but the bond market is certainly showing no signs of concern over the geopolitics of the moment.

On Sunday the Chinese did meet
And promised they’d finally complete
Their stimulus drive
And therefore revive
The growth that has been in retreat

A story that has had an impact on markets this morning is the Chinese Politburo’s comments that they are going to implement a “more proactive” fiscal policy in the upcoming year along with “moderately loose” monetary policy as President Xi scrambles to both improve the growth impulse and prepare for whatever President-elect Trump has in store for China once he is inaugurated. Now, we have heard these words before and to date, each effort has been, at the very least, disappointing, if not irrelevant. But hope is a trader’s constant companion and so once again we saw specific markets respond to the news.

Interestingly, mainland Chinese shares did not respond as enthusiastically as one might have expected with the CSI 300 actually slipping -0.2%. But the Hang Seng (+2.75%) embraced the news warmly. In the FX markets, early weakness in CNY was reversed although the renminbi closed the onshore session essentially unchanged on the day. The big winners were AUD (+0.9%) and NZD (+0.5%) as traders bid up the currencies of the two nations likely to benefit most given their export profiles of commodities to China. But beyond those market moves; it is hard to make a case that anyone was listening.

Ok, let’s look at the rest of the overnight session and see what we can anticipate in the week ahead. Japanese shares (Nikkei +0.2%) were little changed overnight while the big mover in Asia was Korea (-2.8%) as the ructions from the brief interlude of martial law last week continue to weigh on the short-term future of the government and economy there. However, away from those markets, the rest of Asia saw movement of just +/- 0.3% or less, hardly newsworthy. In Europe, the story is also mixed with the CAC (+0.5%) leading the way higher, perhaps on the back of the successful reopening of the Notre Dame cathedral, or more likely on the back of hopes that the luxury goods sector would improve based on Chinese stimulus supporting that economy. As to the rest of the continent, more laggards than winners but movement has been small, 0.2% or less, although the FTSE 100 (+0.4%) is also higher this morning led by the mining shares in the index, also related to Chinese stimulus.

We have already discussed the bond market, which has been extremely quiet ahead of this week’s CPI and next week’s FOMC meeting so let’s turn to the commodity markets, where not only is oil rallying, perhaps more related to China than the Middle East, but we are seeing metals markets rally as well with both precious (Au +0.9%, Ag +2.2%) and industrial (Cu +1.6%, Zn +2.0%) performing well. Surprisingly, aluminum (-0.25%) is not playing along this morning but if the China story is real, it should follow suit.

Finally, the rest of the currency story shows KRW (-0.5%) continuing to feel the pain, along with its stock market, from the politics last week. At the same time, we are seeing solid gains in ZAR (+1.1%) on the metals moves and NOK (+0.4%) on the back of oil’s rally. Elsewhere, while the dollar is broadly softer, it is of a much lesser magnitude, maybe 0.2% or so.

On the data front, this week brings two central banks (BOC and ECB) and a bunch of stuff, although CPI on Wednesday will be the most impactful.

Tuesday	NFIB Small Biz Optimism	94.2
	Nonfarm Productivity	2.2%
	Unit Labor Costs	1.9%
Wednesday	CPI	0.2% (2.7% Y/Y)
	-ex food & energy	0.3% (3.3% Y/Y)
	BOC Meeting	3.25% (current 3.75%)
Thursday	ECB meeting	3.0% (current 3.25%)
	Initial Claims	220K
	Continuing Claims	1870K
	PPI	0.3% (2.6% Y/Y)
	-ex food & energy	0.2% (3.3% Y/Y)

Source: tradingeconomics.com

Last week saw what appeared to be stronger payroll data on the surface, with the NFP rising 227K and upward revisions, while the Unemployment Rate rose the expected 1 tick to 4.2%. As well, Average Hourly Earnings rose more than expected, to 4.0%. And yet, the Fed funds futures market raised the probability of a rate cut next week to 87% (it was over 90% for a while in the session). Now, there has been a group of analysts who have been claiming that the headline payroll data is very misleading and actually the jobs market is much weaker than the administration is portraying, and it seems they got a bit more traction in their case last week. Nonetheless, it is hard for me to look at the data and justify another rate cut by the Fed, at least if their objective is to push inflation back to 2.0%. Of course, that is another question entirely!

Mercifully, the Fed is in their quiet period so we will not hear from them until they pronounce things at the FOMC meeting a week from Wednesday. Until then, I expect that the China story, as well as assorted Trump related stories, will drive things although keep a wary eye on the Middle East for anything more explosive. As to the dollar, I have consistently explained that if the Fed eases in the face of rising inflation, that will undermine the greenback. It will be very interesting to see how things play out this week and next as a set-up for 2025. For now, I don’t see a good reason for a large move, but if I were a hedger, I would make sure that I am as hedged as I am allowed to be.

Good luck

Adf

Boom and Bust

Posted on December 6, 2024 by fxpoet

According to people we “trust”
The past which involved boom and bust
Will stay in the past
And now, at long last
The owning of stocks is a must

So, whether today’s NFP
Is weak or strong, what we foresee
Can best be expressed
By buying the best
That BlackRock will sell for a fee

Is it different this time? Have stocks reached a “permanently high plateau”? Has the global economy exited the cycle of ‘boom and bust’ which has existed since the beginning? These questions are relevant today after the release of BlackRock’s 2025 Global Outlook which explained that “Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence (AI), transform economies.”

BlackRock’s claim is simply the latest by a well-known investor that stock prices will never retreat again, and the future is unbelievably bright. “This time is different” has been said about virtually every bull market top, whether the real estate bubble, the tech bubble, the Japanese bubble, the Chinese real estate bubble or even the South Seas bubble hundreds of years ago. In fact, in order to inflate a bubble, the narrative must be, this time is different.

That permanently high plateau comment came from Irving Fisher, who while a very well-respected economist for his work on debt deflation (which came after the Depression started), famously made that comment on October 21, 1929, just days before the crash that led to the Great Depression.

So, the question is, has BlackRock defined the top in equity markets this time? I think it is worthwhile to take a longer-term perspective on market performance to try to answer that question, and more importantly, figure out what to do if this is the top. A look at the chart below, the last 50 years of the S&P 500, shows that every one of the major downturns we have seen, at least in my lifetime, has been nothing more than a blip.

Source: tradingeconmics.com

For instance, the tech bubble was an anthill around 2000 on this chart, and the GFC crash, while described as the worst recession since the Great Depression, seems to be a pretty modest dip. Covid in 2020 was almost nothing and the biggest was really 2022, which saw the index slide 25% through the first 9 months of the year. Of course, part of this is the number itself. A 25% decline now would be ~1500 S&P points (or 11,000 Dow points), the type of thing that would freak out nearly everybody.

Is this possible? Certainly, it is, 25% declines have occurred pretty regularly through the history of the market. Is it likely? This is a much tougher question. BlackRock’s thesis is that this time is different; that AI is the game changer, and the future will be finally filled with flying cars and robots doing all our chores on the basis of unlimited free energy for everyone. Ok, that may be a slight exaggeration, but they are extremely optimistic that technology will continue to move forward and solve what currently appear to be intractable problems.

The one thing working in their favor, I think, is that governments and central banks around the world have essentially lost their tolerance for market corrections, whether that is in equity or fixed income markets, and so will do whatever they can to prevent any small slide from becoming a large one. Of course, the only thing they can do is print money to buy those assets that are falling in price. If that is the plan of action, then the future will be highly inflationary, that is the only clear outcome.

I have no idea how things will turn out. Perhaps BlackRock is correct, and we are about to embark on an entirely new segment of economic and financial history. Perhaps Elon will successfully help restructure the US government so it is efficient and focused on a more limited role, and that process will inspire other nations to follow suit. Perhaps pigs can fly as well. I hate to be a curmudgeon, but trees still don’t grow to the sky, whether they are created by AI or nature. Gravity remains undefeated. But I am wary when I read reports claiming this time is different. Forty plus years in the markets has taught me that is never the case. Tools may change, timelines may change, but ultimate outcomes remain the same.

Ok, as we await this morning’s NFP report, let’s see what happened overnight. Yesterday’s very modest declines in the US equity markets were followed by a slide in Japan (Nikkei -0.8%) and one in Australia (-0.6%) although this was predicated on weaker than expected GDP data, while Chinese shares (Hang Seng +1.6%, CSI 300 +1.3%) rallied on hopes that the economic conference next week is going to finally fire that long awaited Chinese bazooka! In Europe, the most interesting aspect is the CAC (+1.4%) is having a wonderful day after the French government fell and prospects for managing the economy there remain extremely uncertain. Perhaps that represents the idea that if the government is not interfering, French corporates can get on with the business of business unhindered and make more money. Or perhaps it is an assumption that the ECB will ease more forcefully to prevent a major mishap. After all, Madame Lagarde is French, so is likely not unbiased in the matter. As to US futures, at this hour (7:15) they are lower by -0.1% across the board as we await the data.

In the bond market, there is nothing going on at all. Treasury yields are unchanged on the day which is true of virtually every European sovereign with one exception, French OATs which have seen more buying and have slipped 2bps lower in the session. Here, too, it almost seems as though the market has decided the lack of a working government is better for France’s finances than when there is someone in power. One other thing to note is that JGB yields have edged lower by 1bp this morning and have fallen 4bps this week as USDJPY has traded higher over the same period. The most noteworthy thing here is that Toyoaki Nakamura, one of the most dovish BOJ members, explained that he was not against hiking rates, per se, and market participants took that as an opening for the BOJ to do just that and perhaps take a more pronounced stance against the ongoing inflation there. I’ll believe it when I see it.

In the commodity markets, apparently nobody needs oil (-0.8%) anymore as it continues to sell off. Remember just a few days ago we breached $70/bbl on the upside. Well, this morning we are below $68/bbl amid fears(?) that peace is breaking out in the Middle East with talk that Hamas is willing to release the hostages to achieve a cease fire. Arguably, a bigger issue is that much of the world (mostly China and Europe) have seen slowing economic activity and so demand estimates continue to decline along with the price. As to the metals markets, they have been bouncing around lately, not making any headway in either direction as it appears traders are waiting for more concrete clues about demand here as well. Gold (+0.2%) is the exception here, with demand not in question, just the timing of the next wave of central bank purchases.

Finally, the dollar is somewhat stronger overall this morning, notably vs. both AUD (-0.5%) and NZD (-0.4%) on the back of that weak GDP data. Away from that, the rest of the G10 is mostly a bit softer, but not seeing large moves with NOK (-0.4%) excepted on the weak oil prices. In the EMG bloc, declines are pretty consistent around the -0.2% range, but nothing really of note.

Now to the NFP data. Here’s what is forecast:

Nonfarm Payrolls	200K
Private Payrolls	200K
Manufacturing Payrolls	28K
Unemployment Rate	4.2%
Average Hourly Earnings	0.3% (3.9% y/Y)
Average Weekly Hours	34.3
Participation Rate	62.6%
Michigan Sentiment	73.0

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers (Bowman, Goolsbee, Hammack and Daly) so it will be interesting to see how they perceive the amount of caution that is appropriate going forward. As a marker, this morning the Fed funds futures market is pricing a 70% probability of a December rate cut, down 4 points.

The big picture remains that the economy continues to outperform the naysayers, at least according to the official data. The fact that performance is spread unevenly does not matter to markets at this time. As such, it remains difficult for me to create the scenario where the dollar gives up substantial ground. If the Fed does cut in two weeks, I think it will be the last for a while unless we start to see some major revisions lower in the data. Maybe that starts this morning, but until then, you have to like the buck.

Good luck and good weekend

Adf

To Further Debase

Posted on December 5, 2024 by fxpoet

Said Jay, “The economy’s strong”
But rate cuts before weren’t wrong
We’re in a good place
~~To further debase~~
~~Your dollars and will before long~~
As we slow the pace
Of policy ease all year long

Chairman Powell regaled the market for the last time before the Fed’s quiet period begins tomorrow evening and here are the three comments that seem to explain his current views.

“We wanted to send a strong signal that we were going to support the labor market if it continued to weaken.”
“The economy is strong, and it’s stronger than we thought it was going to be in September.”
“The good news is that we can afford to be a little more cautious as we try to find a rate-setting that neither spurs nor slows growth.”

My read is he was trying to make an excuse for the 50bp cut that started the process in September as there is still no justification for that move. However, he essentially reiterated his last remarks of the Fed not being in a hurry to cut rates further. As it happens, SF Fed president Mary Daly also explained, “We do not need to be urgent. There’s no sense of urgency, but we do need to continue to carefully calibrate our policy and make sure it’s in line with the economy we have today the one we expect to have going forward.”

Now, a funny thing happened to me yesterday as I read those comments, and my expectation was that the Fed funds futures market might reduce the probability of a December rate cut. After all, we just heard from the Chairman that things are good and they can be cautious about further cuts, while another member expressly said there was no urgency to cut. But in fact, the 74% probability this morning is unchanged from yesterday’s level and the punditry remains very convinced that they are going to cut next week despite their caution. It seems that my understanding of caution and Powell’s are somewhat different. However, his understanding is the one that matters, so it appears absent a major upside surprise in both NFP tomorrow and CPI next week, a cut is coming on the 18^th.

The French president, M. Macron
May soon find himself overthrown
His PM is out
And there is great doubt
‘Bout any new views he has shown

The other topic of note this morning is the collapse of Monsieur Macron’s minority government in France. This was the widely expected outcome that markets had priced in, so there has been little in the way of impact there. However, the bigger picture impact is about the structure of the Eurozone (and EU) and its rules. After all, if the second largest economy in the group is not merely floundering economically, but essentially leaderless, the concept of a coherent set of plans to oversee the Eurozone seems a bit of a stretch.

Macron’s term is not up until 2027, and he has consistently maintained he will not step down early, but there are increasing calls for him to do just that. Members of parliament on both the left and right, although not Marine Le Pen, the RN’s leader, have been vocal on the subject and a recent poll by Cluster17 for Le Point magazine showed that 54% of the French public wanted him to step down as well. Now, you know as well as I that absent a criminal conviction, the odds of an elected official stepping down anywhere in the world approach zero and I expect nothing less from Macron. At the same time, French law prevents another parliamentary election for 12 months after the last, which means July. At that time, one will almost certainly be called, and it will be interesting to see how that plays out.

However, in the meantime, it seems likely that France will be floundering with no ability to address fiscal issues, be they spending or deficit focused. This cannot be a positive for the single currency, especially if France slips into recession. Again, despite all the concerns over the dollar and the untenable fiscal deficits, things in Europe appear far worse. Parity in the euro and below seems a far better bet over the next 6 months than the opposite. While the euro (+0.2%) has bounced slightly this morning, a look at the chart below indicates, at least to me, that the trend is distinctly lower.

Source: tradingeconomics.com

And with that, let’s look at the overnight session in markets. Continuing in the FX world, that modest euro gain is descriptive of the market as a whole, with the dollar slightly softer this morning, although few currencies showing any notable strength. I suspect much of this is based on the idea that the Fed will cut rates soon despite the “strong economy”. In truth, in the G10, no currency has moved more than 0.2% and even in the EMG space, only ZAR (+0.4%) and HUF (+0.5%) have climbed more. Those moves, which don’t appear to have any fundamental drivers, seem more likely to be expressions of the fact those markets are more volatile than the G10.

In the equity markets, yesterday’s US rally, to new all-time highs across the board, saw a mixed review in Asia with the Nikkei (+0.3%) edging higher but both Hong Kong (-0.9%) and Shanghai (-0.25%) slipping a bit. The rest of Asia was also mixed with Korea (-0.9%) still suffering from the bizarre happenings there yesterday but other markets performing well (India +1.0%, Singapore +0.6%). In Europe, only the UK (-0.1%) is under water this morning although the CAC (+0.2%) is the continental laggard. Spain’s IBEX (+1.2%) is the leader on the back of stronger IP, and although Eurozone Retail Sales were much weaker than expected, it has not seemed to impact investor views. As to US futures, they are little changed at this hour (7:30).

In the bond market, Treasury yields have backed up 3bps and I am beginning to sense that there is a negative correlation to the probability of a Fed rate cut and the 10-year yield. As that probability rises, bonds sell off further, but that is merely an anecdotal observation, I have not done the math. In Europe, yields are mixed, but within 1bp of yesterday’s closing levels with even French yields slipping 1bp. It will be very interesting to see how the European Commission handles the fact that the French budget deficit is so far above the targeted 3% level and now without a government, there is no way to address the situation. The original idea when the euro was formed was that governments would be fined if they broke the policy caps on debt and deficits. Of course, no fine has ever been imposed and I don’t suppose one will be now. (However, if Marine Le Pen’s RN wins the election next summer, you can be sure they will seek to impose fines on her government!)

Finally, in the commodity markets, it is very quiet this morning. Oil (+0.3%) is edging higher after a big rise and fall yesterday. The rise was the result of a steep draw in US inventories, but the decline seemed to be a response to OPEC+ confirming they will be increasing production at some point in 2025. Meanwhile, metals markets are basically unchanged this morning.

One other thing I have not discussed but is obviously getting a lot of press this morning, is Bitcoin which traded through $100K yesterday after President-elect Trump named Paul Atkins to be his new SEC Chair. Atkins has a very pro crypto bias, and I expect we will see far more impetus in the crypto space going forward, not just in Bitcoin.

On the data front, yesterday’s ISM data was a bit softer than forecast while the Beige Book explained that economic activity rose slightly in the past month along with employment and prices, but all movements were quite modest. This morning, we see Initial (exp 215K) and Continuing (1910K) Claims as well as the Trade Balance (-$75.0B) and later we hear from Richmond Fed president Barkin.

Looking at the overall situation, investors continue to ignore any potential problems and run to risk assets, as evidenced by the rally in Bitcoin and new highs in stock prices. Unless we see some really surprising data, either crazy strong implying the Fed is going to stop easing, or crazy weak implying we are in a recession, I see no reason for this process to end heading into the new year and President Trump’s inauguration. Again, in that scenario, I think you have to like the dollar higher.

Good luck

Adf

Chaos is Spreading

Posted on December 4, 2024 by fxpoet

Around the world, chaos is spreading
As government norms get a shredding
Korea’s the latest
But not near the greatest
Seems to the Fourth Turning we’re heading

While Russia/Ukraine knows no end
And Israel seeks to defend
The French are about
To toss Michel out
And all this ere Trump does ascend

If you view markets through a macro lens, the current environment can only be described as insane. Niel Howe and William Strauss wrote a book back in 1997 called The Fourth Turning (which I cannot recommend highly enough) that described a generational cycle structure that has played out for hundreds of years. If you have ever heard the saying

Hard times make strong men (1^st Turning)
Strong men make good times (2^nd Turning)
Good times make soft men (3^rd Turning)
Soft men make hard times (4^th Turning)

Or anything in the same vein, this book basically describes the process and how it evolves. The essence is that about every 20-25 years, a new generation, raised by its parents whose formative years were in the previous Turning, falls into one of these scenarios. Howe and Strauss explained that at the time they wrote the book, we were in the middle of the 3^rd Turning, and that the 4^th Turning would be upon us through the 2020’s. One of the features they highlighted was that every 4^th Turning was highlighted by major conflict (WWII, Civil War, Revolutionary War, etc.) with the implication that we could well be heading toward one now.

Of course, we already have a few minor wars with Russia/Ukraine (although that seems to have the potential to be more problematic) and Israel/Hezbollah/Hamas, with Iran hanging around the edges there. In a funny way, we have to hope this is the worst we get, but there are still more than 5 years left in the decade for things to deteriorate, so we are not nearly out of the woods yet.

But turmoil comes in many forms and political turmoil is also rampant these days. This is evident by the number of sitting governments that have been ejected in the most recent elections as well as the increasingly strident blaming of others for a nation’s current problems. In this vein, the latest situation will happen shortly when the French parliament votes on a no-confidence motion against the current PM, Michel Barnier. As it is, he is merely a caretaker PM put in place by President Macron after Macron’s election gamble in June failed miserably. Adding to France’s problems, and one way this comes back to the markets, is that the French fiscal situation is dire, with a current budget deficit exceeding 6% of GDP and no good way to shrink it. In fact, Barnier’s efforts to do so are what led to the current vote. I have already discussed French yields rising relative to their European peers and the underperformance of the CAC as well.

On the one hand, today’s vote, which is tipped to eject Barnier, may well be the peak (or nadir) of the situation and things will only improve from the current worst case. However, it strikes me this is not likely to be the case. Rather, there are such a multitude of problems regarding immigration, culture, economic activity and government responsiveness, that we have not nearly found the end. My fear is we will need to see things deteriorate far more than they have before populations come together and agree that ending the mess is the most important outcome. Right now, there are two sides dug in on most issues and the split feels pretty even. As such, neither side is going to give up what they believe for the greater good, at least not yet.

And before I move on to the markets, I cannot ignore the remarkable events in South Korea yesterday, where President Yoon Suk Yeol declared martial law in the early hours on the basis of the opposition’s efforts to paralyze the government (I guess that means they didn’t agree with him). In the end, the Korean Parliament voted to rescind the order, and the military has since stood down with all eyes on the next steps including likely impeachment hearings for the President. Not surprisingly, Korean assets suffered during this situation with the won tumbling briefly, more than 2.6%, before retracing the bulk of those losses once the order was rescinded.

Source: tradingeconomics.com

Too, the KOSPI (-1.5%) suffered although that was off the worst levels of the day after things settled down. The point to keep in mind here is that markets are subsidiaries of economies. They may give indications of expectations for the future, or sentiments of the current situation, but if we continue to see geopolitical flare ups, markets are going to respond as investors seek havens. In this case, the dollar, despite all its flaws, remains the safest choice in many investors’ eyes, so should remain well bid overall.

Ok, let’s look at how markets have been behaving through this current turmoil. In Asia, given the events in Korea, it ought not be surprising that equities had little traction. Japanese shares were unchanged as were Hong Kong although mainland Chinese (-0.5%) and Australian (-0.4%) shares were under some pressure. That said, Australia suffered on weaker than forecast GDP data which puts more pressure on the RBA to cut rates despite inflation remaining sticky. Australia dragged down New Zealand (-1.5%) shares as well with really the only notable winner overnight being Taiwan (+1.0%). In Europe, investors seem to be betting on a more aggressive ECB as somewhat weaker than expected PMI Services data has led to gains on the continent (DAX +0.85%, CAC +0.5%, IBEX +0.7%) although UK shares (-0.2%) are not enjoying the same boost. I guess the French market has already priced in the lack of a working government, hence the market’s underperformance all year. US futures, at this hour (8:00) are pointing higher by between 0.3% and 0.6%.

In the bond market, yields are rising, with Treasuries (+4bps) leading the way although most of Europe are higher by between 3bps and 4bps. It has the feel that bond markets are starting to decouple from central banks as they see inflationary pressures building and central banks still in active cutting mode. I fear this will get messier as time goes on.

In the commodity markets, oil is unchanged this morning, right at $70/bbl, having continued its rally for the week on news that OPEC+ will maintain its production cuts through March 2025. NatGas (-2.0%) has been sliding since the spike seen 2 weeks ago ahead of the current cold spell as warmer weather is forecast for next week. In the metals market, gold (-0.2%) seems stuck in the mud right now while silver (-1.3%) and copper (-0.6%) appear to be victims of the dollar’s strength.

Turning to the dollar, it is stronger across the board with AUD (-1.3%) the laggard after that GDP data and it dragged NZD (-1.0%) down with it. JPY (-1.1%) is also under pressure as hopes for that BOJ rate hike dissipate. Away from those, the euro (-0.2%) and pound (-0.1%) are softer, but much less so. In the EMG bloc, ZAR (-0.5%) is feeling the weight of the weaker metals prices and we are seeing BRL (-0.3%) and CLP (-0.1%) also sliding slightly although both are stabilizing after more pronounced weakness earlier in the week.

On the data front, this morning brings ADP Employment. (exp 150K) along with ISM Services (55.5) and then the Fed’s Beige Book. Perhaps of more importance, at 12:45, Chairman Powell will be speaking and taking questions, so all eyes will be there looking for clues as to how the Fed will be viewing things going forward. Fed funds futures have been increasing the probability of that rate cut, now up to 74%, which implies we are going to see one, regardless of the inflation story.

Central banks around the world are in a bind as inflation refuses to fall like they want but many nations are seeing slowing economic activity. In the end, I expect that the rate cutting cycle has not ended, but the dollar is likely to remain well bid given both its haven status and the fact that the US economy is outperforming everywhere else.

Good luck

Adf

Declines and Duress

Posted on December 3, 2024 by fxpoet

In France, there’s a government mess
That lately’s been causing some stress
For French sovereign debt
With stocks under threat
Of further declines and duress

In one of the most colossal political blunders in recent memory, French President Emmanuel Macron completely misread the country and called a snap election after the European Parliament elections sent his party and allies to a significant defeat in June. In what should not have been a surprise to anyone, his party was decimated in the national election, although the results have been even more unfortunate for the people of France as they have basically left the nation without a working government. While there is currently a caretaker PM in place, Monsieur Barnier is almost certainly going to lose a no-confidence vote tomorrow as both the left and right express their displeasure at the situation.

Alas, the pattern we observe of late is that European citizens have been generally unhappy with the decisions made by their governments, with a universal issue being immigration policies, and when elections have been held, the parties in power have been shown the door. Or they would have been except that they are extremely reluctant to leave office and are willing to do anything at all, except work with the anti-immigration parties (typically on the right) to govern their nations. The result has been a series of election results with very weak minority governments and no power to do anything to help their citizens by addressing key issues. Budgets are a problem; massive debt loads are constraining and economic activity is shrinking.

France is merely the current fracas although we have seen the same things occur in Germany, the Netherlands, Austria, Sweden and much of Eastern Europe. From our perspective, the issue here is what does it mean for the economic prospects of the euro (and other European currencies) and how might the ECB respond. Consider that as poorly as things are going in Germany, and they are really having a tough time, a quick look at the performance of the DAX and CAC (as well as the S&P 500) shows that France is really a laggard right now.

Source: tradingeconmics.com

Since the dip in the beginning of August, French equities are essentially unchanged while even German equities have risen 15% alongside their US brethren. During that same period, French 10-year yields have been rising relative to their German counterparts as fears over a French fiscal disaster rise. In fact, there is now discussion that the ECB will need to use their TPI program, originally designed to support Italian debt, to prevent the spread between French and German yields from widening too far.

If you were wondering why the euro has been having problems lately, this has clearly been a piece of the puzzle, and likely a key piece. While the single currency has rallied slightly this morning, up 0.2%, the below chart speaks volumes as to the direction of travel.

Source: tradingeconomics.com

While yesterday I explained why I thought over time the dollar might eventually decline, right now, I think we need to look for the euro to test parity and potentially go below for the first time since November 2022.

As well, there’s another key nation
That’s seeking its ‘nomic salvation
Their currency’s falling
As pundits are calling
For stimulus midst their frustration

This brings our attention to China, where next week, the Central Economic Work Conference will be held as President Xi tries to shake the nation out of its economic lethargy. There are high hopes for yet more stimulus despite the fact that the efforts so far have had a limited impact at best. Perhaps the Chinese problem can best be described as they produce far too many goods for their own consumption and so run large trade surpluses angering their trade partners. While President-elect Trump gets most of the press regarding his complaints about China’s economic behavior, it turns out that many countries around the world are pushing back. This morning’s WSJ had an article on this very issue and it seems possible that President Xi may find himself even more isolated on the issue than before.

The natural solution is for China to consume more of what it produces, but that is far easier said than done, especially as the youth unemployment rate in China remains quite high, above 17%, while demographics continue to work against the country. Arguably, one way to solve this issue would be for the renminbi to strengthen dramatically, simultaneously increasing the price of Chinese exports, so likely reducing demand, while increasing demand for imports. Unfortunately, as can be seen below, the currency is moving in the opposite direction as the tariff threats from the US and elsewhere feed into the market psyche.

Source: tradingeconomics.com

It will be interesting to see if the PBOC is comfortable allowing the renminbi to weaken further. It is currently at its weakest point since July, but also at levels where historically, the PBOC has entered the market over the past several years to prevent further declines. With tariffs imminent, will this time be different?

Ok, let’s turn to the overnight market activity. Asian equity markets were all strong overnight led by Japan (+1.9%) although we saw gains throughout the region (Korea +1.9%, India +0.75%, Taiwan +1.3%). In China, Hong Kong (+1.1%) fared far better than the mainland (+0.1%) although both these markets closed well off early session lows after discussion of the economic conference and more subsidies made the rounds. In Europe, screens are green this morning as well, seemingly on growing hopes that the ECB will be cutting more aggressively as data there remains soft, and comments from Fed Governor Waller yesterday indicated he was on board with further cuts despite the current data showing solid performance. However, US futures are little changed at this hour (7:30) as focus begins to turn toward Friday’s NFP report.

In the bond markets, yields are edging higher with 10-year Treasuries up 2bps while most European sovereigns are higher by between 1bp and 3bps. France is an exception this morning as that TPI talk has traders thinking there will be a price insensitive bid for OATs soon.

In the commodity markets, oil (+1.2%) is rebounding nicely from yesterday’s selloff although continues to trade below that $70/bbl level. In the metals market, yesterday’s declines, which seemed to have been driven by the much stronger dollar, are being reversed in silver (+0.8%) and copper (+1.0%) although gold is essentially unchanged on the day.

Finally, the dollar, after a ripping rally yesterday, is backing off a bit, but not very much. In fact, there are a number of currencies which are still sliding somewhat, notably CNY (-0.2%) and SEK (-0.2%) with the only gainer of note this morning being CLP (+0.6%) as it follows the price of copper higher. Broadly speaking, the current setup remains quite positive for the dollar I believe.

On the data front, this morning brings only the JOLTS Job Openings report (exp 7.48M) and a bit more Fedspeak. Yesterday’s ISM data was stronger than expected but still, at 48.4, below the key 50.0 level indicating manufacturing is still in a funk. Perhaps better news was that the Prices Paid survey declined to 50.3, potentially indicating reduced inflation pressures.

While the market keenly awaits Chairman Powell’s speech on Wednesday as well as the NFP release on Friday, I sense that there is limited appetite to take on new positions. Implied volatility is climbing as uncertainty reigns over the market but has not yet reached extremely high levels. For hedgers, this is when options make the most sense.

Good luck

Adf

The Conundrum We Find

Posted on December 2, 2024 by fxpoet

Tis nearly a month since the vote
When President Trump, Harris, smote
So maybe it’s time
To sample the clime
Of what all his plans now connote

To many, his claims are just talk
With pundits believing he’ll balk
But history shows
That Trump will bulldoze
Detractors as he walks the walk

So, tariffs are likely to be
The first part of his strategy
But if that’s the case
The dollar may chase
Much higher than he’d like to see

It seems the conundrum we find
Is not all his thoughts are aligned
And this, my good friends
Is why dividends
Are paid to a hedge, well designed

I have tried to stay away from forecasting how things will evolve once Mr Trump is inaugurated, but this weekend, listening to a podcast (Palisades Gold Radio) I got inspired as there was some interesting discussion regarding the dollar. As I consider the issues, as well as what appears to be the current expectations, I thought it might be worthwhile to note my views, especially in the context of companies considering their hedging needs for 2025 and 2026.

Clearly, the watchword for Trump is tariffs as he has been boasting about implementing significant tariffs on trade counterparties on day 1. The latest discussion is 25% on Canada and Mexico and 60% on China with Europe in the crosshairs as well. (Remember, though, many believe these tariff threats are being used to encourage those countries to change their emigration policies and help stop the current influx of illegal immigration. So, if countries do their part, those tariffs may never materialize.)

The classical economic view is that tariffs are a terrible policy as impeding free trade negatively impacts all players. As well, you will hear a lot about how the countries in question will not pay them, but rather consumers in the US will pay those tariffs. As such, there is a great deal of talk about how tariffs will feed immediately into inflation. (Of course, this is in addition to the inflation that will allegedly come immediately on the heels of Trump’s promise to deport all illegal aliens in the country because it will decimate the workforce. On this subject, simply remember that the deportation will result in a significant decline in demand for things like housing which remain quite sticky in the pricing process.)

But let’s consider what Trump’ stated goals really are. I would boil them down to rebuilding America’s industrial capacity and creating good jobs throughout the nation for citizens and legal residents. If he is successful, the result will be a dramatic reduction in the trade deficit which will reduce the need to import so much foreign capital to fund things. And what are the knock-on effects there? Well, classical economics tells us that tariffs will be met with foreign currency depreciation (higher dollar) in an effort to offset the higher prices of those imports. However, one of Trump’s goals is to reduce the value of the dollar in order to make US exporters more competitive internationally while reducing demand for imports. Now, it seems that those two goals are at odds.

I think the thing we need to consider, though, is that the timing of these changes is very uncertain. My guess is Trump is thinking of a 4-year process, or at least a 3-year one, not a 6-month outcome. After all, these are tectonic shifts which will take time to play out. Based on his commentary, and I think we must pay it close attention as he is pretty clearly telling us what he wants to do, the market response to any tariffs imposed will likely be weakness in the currencies of the countries affected.

But, over time, it would not be surprising to see Trump lean effectively on the Fed to reduce policy rates (remember, he was quite upset the Fed never went negative). As well, if there is any success in the DOGE project, with significant reductions in spending and deficits, that seems likely to alleviate some of the concerns over the US fiscal stance. After all, if debt grows more slowly than the nominal pace of the economy, it remains quite manageable and should help remove some of the current hysteria. In fact, a look at the 10-year yield over the past month (see chart below) shows that it has fallen 25bps (although they are 4bps higher this morning) and may well be signaling a market that is willing to give DOGE a chance. If that is the case, it seems quite possible that the dollar will eventually start to recede from its current loftier levels.

Source: tradingeconomics.com

Bringing this back to the hedging issue, I might suggest that given the uncertainty of the timing of any movements, receivables hedgers will be well-served by using optionality here, whether outright purchases or zero-premium structures as they look to address 2025 and 2026 exposures. While the dollar may well continue its recent strengthening trend with the euro heading to parity or below for a time, and other currencies following, at some point in H2 25 or beyond, it is quite feasible that the dollar reverses course. Consider what could happen if Trump convenes a Mar-a -Lago accord, similar to the Plaza Accord of 1985, which saw the dollar decline dramatically in the ensuing three years, falling nearly 50% against a broad mix of trading partners’ currencies by the end of 1987.

Source: tradingeconomics.com

In that situation, those out-month hedges will want to have optionality to allow the weaker dollar to benefit the revenue line. Similarly, for those with payables hedges, care must be taken to hedge effectively there as well given the opportunity for much higher costs due to the potential dollar decline. Current market pricing (implied volatilities) is quite reasonable from a long-term perspective. While they are not near the lows seen in the past year, they very likely offer real value for hedgers of either persuasion.

I apologize for the extended opening, but it just seemed to be a good time to review the evolving Trump impact. Now onto markets. The first thing to recall is that last Wednesday’s PCE data continued to show that inflation, even in this measurement, appears to have stopped declining and is beginning to head higher again. This will continue to put pressure on the Fed as housing data was pretty dreadful last Wednesday. Add to the data conundrum the unknown unknowns of a Trump presidency and Chairman Powell will have his hands full until his term ends.

Friday’s abbreviated session in the US saw two of the three major indices trade to new all-time highs (NASDAQ is < 1.0% below its recent high) and that seemed to help support the Asian time zone markets with green outcomes nearly universal. Japan (+0.8%), China (+0.8%) and Hong Kong (+0.65%) all had solid sessions as did every regional exchange other than Indonesia (-0.95%) which has been suffering for the past several months in contrast to most other nations. In Europe, the picture is more mixed with most bourses in the green (DAX +0.8%, IBEX +0.9%) although the CAC (-0.35%) is feeling pain from increased worries that the government there will fall, and the fiscal situation will be a disaster going forward. French yields continue to climb vs. every other European nation as the country is leaderless for now. For the rest of the continent, slightly softer PMI Manufacturing data seems to have investors increasing their bets that the ECB is going to become even more aggressive in their rate cutting going forward. As to the US futures market, at this hour (7:00) it is mixed with the SPX (+0.5%) rising but the other indices little changed.

In the bond market, as mentioned above, US yields have rallied a bit although European yields are all lower by between -2bps and -4bps (France excepted at unchanged) as those hopes for an ECB rate cut are manifest here as well. As to JGB’s, 10yr yields are higher by 2bps this morning as there is increasing chatter that Ueda-san will be hiking rates later this month. One other interesting note here is that in the 30-year space, Chinese yields have fallen below Japanese yields for the first time ever. This seems to be an indication that market expectations of a Chinese rebound (despite solid Caixin PMI data overnight at 51.5) are limited at best.

In the commodity markets, oil is little changed on the day, remaining below the $70/bbl level but potentially seeing some support after a story surfaced that China would be reducing its purchases of Iranian oil in an effort to avoid US sanctions and tariffs under the Trump administration. If Trump is successful in isolating Iran again, that could well support prices. In the metals markets, this morning is seeing a little profit-taking in the precious space after last week’s late rally, but industrial metals are little changed.

Finally, the dollar is stronger again this morning, rallying against all of its counterparts in various degrees. The euro (-0.5%) is lagging along with SEK (-0.65%) in the G10 space as concerns over slowing growth weigh on the single currency. But the dollar is stronger across the board. In the EMG bloc, BRL (-0.75% and back above 6.00) is leading the way lower but we have seen declines across the board with MXN (-0.4%), KRW (-0.7%), ZAR (-0.6%) and HUF (-1.1%) just some of the examples. Despite that hotter than expected PCE data last Wednesday, the market is still pricing a nearly 62% probability of a cut by the Fed later this month.

On the data front, there is much to learn this week, culminating in NFP data on Friday.

Today	ISM Manufacturing	47.5
	ISM Prices Paid	55.2
Tuesday	JOLTS Job Openings	7.48M
Wednesday	ADP Employment	150K
	ISM Services	55.6
	Factory Orders	0.3%
	Fed’s Beige Book
Thursday	Initial Claims	215K
	Continuing Claims	1905K
	Trade Balance	-$75.1B
Friday	Nonfarm Payrolls	195K
	Private Payrolls	200K
	Manufacturing Payrolls	15K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.6%
	Michigan Sentiment	73.3

Source: tradingeconomics.com

In addition to all the data, we hear from 10 different Fed speakers, most notably Chairman Powell on Wednesday afternoon. Given that the recent data does not seem to be going according to their plans, at least not the inflation data, it will be very interesting to hear what Powell has to say about things.

As the end of the year approaches with many changes certain to come alongside the Trump inauguration, I will once again express my view that hedging is crucial for risk managers here. While I see the dollar benefitting in the near term, as discussed above, the longer-term situation is far less certain.

Good luck

Adf

In a Plight

Posted on November 27, 2024 by fxpoet

The Minutes explained that the Fed
Is confident, looking ahead
They’ve conquered inflation
Although its duration
May last longer than they had said

They still think their policy’s tight
And truthfully, they may be right
But if they are not
And ‘flation’s still hot
They might find themselves in a plight

Below are a couple of key passages from the FOMC Minutes which show that the Fed continues to put on a game face when it comes to their performance. Although some participants have begun to hedge their bets, it is clear the majority of the committee remains convinced that despite the broad inaccuracies of their models over the past ~~forty~~ four years, they are still on track to achieve their objectives.

“Participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”

“Participants indicated that they remained confident that inflation was moving sustainably toward 2%, although a couple noted the possibility that the process could take longer than previously expected.” [emphasis added]

And this morning, they will get to see if their confidence has been rewarded with the release of the October PCE data (exp 0.2%, 2.3% Y/Y headline; 0.3%, 2.8% Y/Y core). One of the tell-tale signs that they are losing confidence is there has been more discussion about the vagaries of where exactly the neutral rate lies as evidenced by the following comment.

“Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”

Once upon a time, the Fed was the undisputed master of markets, and their actions and words were the key drivers of prices across all asset classes. However, not dissimilar to what we have seen occur regarding other mainstream institutions and their loss in respect, the same is happening at the Marriner Eccles Building I believe. Chairman Powell, he of transitory inflation fame, is a far cry from the Maestro, Alan Greenspan, let alone Saint Volcker, and my observation is that more and more market participants listen to, but do not heed, the Fed’s words.

My read is the Fed has it in their mind that they need to continue to cut rates because the committee members have not lived through periods when interest rates were at current levels for any extended length of time. They still fervently believe that their policy is restrictive, despite all the evidence to the contrary (record high stock prices and GDP expanding above potential) and so seem afraid that if they don’t cut rates they will be blamed for a recession. I would argue the market interpretation of the Minutes was dovish as shown by the Fed funds futures market increasing the probability of a December cut to 66%. Remember, Monday it was 52%. My cynical view is the reason Powell wants to cut is his friends in the Private Equity space are suffering and he wants to help, because really, given both the inflation and economic activity data, it does not appear a cut is warranted.

Turning our attention elsewhere, there is a story going round that China is preparing to fire that bazooka this time…for real. At least that’s what I keep reading on X, and certainly, Chinese equity markets rallied on something (CSI 300 +1.75%, Hang Seng +2.3%), but I cannot find a news story explaining any of it. Were there comments from Xi or Li Qiang? If so, I have not seen them. While Chinese assets have underperformed lately, that seems to have been a response to the Trump announcements of even more tariff-minded economic cabinet members. And the currency is essentially unchanged this morning, hanging just above that 7.25 level vs. the dollar which has served as a cap for the past decade. (see below).

Source: tradingeconomics.com

Keep in mind that the consensus view is if Trump imposes tariffs, the renminbi will weaken enough to offset them very quickly. Arguably, the dollar’s strength since September, when it briefly traded below 7.00, is a response to first, Trump’s improving prospects to win, and then once he won, his cabinet selections. Will CNY really decline 5% if tariffs are imposed? That seems an awful lot, but I guess it’s possible. It strikes me that hedgers should be looking at CNY puts to manage their risk here.

Finally, a look at Europe shows that the dysfunction on the continent seems to be accelerating. France is the latest target as the current government is hanging on by a thread with growing expectations that Marine Le Pen’s RN party is going to call for a confidence vote and topple it. As well, there are growing calls for President Macron to resign as he has clearly lost control. They are currently running a 6% fiscal deficit (just like the US although without the benefit of the world’s reserve currency) and they already have the highest tax burden in Europe. With Germany sinking further into its own morass (GfK Consumer Confidence fell to -23.3 and continues to show a nation lacking belief in its future. Just look at the longer-term chart of this indicator below:

Source: tradingeconomics.com

While Covid was obviously a problem, things seemed to be getting back toward normal until Russia’s invasion of Ukraine in early 2022 sent energy prices higher and laid bare the insanity of their Energiewende policy. As industry flees the country and politics focuses on the immigration issues ignited by Angela Merkel’s open borders policy, people there truly have little hope that things will get better.

I cannot look at the situation in both Germany and France, with both nations struggling mightily and conclude anything other than the ECB is going to be cutting rates more aggressively going forward. Combining that with the ongoing belief that Trump’s policies are going to be dollar positive overall, it seems that the euro has much further to decline. Do not be surprised to see it break parity sometime early in 2025.

Ok, ahead of the Thanksgiving holiday, let’s look at other markets. In addition to the gains in Chinese shares, Australia (+0.6%) and New Zealand (+0.7%) had a good session with the latter buoyed by the RBNZ cutting rates the expected 50bps. However, Japan (-0.8%) was under pressure as the yen (+1.1%) rallied strongly on rumors that the BOJ is getting set to hike rates next month, a bit of a change from the previous viewpoint. In Europe, the CAC (-1.25%) is the laggard as investors are watching French OATs slide in price (rise in yields) relative to their German Bund counterparts and worrying that if the government does fall, there is no way for things to work without the RN involved. But the DAX (-0.6%) is also softer as is the rest of the continent. Only the UK (0.0%) is holding up this morning. meanwhile, at this hour (7:10), US futures are pointing slightly lower, just -0.15% or so.

In the bond market, Treasury yields (-4bps) continue to slide as investors are going all-in on the idea that proposed Treasury Secretary Bessent will be able to solve the intractable problems current Secretary Yellen is leaving him. This decline is helping European sovereign yields slide as well, as they decline between -1bp and -3bps. However, a quick look at the chart below shows the above-mentioned Bund-OAT story and how that spread is the widest it has been in many years.

Source: tradingeconomics.com

In the commodity space, oil (+0.2%) is settling in just below $70/bbl as it becomes clear that OPEC+ is not going to be raising production anytime soon. NatGas (-4.8%) has suffered this morning on warmer weather in Europe, but the situation there remains dicey at best, and I think this has further to run. In metals markets, gold (+0.8%) is continuing to rebound from Monday’s wipeout, having recouped about half of the move, and we are also seeing strength in silver and copper on the China stimulus story.

Finally, the dollar is under pressure again this morning with the yen and NZD (+1.1%) leading the way although the euro (+0.3%) and pound (+0.3%) are having solid sessions as well. In the EMG bloc, MXN (-0.3%) continues to be pressured by the tariff talk although much of the rest of the bloc is following the euro’s lead and edging higher. My sense here is that there are quite a few crosscurrents pushing the dollar around so on any given day, it is hard to tell what will happen. However, I still am looking for eventual further dollar strength, especially given the Fed seems to be far less likely to cut aggressively.

On the data front, yesterday’s new Home Sales were horrific, falling -17.3% and indicating the housing market is beginning to struggle. I think that is one of the reasons the rate cut probability rose. As to the rest of today’s data beyond PCE we see the following:

Personal Income	0.3%
Personal Spending	0.3%
Q2 GDP	2.8%
Durable Goods	0.5%
-ex Transport	0.2%
Initial Claims	216K
Continuing Claims	1910K
Goods Trade Balance	-$99.9B
Chicago PMI	44.0

Source: tradingeconomics.com

With the holiday, there are no Fed speakers scheduled and Friday, exchanges are only open for a half-day. There continues to be a very positive vibe overall, with retail investors the most bullish they have ever been according to several banking surveys. As well, there continues to be a positive vibe from the Trump cabinet picks which has many people expecting great things. As I said yesterday, I hope they are correct.

My concerns go back to the fact that I just don’t see inflation declining like the Fed projects and that is going to have some negative market impacts along the way. The one inflation positive is that I see oil prices with the opportunity to fall further, although demand for NatGas should keep that market underpinned. As to the dollar, I’m still looking for a reason to sell it and none has been presented.

There will be no poetry on Friday so please have a wonderful Thanksgiving holiday and we get to see how things play out come Monday.

Good luck and good weekend

Adf

Think More Than Twice

Posted on November 26, 2024 by fxpoet

The verdict, as best I can tell
Is Trump and his new personnel
Are being embraced
So, buy risk, post-haste
Lest owners all choose not to sell!

And yet there seems always a price
Where owners will sell in a trice
But if it’s that high
It just might imply
It’s worth it to think more than twice

Euphoria is one way to describe what we have seen in markets over the past several sessions, with substantial gains across both equity and bond markets while havens like gold and the dollar have been discarded. Insanity may be a better way to do so. Regardless of your description, the facts are that risk assets have been consistently higher since the election results and there is a palpable excitement about how the future, at least for markets, will unfold. I hope all this excitement is not misplaced, but it is still early days. Just remember, that whatever ideas are currently being bandied about regarding Trumpian policies, it is almost certain that the reality will not quite live up to the hype.

Consider, too, for a moment just how different the impact will be on different markets. The obvious first thought is China, where we have seen a significant divergence between the S&P 500 and the CSI 300 over the past week as seen in the chart below.

Source: tradingeconomics.com

My point is all that euphoria is very country specific. After all, yesterday’s comments by President-elect Trump that on day one he will impose tariffs of 25% on all imports from both Mexico and Canada had the expected impact on their currencies, weakening both substantially. In fact, it is quite interesting to look at a longer-term chart of USDCAD and see that this is the third time in the past decade the exchange rate has traded above 1.40. The previous two times were the beginnings of Covid, amid massive risk-off trading…and in 2016 when Mr Trump was previously elected president.

Source: tradingeconomics.com

I assure you that whatever China decides to do, and they have many inherent strengths as well as weaknesses, both Mexico and Canada are going to ultimately concede to whatever Trump wants as they cannot afford to ignore it. In fact, my take is that the reason so many political leaders around the world are distraught is because they recognize that they are going to have to change their policies to keep in Trump’s good graces. To me, the implication is that we are due for much more volatility as markets respond to all the changes that are coming.

And that should be our watchword going forward, volatility. We live in a time where previous theories that led to previous policies are being questioned and upended. We are also living through what appears to be the end of the Pax Americana era, where the US is turning its focus inward rather than concerning itself with pushing its brand globally. These realignments are going to be ongoing for quite a while, and as new models will need to be developed and implemented, in both the public and private sectors, outcomes are going to remain quite uncertain for a while. It is this that will drive all the volatility. Once again, I urge hedgers to keep this in mind and maintain robust hedging programs as risk mitigation is going to be critical for future performance.

Ok, so let’s look at how things turned out overnight. While the rally in the US equity market continues, especially in value and small-cap stocks, the story in Asia was far less positive with declines in Japan (-0.9%), China (-0.2%) and Australia (-0.7%) and almost every regional exchange in the red overnight. This seems a direct response to the resurgence of tariff talk from Trump and I expect may be the guiding force for a while yet, perhaps even until the Inauguration. Of course, we could also see some nations capitulating quickly in an effort to gain favor and I would expect those markets to reflect a more positive stance in that situation. Neither is Europe immune from tariff talk as every bourse on the continent is weaker this morning amid concerns that tariffs are coming for them as well. In addition, Trump has made it clear he is uninterested in supporting the Ukraine effort which means that either Europe will need to spend more money, or the map is going to change in an uncomfortable manner. As to US futures, at this hour (7:20) they are modestly firmer.

In the bond market, yesterday saw the largest rally (-14bps) since the July NFP report showed Unemployment jumped to 4.3% in early August and triggered all sorts of claims that recession had started. Yesterday’s catalyst was far more ambitious, ascribing success to Treasury Secretary selection Scott Bessent’s ability to rein in the fiscal deficit. That bond rally dragged European sovereign yields lower, although a much smaller amount, 3bps-5bps, and this morning things are back to more normal trading with Treasury yields unchanged while Europeans are generally trading with yields lower by -2bps. Certainly, if fiscal issues are successfully addressed, the opportunity for bond yields to decline exists, but this seems like a lot of hope right now.

In the commodity markets, gold had its worst day in forever, falling $110/oz although it is rebounding a bit this morning, up $21/oz or 0.8%. That move seemed entirely driven by this same euphoria that has been underpinning both stocks and bonds, namely the future is bright, and havens are no longer needed. Silver, too, had a rough day yesterday and is rebounding this morning, +1.4%, while copper sits the whole move out. Oil (+0.8%) sold off yesterday amid the same risk thoughts as well as the news that an Israeli/Hezbollah ceasefire may be coming soon, reducing Middle East risk. In the short-term, the day-to-day vicissitudes of oil’s price are inscrutable to all but the most connected traders, but nothing has changed my longer term view, which has only been enhanced by Trump’s drill, baby, drill thesis, that there is plenty of oil around and sharp price rises are unlikely going forward.

Finally, the dollar seems to have put in a top last Friday and has been selling off since the Bessent announcement. I’m not sure I understand the logic here as Bessent is seeking to increase real GDP growth while reducing the deficit, both of which strike me as dollar positives. Perhaps the idea is interest rates will be able to be lower in that situation, thus undermining the dollar, but again, on a relative basis, it seems quite clear that the US remains in far better macroeconomic condition than virtually every other nation. So, if the US is cutting rates, others will be cutting even faster. However, that is where we are this morning, with both the euro (+0.5%) and pound (+0.4%) climbing alongside the yen (+0.7%). Offsetting that is the Loonie (-0.7%) and MXN (-0.8%) as both are the initial targets of those potential tariffs. It strikes me that we are likely to see a number of previous relationships break down as the tariff talk adjusts views on different national outcomes. Once again, volatility seems the watchword.

On the data front, this morning brings Case-Shiller Home Prices (exp 4.8%), Consumer Confidence (111.3) and New Home Sales (730K) and then the FOMC Minutes are released at 2:00. All eyes will be there as things have so obviously changed since the meeting earlier this month, including Chairman Powell’s downshifting on the rate cutting cycle. You remember, he is no longer in a hurry to do so. Interestingly, as of this morning, the futures market is pricing in a 60% chance of a cut next month, up from 52% yesterday morning. Perhaps that is a result of yesterday’s Chicago Fed National Activity Index, a meta index looking at numerous other indicators, which printed at -0.40, much worse than the expected -0.20, and as can be seen below, has shown a consistent trend that growth may not be what some of the headline data implies.

Source: tradingeconomics.com

Remember, too, with the holiday on Thursday, tomorrow brings a huge data dump so macro models will be waiting to respond. As well, given the holiday, liquidity is likely to be less robust than normal meaning price dislocations are quite possible.

My sense is the dollar’s decline is more of a profit taking exercise (recall it rallied more than 7% in a few months) than a change in the long-term fundamentals. But it is always possible that the new administration’s policies will be focused on pushing the dollar down, although funnily enough I don’t think Trump really cares about that this time. My take is he is far less concerned about growing exports than reducing imports and bringing production home. We shall see.

Good luck

Adf

Three-Three-Three

Posted on November 25, 2024 by fxpoet

Apparently, everyone’s sure
Scott Bessent is wholesome and pure
As well, he will fix
The Treasury’s mix
Of policies for more allure

He’s focused on three, three and three
His shorthand for what we will see
The budget he’ll cut
Build up an oil glut
And push up the real GDP

President-elect Trump has named hedge fund manager Scott Bessent to be Treasury Secretary. This appears to be one of his less controversial selections and has been widely approved by both the punditry and the markets, at least as evidenced by the fact that equity futures are rallying while Treasury yields are sliding. An article in the WSJ this morning lays out his stated priorities which can be abbreviated as 3-3-3. The 3’s represent the following:

Reduce the budget deficit to 3%
Pump an additional 3 million barrels/day of oil
Grow GDP at 3% on a real basis

The target is to have these three processes in place by the end of Trump’s term in 2028. I certainly hope he is successful! However, while 3-3-3 is a catchy way to define things, it is a heavy lift to achieve these goals. In the article, he also explains that he will be seeking to make permanent the original Trump tax cuts from 2017 as well as uphold Trump’s promises of no tax on tips, overtime or Social Security.

Now, the naysayers will claim this is impossible, especially the idea of cutting taxes and reducing the budget deficit, but then, naysayers make their living by saying such things. While nothing about this will be easy, the one overriding rule, I believe, is that increasing the pace of real GDP growth is the only way to achieve any long-term sustainability. It is in this space where I believe the synergies between Treasury and the newly created DOGE of Musk and Ramaswamy will be most critical. Improved government efficiency (I know, that is truly an oxymoron) and reduced regulatory red tape will be what allows the real economy to perform above its currently believed potential growth rate. And in truth, if Trump and his government are successful at that, the chances of overall success are quite high. Yes, that’s a big ‘if’ but it’s all we’ve got right now.

And truthfully, this has been the only story of note overnight as the punditry churns out stories about what can be good or why he will fail. While there was a note that a ceasefire in Lebanon may be close, I don’t believe that has been a major part of the market narrative regarding oil prices for a while. After all, Lebanon doesn’t have any oil infrastructure and while Iran clearly funds Hezbollah, it doesn’t appear they have been willing to lay it all on the line for Hezbollah’s success.

So, market participants are very busy trying to determine the best investments in the new Trump administration and based on all we have seen so far, it appears that Bitcoin is at the top of the list followed by equities, especially value and small-cap and then the rest of the equity universe. US markets remain more attractive than foreign markets while commodities, especially haven assets like precious metals, have lost their allure in this shiny new world. At this point, the big Investment banks are busy increasing their equity market targets for 2025 and beyond with S&P 500 forecasts of 6700 and more already being put in place.

Oh yeah, one other thing is the dollar, which had been on a tear for the past two months, has at the very least paused and some are calling that it has topped. While it is certainly softer this morning, calling a top may be a bit premature. At any rate, let’s see how markets around the world have behaved in the wake of the newest US news.

Some are saying that Friday’s US equity rally was in anticipation of the Bessent pick, and certainly his name was on the short-list, but that’s a tough case to make in my eyes. Nonetheless, rally it did and that was followed by strength in Japan (+1.3%) overnight as well as most of Asia (Korea +1.4%, India +1.25%, Australia +0.3%) although both China (-0.5%) and Hong Kong (-0.4%) lost ground as Bessent is very clear that tariffs are an important part of his strategy. Meanwhile, in Europe, there are modest gains (DAX +0.1%, FTSE 100 +0.2%, IBEX +0.6%) although the DAX (-0.1%) is softer after weaker than forecast IFO data. Europe remains stuck in a difficult situation as their energy policy is hamstringing the economy while services inflation remains stickier than they would like to see, thus potentially hindering more aggressive ECB policy. In the end, though, prospects on the continent are just not as bright as in the US right now. US futures are quite happy with the Bessent choice, rising 0.5% at this hour (7:30).

In the bond market, investors are also of the belief that Bessent will be able to solve some of the US’s problems and Treasury yields have slipped -4bps this morning, although remain near 4.40%. However, European sovereign yields are all creeping higher, between 1bp and 3bps, as the prospects there seem less positive. I would say that investors are willing to give Bessent a chance to try to improve the US fiscal situation and that should help encourage bond buying.

Commodity markets, though, are under pressure generally, although not completely. For instance, oil prices fell $1/bbl upon the Bessent news but have since regained the bulk of that as it appears the growth story is starting to take over. Nat Gas (+4.8%) is continuing to rally strongly, especially in Europe as cold weather forces rapid inventory drawdowns and supplies remain a political, not market question. Interestingly, upon inauguration, one of the first things Trump has promised is to take the pause off the LNG terminals which should raise demand in the US as exports increase and potentially reduce prices in Europe.

However, as mentioned above, precious metals are under pressure (Au -1.2%, Ag -1.9%) as investors believe that a combination of less warmongering and an attack on the fiscal deficit will both reduce the need for a safe haven. As well, given Trump’s well-known disdain for the climate change hysteria, it seems likely support for wind and solar will be reduced, if not eliminated, and silver is a critical need for solar panels.

Finally, the dollar is under pressure this morning, lower versus almost all its counterparts, notably the euro (+0.6%), although also seeing losses (currency gains) against the entire G10, more on the order of 0.25% or so. In the EMG bloc, CLP (+0.9%) is the leader as copper (+0.6%) is the outlier in the metals group gaining on the positive economic story. But we are seeing strength in MXN (+0.45%), PLN (+0.8%) and CNY (+0.15%) as long dollar positions are reduced.

On the data front this week, with the Thanksgiving holiday on Thursday, everything is crammed into the beginning of the week as follows:

Today	Chicago Fed National Activity	-0.15
Tuesday	Case-Shiller Home Prices	4.9%
	Consumer Confidence	111.6
	New Home Sales	730K
	FOMC Minutes
Wednesday	PCE	0.2% (2.3% Y/Y)
	Core PCE	0.3% (2.8% Y/Y)
	GDP	2.8%
	Personal Income	0.3%
	Personal Spending	0.3%
	Durable Goods	0.5%
	-ex transports	0.2%
	Initial Claims	217K
	Continuing Claims	1910K
	Real Consumer Spending	3.7%
	Chicago PMI	44.7

Source: tradingeconomics.com

Mercifully, the Fed seems to be taking the week off with no scheduled speakers although I suppose if something surprising happens, we will likely hear from someone.

I guess the question is, does Scott Bessent really change everything by that much? Obviously, we have no way of knowing until he is in the chair, and that is probably two months away at minimum and then it will take some months before anything of substance actually happens.

But, when I consider my long-term thesis which was that inflation is going to be with us for a while which will result in a steeper yield curve, especially if the Fed continues to cut rates, that would have helped both the dollar and gold while hurting both equities and bonds. This morning, though, the probability of a December rate cut has fallen to 52%, and I imagine it will continue to decline, especially if the PCE data remains hotter than the Fed keeps expecting. As well, questions about the Fed’s political bias will be raised again as the rationale for cutting rates 75bps given the headline data remained strong has always been unclear. So, if the Fed is done cutting, that means the dollar is far more likely to rally from here than fall further, commodity prices will struggle (except maybe NatGas) and bond markets may not anticipate nearly as much future inflation with a tighter Fed and a new administration focused on more fiscal rectitude. In that situation, equities certainly hold much more appeal, although pricing remains steep no matter how you slice it.

Good luck

Adf

Growth Stank

Posted on November 22, 2024 by fxpoet

Three score and a year have now passed
Since flags in the States flew half-mast
In honor of Jack
Who wouldn’t backtrack
On his goal of world peace at last

It has been sixty-one years since President John F Kennedy was assassinated in Dallas. This was one of the most dramatic and impactful events in the history of the US with many still of the belief that it was an inside job. One needn’t wear a tin-foil hat all the time to recognize that the government has done nothing but grow dramatically since then, with the defense complex the leader of the pack. Perhaps in his second term, President Trump will release the case files in an effort to shine a light on the underbelly of the government. This poet has no idea what occurred that day (although I did recently visit the 6^th floor museum in Dallas, a quite interesting place) and I would guess that all these years later, there are very few, if any, people who may have been involved that are still alive. Of course, the risk is that powerful organizations like the CIA and FBI could be forever tarred with this if they were involved, and that would have dramatic implications going forward, hence their desire to maintain secrecy. I highlight this simply as another potential flashpoint in the upcoming Trump presidency.

The data from Europe revealed
That if there is growth, it’s concealed
The PMI’s sank
And German growth stank
Thus Christine, her razor, will wield

Let us now discuss the Eurozone. Not only do they have an increasingly hot war on their border and not only are they being inundated by a major blizzard interrupting power and transportation throughout France, Germany and Scandinavia, but their economies appear to be slowing down far more rapidly than previously anticipated. But that inflation was slowing as quickly!

This morning the Flash PMI data was released for Germany, France and the Eurozone as a whole, as well as the UK. It did not make for happy reading if you are a politician or policymaker in any of these nations.

Indicator	Current	Previous
	Germany
Manufacturing PMI	43.2	43.0
Services PMI	49.4	51.6
Composite PMI	47.3	48.6
	France
Manufacturing PMI	43.2	44.5
Services PMI	45.7	49.2
Composite PMI	44.8	48.1
	Eurozone
Manufacturing PMI	45.2	46.0
Services PMI	49.2	51.6
Composite PMI	48.1	50.0
	UK
Manufacturing PMI	48.6	49.9
Services PMI	50.0	52.0
Composite PMI	49.9	51.6

Source: tradingeconomics.com

One needn’t look too hard to see that the economic situation in Europe is ebbing toward a recession or at least toward much slower growth (German GDP was also released at a slower than expected 0.1% Q/Q, -0.3% Y/Y). While the ECB is very aware of this situation, the problem is that like most other central banks, their strong belief that inflation is going to reach their 2.0% goal has not yet been realized let alone shown an ability to stay at that level over time. However, the ongoing comments from ECB members is that more rate cuts are coming with only the timing and size in question. There is still a strong belief that interest rates in Europe (and the UK) are well above ‘neutral’.

Of course, it will not surprise you to see the chart of the EURUSD exchange rate given this information as the single currency ~~collapses~~ continues its sharp decline.

Source: tradingeconomics.com

Since the end of September, the single currency has declined ~7.0% in a quite steady fashion. All the technical levels that had been in play have been broken with the next noteworthy level to consider being parity. I have been clear for a while that I expected the dollar to continue to perform well and nothing has changed that view. The combination of an increase in fear amid the escalation of tensions in Ukraine and Russia’s intimation that the US and NATO have entered the war already and the very divergent paths of the US and Eurozone economies can only lead to the conclusion that the euro is going to continue to decline for a while. And remember, this price action has very little to do with potential Trump tariff or other policies as they remain highly uncertain. The euro is simply a victim of its own leaders’ ineptitude on both the economic and diplomatic/military fronts. Any Trump tariffs that are imposed on Europe will simply add to the pain.

Before we head to other asset classes, let’s take a quick look beyond the euro in the FX markets. It should be no surprise that the dollar is broadly higher, although not universally so. Versus the rest of the G10, even the yen has not been able to find enough haven demand to hold up as the greenback rallies against them all with the euro (-0.6%) and pound (-0.6%) sharing honors as the laggards. However, in the EMG bloc, the picture is more mixed with CE4 currencies all sliding but ZAR (+0.4%) rallying amid the ongoing rebound in the price of gold (+1.2%) which is also benefitting from increased fear and risk disposition. As to Asian currencies, most were somewhat weaker but other than KRW (-0.4%) the moves were unimpressive.

On the commodity front, oil (-0.6%) is slipping a bit heading into the weekend but it has had an excellent week, rallying more than 4%. There are many cross tensions in this market as on one side we have fears that the Russia/Ukraine situation will impact supply, or that Iran will react to Israel’s ongoing campaign in Lebanon and do something about the Strait of Hormuz. These are obviously bullish for crude. But the flip side is that Trump has made very clear his desire to open up far more land for drilling and is seeking to increase supply substantially, a negative price signal.

Turning to bond markets, there is demand everywhere as the combination of risk aversion and weaker Eurozone growth have brought the buyers out of the woodwork. Treasury yields have slipped -4bps and in Europe, the entire continent is seeing yields decline between -7bps and. -8bps. After the PMI data this morning, the Euribor futures market upped pricing for a December ECB rate cut from a 15% to a 50% probability. Add to that comments from ECB members Stournaras and Guindos and it seems quite likely that rates in Europe are going to decline.

Finally, equity markets have shown very little consistency. Yesterday’s strong US rally was followed by strength in Japan (+0.7%) but massive weakness in China (CSI 300 -3.1%, Hang Seng -1.9%) as concerns over those Trump tariffs continue to weigh on investors there. However, it was only China that suffered as pretty much every other market in the region saw gains, with some (India +2.55, Taiwan +1.6%, New Zealand +2.1%) quite substantial. European shares, however, are more mixed with most continental bourses showing modest declines although the UK (+0.8%) has managed to buck that trend despite the weak PMI data and weak Retail Sales data as investors seem to be prepping for a BOE rate cut next month. As to US futures, at this hour (7:30) they are little changed.

Yesterday’s data showed Initial Claims sliding but Continuing Claims rising to their highest level, above 1.9M, in three years. It appears that while layoffs aren’t increasing, finding a job once you are unemployed is much tougher. Philly Fed was also softer than forecast and that seemed to help the Fed funds futures market push up the probability of a December cut to 59% this morning, up from 55% yesterday. This morning, we see the Flash PMI data here (exp Mfg 48.5, Services 55.0) and then Michigan Sentiment (73.7). There are no Fed speakers on the schedule so I expect that this morning’s trends may run for a little longer, but as it is Friday, I would not be surprised to see a little reversal amid week ending profit taking. However, the dollar has further to go, mark my words.

Good luck and good weekend

Adf

	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on Talk of the Town

fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Category Archives: Uncategorized

All Goes to Hell

Boom and Bust

To Further Debase

Chaos is Spreading

Declines and Duress

The Conundrum We Find

In a Plight

Think More Than Twice

Three-Three-Three

Growth Stank