Tag Archives: #dollar up

On Command

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As Covid infections expand
Worldwide, and more meetings get banned
The worry is that
Growth’s surge will fall flat
And stocks will not rise on command

But Monday’s price action was fleeting
As dip buyers now are competing
To add to their stash
Of low value trash
Before the Fed’s next monthly meeting

Come with me on a journey to the past.  A time when investors considered risks as well as rewards and if those risks seemed elevated, those very same investors would consider actually selling stocks and running to the (relative) safety of the government bond market.  Risks could include slower growth, higher inflation or even the recurrence of a global pandemic.  Naturally, under circumstances of that nature, investors displayed caution.  Now, fortunately, situations like that don’t seem to happen very often anymore, although if you think back to…Monday, that seemed to be the developing narrative.   Ahh, but as Dinah Washington crooned so fantastically in 1959, What a Difference a Day Makes.

Monday’s price action and narrative might as well have occurred in 2008 during the GFC given how long ago it seems and how short memories have become over time.  So, all of the angst regarding the spread of the delta variant and additional lockdowns around the world, as well as the impact that would have on the global growth scenario has essentially been expunged from the record and it’s now all sunshine, lollipops and rainbows going forward.  At least, that’s the way it seems this morning.

Yesterday saw a significant rebound in the equity market and a sharp sell-off in Treasury and other government bond markets as the bargain hunters were out in force taking advantage of the 2% dip seen Monday.  After all, it’s not as though there was any new news released to encourage a change in view.  The only data release was Housing Starts which were marginally better than expected, but then everybody knows the housing market is en fuego.  With both the Fed and ECB in their quiet periods ahead of upcoming meetings, there were no central bank statements to help ameliorate concerns that had become manifest on Monday.  Which leads to the conclusion that nothing in the zeitgeist has changed; buy the dip because there is no alternative remains the single most powerful underlying force in markets today.

Which brings us to this morning’s situation, where the rally continues in equity markets, bond markets continue to retreat from their recent highs and commodity markets are getting their feet under themselves again.  What about inflation you may ask?  Bah, old news.  Clearly it is transitory as there hasn’t been a higher than expected print in more than a week!  (Well, that’s not strictly true as this morning South African CPI was released at a higher than expected 4.9% which has pushed back on the growing narrative that the SARB might be able to back off its mooted tightening.)  But South Africa is insignificant in the broad scheme of things, so the combination of increasing infections there along with rioting over the imprisonment of former president Jacob Zuma has just not been enough to concern investors in other markets.

One has to give props to the central banking community for their ability to convince economists, politicians and investors that the worsening inflation situation is really a very short-term blip, and that the big problem remains deflation.  Of course, it is not hard to convince politicians once they understand this stance allows for more spending.  Economists tend to be lost in their models so aren’t that important anyway.  Investors, however, have historically taken these things with a bit more skepticism, and the fact that the market is responding in exactly the manner central banks want is the truly surprising outcome.  Nothing has changed my view that this entire house-of-cards-like market will come tumbling down at some point, but it is very clear that as John Maynard Keynes explained in 1924, “the market can stay irrational longer than you can stay solvent.”  In other words, calling the timing of any significant pullback is a fool’s errand, and I will endeavor not to be foolish today.

As to markets today, it is very clear by now that risk is back on.  Equities in Asia were generally higher (Nikkei +0.6%, Hang Seng -0.1%, Shanghai +0.7%) and are quite strong in Europe (DAX +0.9%, CAC +1.4%, FTSE 100 +1.7%).  US futures you ask?  Generally higher as well, with DOW +0.4%, although NASDAQ futures are actually -0.1% at this hour.  The rotation into value seems to be this morning’s view.

The bond market is behaving as expected with investors quickly getting out of their recently added long positions.  Treasury yields are higher by 2.2bps, while Bunds, OATs and Gilts are all about 1.5bps higher this morning.  There is certainly no reason to own bonds when stocks are on the move!

Commodity markets are mixed this morning, although the most important of the bunch, oil, is higher by 1.5% and continuing to rebound from Monday’s substantial declines.  That price action on Monday was clearly technical in nature and shook out a great many weak hands.  The case for higher oil prices remains strong in my view, as the lack of capex in the sector as well as the ESG efforts to starve the industry of capital will result in a supply demand mismatch over time that will only resolve itself with higher prices.  As to the rest of the commodity space, precious metals are mixed (Au -0.5%, Ag 0.7%), as are base metals (Cu -0.2%, al +0.2%) and Ags (Soybeans -0.4%, Wheat +0.4%).  In other words, there is no directional bias here.

Finally, in the currency markets, movement has been a bit more muted overall, and mixed just like elsewhere.  In the G10 bloc, NOK (+0.35%) is following oil higher and JPY (-0.25%) is seeing its haven status work against it as it reverts to form, with the rest of the bloc +/- 0.1% meaning there is nothing to discuss.  In the emerging markets, there is a bit more weakness with ZAR (-0.4%) still suffering from the increased spread of Covid as are KRW (-0.3%) and the CE4 (HUF -0.3%, CZK -0.3%, PLN -0.25%).  On the plus side there is only CNY (+0.2%) which was supported by comments from the central bank claiming they will keep the yuan “basically stable”.

There is no data and no speakers today which means that the FX market is left to watch other markets for its cues.  With risk back in vogue, I expect that the dollar could cede some ground against the majors, but the ongoing issues throughout different emerging markets are likely to continue to weigh on currencies in that sector.

Good luck and stay safe
Adf

Fated To Burst

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While here in the US the word
Is stimulus, more, is preferred
The UK is thinking
‘Bout how they’ll be shrinking
Their deficit, or so we’ve heard

Meanwhile, China, last night, explained
That excesses would be contained
The bubble inflated
By Powell is fated
To burst, as it can’t be sustained

If you look closely enough, you may be able to see the first signs of governments showing concern about the excessive policy ease, both fiscal and monetary, that has been flooding the markets for the past twelve months.  This is not to say that the end is nigh, just that there are some countries who are beginning to question how much longer all this needs to go on.

The first indication came last night from China, remarkably, when the Chairman of the China Banking and Insurance Regulatory Commission, and Party secretary for the PBOC, explained that aside from reducing leverage in the Chinese property market to stay ahead of systemic risks, he was “very worried” about the risks from bubbles in the US equity markets and elsewhere.  Perhaps bubbles can only be seen from a distance of 6000 miles or more which would explain why the PBOC can recognize what is happening in the US better than the Fed.  Or perhaps, the PBOC is the only central bank left in the world that has the ability, in the words of legendary Fed Chair William McChesney Martin “to take away the punch bowl just as the party gets going”.  We continue to hear from Fed speakers as well as from Treasury secretary Yellen, that the Fed has the tools necessary if inflation were to return, and that is undoubtedly true.  The real question is do they have the fortitude to use them (take away that punch bowl) if the result is a recession?

The second indication that free money and government largesse may not be permanent comes from the UK, where Chancellor of the Exchequer Rishi Sunak is set to present his latest budget which, while still offering support for individuals and small businesses, is now also considering tax increases to start to pay for all the previous largesse.  The UK budget deficit is running at 17% of GDP, which in peacetime is extremely large.  And, as with the US, the bulk of that money is not going toward productive investment, but rather to maintenance of the current situation which has been crushed by government lockdowns.  However, the UK does not have the world’s reserve currency and may find that if they continue to issue gilts with no end, there is a finite demand for them.  This could easily result in the worst possible outcome, higher interest rates, slowing growth and a weakening currency driving inflation higher.  The pound has been amongst the worst performers during the past week, falling 1.4% (-0.1% today), as investors start to question assumptions about the ability of the UK to continue down its current path.

But not to worry folks, here in the US, the $1.9 trillion stimulus bill is starting to get considered in the Senate, where some changes will need to be made before reconciliation with the House, but where it seems certain to get the clearance it needs for passage and eventual enactment within the next two weeks.  So, the US will not be heeding any concerns that going big is no longer the right strategy, despite what has been a remarkable run of economic data.  In the current Treasury zeitgeist, as we learned from Florence + The Machine in 2017, “Too Much is Never Enough”!

Where does that leave us today?  Well, risk struggled in the overnight session on the back of the PBOC concerns about bubbles and threats to reduce liquidity (Nikkei -0.9%, Hang Seng -1.2%, Shanghai -1.2%), but after a weak start, European bourses have decided that Madame Lagarde will never stop printing money and have all turned positive at this time (DAX +0.5%, CAC +0.5%, FTSE 100 +0.6%).  And, of course, that is a valid belief given that we continue to hear from ECB speakers that the PEPP can easily be adjusted as necessary to insure continued support.  The most recent comments come from VP Luis de Guindos, who promised to prevent rising bond yields from undermining easy financing conditions.  US futures, meanwhile, while still lower at this hour by about 0.2%, have been rallying back from early session lows of greater than -0.7%.

Treasury yields continue to resume their climb higher, up another 2.9 basis points this morning, although they remain below the 1.50% level.  In Europe, bunds (+2.0bps), OATs (+2.7bps) and Gilts (+0.6bps) are all giving back some of yesterday’s rally, as risk appetite is making a comeback.  Also noteworthy are ACGBs Down Under with a 5.2 bp rise last night although the RBA did manage to push 3-year yields, their YCC target, even lower to 0.087%.

Commodity prices seem uncertain which way to go this morning, with oil virtually unchanged, although still above $60/bbl, and gold and silver mixed.  Base metals are very modestly higher with ags actually a bit softer.  In other words, no real direction is evident here.

As to the dollar, the direction is higher, generally, although not universally.  In the G10, NOK (+0.6%) is the leading gainer followed by AUD (+0.3%) which has held its own after the RBA stood pat and indicated they would not be raising rates until 2024! That doesn’t strike me as a reason to buy the currency, but that is the word on the Street.  But the rest of the bloc is softer, although earlier declines of as much as 0.5% have been whittled down.

EMG currencies have also seen a few gainers (RUB +0.4%, INR +0.25%) but are largely softer led by BRL (-0.7%) and ZAR (-0.7%).  It is difficult to derive a theme here as the mixed commodity markets are clearly impacting different commodity currencies differently.  However, the one truism is that the dollar is definitely seeing further inflows as its broad-based strength is undeniable today.

There is no data released today in the US, although things certainly pick up as the week progresses from here.  On the speaker front we hear from two arch doves, Brainerd and Daly, neither of whom will indicate that a bubble exists or that it is time to cut back on any type of stimulus.  Perhaps at this point, markets have priced in the full impact of the stimulus bill, and the fact that the Fed is on hold, and is looking at other central bank activities as the driver of rates.  After all, if other central banks seek to expand policy, as we have heard from the ECB, then those currencies are likely to come under pressure.

Here’s the thing; investors remain net short dollars against almost every currency, so every comment by other central banks about further support is going to increase the pain level unless the Fed responds.  Right now, that doesn’t seem likely, but if yields do head back above 1.5%, don’t be surprised to see something out of the FOMC meeting later this month.  However, until then, the dollar seems likely to hold its recent bid.

Good luck and stay safe
Adf