Tag Archives: #ceasefire

Dine and Dash

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The president left in a flash
Completing a quick dine and dash
But so far, no word
On what, this move, spurred
Though I’ve no doubt he’ll make a splash
 
Then last night the BOJ passed
On hiking, though none was forecast
And Germany’s ZEW
Implied there’s a view
That growth there will soon be amassed

 

I have to admit that when I awoke this morning, I expected there to have been significantly more news regarding the Iran/Israel conflict based on President Trump’s early departure from the G-7 meeting.  But, from what I see so far, while markets have reversed some of yesterday’s hope that a ceasefire was coming soon, my read is we are back to overall uncertainty in the situation.  Of course, the concept of the fog of war is well known, and I expect that we will not find out very much until those in control of the information, whether the IDF or the US military, or Iranian sources, choose to publicize things.  The one thing we know is that everything we learn will be biased toward the informants’ view, so needs to be parsed carefully.  I do think that Trump’s comments to the press when he was leaving the G-7 about seeking “an end. A real end. Not a ceasefire, an end,” to the ongoing activities is telling.  It appears the Israelis planned on a 2-week campaign and that is what they are going to complete.

From a market perspective, as we have already seen in the price of oil, and generally all asset classes, absent a significant escalation, something like a tactical nuclear strike by the Israelis to destroy the Iranian nuclear bomb-making capabilities, I expect choppiness on headlines, but no trend changes.  At some point, the fighting will end, and markets will return their focus to economic and fiscal concerns and perhaps central banks will become relevant again.

So, let’s turn to that type of news which leads with the BOJ leaving policy rates on hold, although they did reduce the amount of QE to ¥200 billion per month, STARTING IN APRIL 2026!  You read that correctly.  The BOJ, which has been buying ¥400 billion per month of JGBs while they raised interest rates in their alleged policy tightening, has decided that ten months from now it will be appropriate to slow the pace of QE.  Yes, inflation has been running above their 2.0% target for more than three years (April 2022 to be exact) as you can see in the below chart, but despite a whole lot of talk, action has been slow to materialize.

Source: tradingeconomics.com

You may recall about a month ago when Japanese long-end yields, the 30-year and 40-year bonds, jumped substantially, to new all-time highs and there was much discussion about how there had been a sea change in the situation in Japan.  Expectations grew that we would start to see Japanese institutions reduce their holdings of Treasuries and bring their funds home to invest in JGBs, leading to a collapse in the dollar.  The carry trade was going to end, and this was another chink in the primacy of the dollar’s hegemony.  Well, if that is the case, it is going to take longer than the punditry anticipated, at the very least, assuming it happens at all.  As you can see from the charts below of both USDJPY and the 40-year JGB, all that angst has at the very least, been set aside for now.

Source: tradingeconomics.com

Elsewhere, the German ZEW data released this morning was substantially stronger than both last month and the forecasts for an improvement.  As you can see from the chart below, it is back at levels that are consistent with actual economic growth, something Germany has been lacking for several years.  It appears that a combination of the continued tariff truce, the promises of massive borrowing and spending by Germany to rearm itself and the ECB’s easy policy have German business quite a bit more optimistic that just a few months ago.

Source: tradingeconomics.com

Ok, while we await the next shoe to drop in Iran or Israel, let’s see how markets have behaved overnight. Yesterday’s nice rally in the US was followed by a mixed picture in Asia with the Nikkei (+0.6%) gaining after the BOJ showed that tighter policy is not coming that soon.  Elsewhere in the region, China, HK and India were all down at the margin, less than 0.4% while Korea and Taiwan managed some gains with Taiwan’s 0.7% rise the biggest mover overall.  In Europe, though, the excitement about a truce in Iran is gone with bourses across the continent lower (DAX -1.25%, CAC -1.05%, IBEX -1.5%, FTSE 100 -0.5%).  Apparently, there is fading hope of trade deals between the US and Europe and concerns are starting to grow as to how that will impact European activity.  I guess the ZEW data didn’t do that much to help.  US futures at this hour (7:00) are all pointing lower by about -0.5%, largely unwinding yesterday’s gains.

In the bond market, Treasury yields, which backed up yesterday, are lower by -3bps this morning, essentially unwinding that move.  However, European sovereign yields have all edged higher between 1bp and 2bps with Italy’s BTPs the outlier at +3bps.  Quite frankly, it is hard to have an opinion as to why bond yields move such modest amounts, so I’m not going to try to explain things.

In the commodity space, fear is back in play as oil (+1.7%) is rallying as is gold (+0.4%) which is taking the rest of the metals complex (Ag +2.3%, Cu +0.3%, Pt +3.0%) with it.  These are the markets that are most directly responding to the ongoing ebbs and flows of the Iran/Israel situation, and I expect that will continue.  In the end, I continue to believe the long-term trend for oil is toward lower prices while for gold and metals it is toward higher prices, but on any given day, who knows.

Finally, the dollar doesn’t know which way to turn with modest gains and losses vs. different currencies in both G10 and EMG blocs.  The euro, pound and yen are all within 0.1% of yesterday’s closing levels while we have seen KRW (-0.4%) and INR (-0.3%) suffer and NOK (+0.4%) and SEK (+0.4%) both gain on the day.  However, those are the largest movers across the board, so it is difficult to make a case that anything of substance is ongoing.

On the data front, yesterday’s Empire State Manufacturing index was quite weak at -16, not a good look.  This morning, we see Retail Sales (exp -0.7%, +0.1% ex-autos), IP (0.1%), and Capacity Utilization (77.7%).  As well, the FOMC begins their meeting this morning with policy announcements and Powell’s press conference scheduled for tomorrow.  Helpfully, the Fed whisperer, Nick Timiraos, published an article this morning in the WSJ to explain why the Fed was going to do nothing as they consider inflation expectations despite the lack of empirical evidence that those have anything to do with future inflation.  But it is a really good sounding theory.

For now, the heat of the Iran/Israel situation will hold most trader’s attention, but I suspect that this will get tiresome sooner rather than later.  The biggest risk to markets, I think, is that the Iranian regime collapses and a secular regime arises, dramatically reducing risks in the Middle East and reducing the fear premium in oil substantially.  If that were to be the case, I expect the dollar would suffer as abundant, and cheap, oil would help other nations more than the US on a relative basis given the US already has its own supply.  But a major change of that nature would have many unpredictable outcomes.  In the meantime…

Good luck

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Somewhat Sedate

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Nvidia’s earnings were great
The Minutes were somewhat sedate
At OpenAI
They got back their guy
And traders, for closing, can’t wait

In Europe, they’re still quite concerned
Inflation’s not been overturned
But positive news
Twixt Arabs and jews
A truce for four days has been earned

As we head into the holiday weekend, the truth is the macroeconomic story is quite dull.  Not only has there been a dearth of Fedspeak (which is a good thing I think) but the data has been second-tier, at best, and sparse overall.  The fact that Existing Home Sales fell further given the current mortgage market situation cannot be surprising.  After all, folks are quite reluctant to give up the 3% mortgage on their current house to buy a new house and pay 7.5%.  As to the Minutes of the last FOMC meeting on November 1st, they were deemed hawkish by some, although they are so out of date, it is not clear why any attention is paid to them.  

Arguably, of much more interest to most every market participant were the earnings results from Nvidia, which beat lofty expectations as the AI phenomenon continues to grow.  In that same vein, the OpenAI saga, where Sam Altman, one of the founders, was ostensibly fired, set to go to work at Microsoft and bring his entire team with him, but now is back at OpenAI has been garnering the lion’s share of market bandwidth.  But I ask, does that really have a macro impact?  I would argue not at all.  

In fact, I would say that the market is quite ready for the Thanksgiving holiday, as most participants are far more concerned about the travel conditions than the market conditions.  Yes, the ECB keeps trying to threaten that they are not done hiking interest rates, although given growth there is fading fast, this feels much more like brave talk than a precursor to action.  And thankfully, it appears there is going to be a four-day cease fire agreement in Gaza with a release of some of the hostages, so that is clearly a good thing.  

But really, it is very difficult to get too excited about too much at all today.  There is some data due this morning, with Initial (exp 225K) and Continuing (1875K) Claims, Durable Goods (-3.1%, +0.1% ex Transports) and Michigan Sentiment (60.5).  But none of it seems very enticing as a rationale to change any opinions or positions.

Reviewing markets, after yesterday’s very modest pullback in the US equity markets, Asia saw mixed price action with Tokyo a bit firmer while China was under pressure.  In Europe this morning, other than the UK (-0.2%) there are modest gains despite a lack of new data.  The UK story seems a reaction to a much weaker than expected CBI Industrial Trends report, indicating much slower growth ahead.  As to US futures, they are a bit firmer at this hour (8:00), arguably benefitting from those Nvidia earnings.

In the bond market, Treasury yields continue to drift lower, down 3bps this morning and currently at 4.36%, just above that first key support level.  European sovereigns are also rallying with yields down by between 3bps and 5bps across the board.  The outlier here was Japan overnight, where yields rebounded 3bps after what had been a very quick decline given all the discussion about how the BOJ was set to tighten policy.  For now, there is a great deal of enthusiasm over the soft-landing scenario which I believe is a key driver of the bond market rally.  However, the future here will be highly dependent on the Fed’s actions going forward, and I, for one, continue to believe in the higher for longer story.  Unless growth really drops quickly, or unemployment skyrockets, I don’t see a rate cut anytime soon.

In the commodity markets, oil (-2.0%) seems to be falling on the back of the de-escalation in the Middle East, as well as word that Russia is exporting diesel fuel again.  Gold prices captured the $2000/oz level yesterday and are still hanging on, although copper and aluminum are both under pressure this morning, down about -0.5% each.  Broadly, I would say that the commodity sector has been the one area most actively considering a recession is coming with the overnight price action merely a reflection of this.

Finally, the dollar is a touch firmer this morning, halting its recent declines with both USDJPY and USDCNY higher by about 0.2% this morning.  Given the lack of news, this seems much more like a trading event, with traders closing positions ahead of the long holiday weekend.  I maintain my view that if the Fed is actually done and beginning to lean toward easier monetary policy, the dollar will decline a bit further.  But that is a big if in my mind.  It is very difficult to get excited about the prospects of most other currencies given the inherent weakness in economies around the world.  However, a change in Fed policy will definitely have an impact on the buck.

And that’s really all for today.  There will be no poetry until Monday as I, too, will be taking a break from the action.

Good luck and have a wonderful holiday

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