Tag Archives: economy

Great Derision

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The markets have made their decision
For Lula, they have great derision
It seems the divide
Twixt left and right sides
Is wider than most can envision

If you wondered why I bought put protection for my portfolio as I mentioned last week to cover the mid-term elections next week, look no further than Brazil’s market this morning after Lula surprised almost everyone by winning.  It seems that investors look at his policy objectives and don’t really like what they see.  Not surprisingly, as you can see in the chart below, the BRL also suffered dramatically with both stocks and the currency now weaker than prior to Bolsonaro’s surprise first round lead.

Source: tradingeconomics.com

For good order’s sake, the BOVESPA Stock Index fell -13.85% while the BRL fell -8.65%.  Now, if you don’t think that can happen in the US should the Democrats win both the House and the Senate next week, you are mistaken.  I am old enough to have seen several moves of that magnitude during my career.  And given the extraordinary amount of leverage that exists within the system, when margin calls start to come, there is no stopping things.  Again, I continue to believe that the Republicans hold the Senate for sure and the House as well, but I put on protection!

Despite the results from Brazil
The rest of the markets were chill
The stock market rallied
While bonds dilly-dallied
And FX remains a buzzkill

The Brazilian market movements were the very definition of isolated events.  While those in the trade were scrambling to adjust their positions and, mostly, licking their wounds, the spillover to other markets was essentially nil.  US markets continue to perform generally well, with all three major indices higher yesterday and that followed through into Asia with Tokyo (+1.7%) and Korea (+3.2%) both benefitting from renewed positivity regarding the AI trade after Anthropic filed to go public.  But elsewhere in Asia things were less sanguine as China (-1.3%) and HK (-0.7%) found limited support as official buying was absent last night.  It tells us a great deal, I believe, that without the Plunge Protection Team, Chinese stocks remain in a sharp downtrend.  In fact, from its recent high in late June, that market, as defined by the CSI 300, has fallen -20%.

Source: tradingeconomics.com

It’s a very interesting conundrum, I think, the fact that the Chinese equity markets are declining so sharply and steadily.  After all, equity markets are deemed to be forward looking indicators, anticipating economic activity 6-9 months in the future.  At least that’s what I was taught all those years ago and have heard repeated consistently since then.  If that is the case, what does it say about the future of the Chinese economy?  It doesn’t seem to me that it portends great strength, but then, I’m just an FX poet.  Is it possible, and I’m just spit balling here, that socialism and communism are not coincident with economic growth?  Inquiring minds want to know!

As to the rest of Asia, the other big loser was Indonesia, which continues to suffer based on the fears that MSCI is going to remove their Frontier Market designation and institutional investors will be forced to exit.  Whatever signs they have shown regarding making changes have not been deemed sufficient, at least by the market.  As you can see below, that massive gap remains wide open, and the initial bounce seems to be reversing.  Absent concrete moves by the securities regulators there, I believe we could see another sharp leg lower.

Source: tradingeconomics.com

In Europe, UK stocks (-0.9%) are under pressure this morning after weak earnings from HSBC dragged the FTSE 100 down, but the rest of Europe is doing little.  Surprisingly, Paris (0.0%) is unchanged despite the lowest Consumer Confidence reading (80) since June 2013.

Source: tradingeconomics.com

As to US futures, at this hour (7:00), they are pointing slightly higher, 0.3% or so.

Treasury yields (-1bp) have been rangebound for the past several sessions as traders and investors await tomorrow’s FOMC statement, and perhaps more importantly, to hear what Chairman Warsh has to say.

Source: tradingeconomics.com

It should be no surprise that other bond markets are also doing little right now as the Treasury market remains the driver of global investment.  The one exception to that rule is France, where OATs (+5bps) are back under pressure as market participants try to determine what comes next there.  Calls for increased protests have been coming from various groups involved while Marine LePen offers herself as a voice of calm in the chaos as she campaigns for the presidency.  However, both sides of the campaign are claiming they will lower the retirement age from the current 62 down to 60, a move the nation simply cannot afford.  Perhaps they will and simultaneously pull themselves from the euro so they can print worthless French francs to pay those increased pensions.

As an aside, I neglected to mention two other central bank meetings this week with the BOC expected to announce a 25bp hike Wednesday morning before the Fed stands pat, and then the ECB expected to sit on its hands on Thursday, although recent commentary has them considering another hike before the end of the year as they are trying to entrench a recessionprevent inflation from becoming entrenched.

In the commodity space, oil (-1.0%) continues to bide its time ahead of the US election as there is a great deal of uncertainty regarding President Trump’s decision about renewed attacks going forward after the election.  Certainly, there have been threats going back and forth but it is very difficult to try to ascertain what will happen as I don’t believe even he knows what he will do yet.

While timing is everything in life, I think it remains abundantly clear that the long-term prospects are for more oil coming from more places outside the Middle East and a diminution of the importance of the Gulf and OPEC.  But until then, things can remain spicy.  Also, you cannot help but look at the price of NatGas (-1.5% today, -17.9% in the past month) and recognize just how much of the stuff is being produced as associated gas given the uptick in oil production.  One other thing to note is that the energy value of oil vs. natural gas and the arbitrage that exists right now.  At current prices, the same amount of energy from one barrel of oil at $100 can be had for <$15.50 in natural gas, at least in the US.  I suspect that conversions of oil to gas are going to continue apace for a long time until that gap is closed, but so far, demand for gas continues to lag.

Source: tradingeconomics.com

Finally, the FX markets are generally dull outside the Brazilian real.  Net, this morning is showing modest USD strength, with the euro (-0.2%) under some pressure but both AUD (+0.2%) and NZD (+0.4%) are firmer, and that is the extent of the movement away from Brazil.  It remains difficult to get excited about FX for now and I continue to believe it is segregating itself from other markets.

On the data front, we see Durable Goods (exp 1.5%, 0.6% ex-Transport) along with Case-Shiller Home Prices (2.5%), Consumer Confidence (81.0) and New Home Sales (650K).  Speaking of Consumer Confidence, and comparing to the French data this morning, things here are also back at their lowest level since 2013 as per the below chart from conference-board.org.  And that was rebounding from the GFC.

Certainly, if the old adage is correct that people vote their pocketbooks, things are not looking good for the Republicans based on this.

And that’s all there is, I think.  I continue to believe that markets remain constrained ahead of the elections and I continue to look at the dollar and find vanishingly few alternatives in the current world.

Good luck

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Lie and Cheat

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Said Lula, it might be confusing
But there is no way that I’m losing
So, I’ll lie and cheat 
In order to beat
The other guy you could be choosing

Meanwhile it’s a central bank week
With Warsh, come this Wednesday, to speak
So, what will he say?
Are hikes still in play?
Or have Fed funds climbed to their peak?

In the biggest surprise of the weekend, Lula da Silva won the Brazilian presidential election.  It seems that right as the polls were due to close, a single member of the Brazilian Supreme Court, Christiano Zanin (who happened to be Lula’s personal attorney before being put on the Court) extended voting by 2 hours despite the rest of the court voting against that action.  I do not know if that changed the outcome, nor do I imagine we will ever really get the story, but the result stands for now.  I suspect the Senor Bolsonaro will sue for a recount or something, but the market has spoken, at least the equity market has as you can see from the following quote for the Brazil stock ETF, EWZ, before the market opens this morning.  That’s a 26% decline!

You may remember after the first round of the election three weeks ago, the market rallied sharply on the idea that Bolsonaro would be unwinding many of Lula’s policies as per the below chart.

Source: tradingeconomics.com

But perhaps the most interesting thing is the fact that the prediction markets, the new “fount of truth” was also completely wrong on this outcome.  Going into the weekend, there was a more than 80% probability of a Bolsonaro victory.  It just goes to show that there are no guarantees when it comes to events.

It is still too early to tell what will happen in the FX markets as BRL is a restricted currency and won’t start trading until Brazilian markets open in a few hours, but I suspect that the real will fall pretty sharply as well.  After all, it mirrored the stock market rally on the first-round news.

Away from that story, and the ongoing riots in France, which seem to have been absorbed by markets now as there has not been much movement overall, at least not in government bond markets, focus is turning to the FOMC meeting that begins tomorrow with the statement and press conference on Wednesday afternoon.  As of this morning, futures markets are pricing less than a 10% probability of a hike, which as you can see is a substantial change from a month ago when there was nearly a 2/3 probability priced in.

Source: cmegroup.com

This is an important lesson, I believe, regarding markets.  I always refer to market pricing as the best descriptor of current information.  However, information changes, situations change and so prices do change.  Just because a future event seems to be priced in at some point in time doesn’t offer certainty, it is simply a reflection of the sum of knowledge at that time.  In this case, in the weeks since that pricing existed, a number of Fed speakers explained they were in no hurry to raise rates again and given the timing of the Fed meeting relative to the mid-term elections, the market has discounted the idea of a Fed move as it could be seen as political.  (LOL, as though all their moves aren’t political!). Nonetheless, at the moment, all the fears of Treasury yields exploding higher to 6% and beyond and the Fed turning more hawkish have faded away.  In fact, I suspect that this meeting will pass uneventfully.  The one thing of which I am confident is that at the press conference, Chairman Warsh will not offer any guidance but will instead reiterate that they will achieve their inflation goals, dammit!

And that’s how things are shaping up this morning, so let’s see how other markets look.  Friday’s weakness in US equity markets has not been the norm either overnight or in Europe this morning.  While Tokyo (-0.8%), Korea (-1.5%) and Taiwan (-1.8%) all fell on the same tech sell-off story, India (+0.7%), HK (+0.5%) and Thailand (+1.1%) all rallied while China’s Plunge Protection team was able to stabilize markets there with a basically unchanged session.  There is much discussion about how neocloud firms are going to run out of funding and how this is the beginning of the end of the AI trade which is clearly weighing on certain companies and markets, but as we saw this weekend, surprises are quite possible.

In Europe, only Spain (-0.2%) is lagging, and it is only slightly lower.  Otherwise, the major nations are all seeing gains (UK +0.5%, Germany +0.9%, France +0.75%, Italy +0.6%) with the only news of note the German Ifo reports which showed current conditions sagging but hope for the future as the Expectations reading was 91.6, higher than expected, but as you can see from the chart below, still well below the pre-Covid readings and the long-term average of 95.1.

Source: tradingeconomics.com

But it’s better than nothing!  As to US futures, they are little changed to slightly higher this morning.

In the bond market, Treasury yields are little changed from Friday’s close at 4.99%.  The real movement today has been in the Bund-OAT spread, which you may recall blew out above 175bps last week, but has now fallen back to 160bps with German yields edging higher by 3bps while French yields have slipped -4bps.  The thing about this movement is there is nothing I can see to drive a change in the concern over France’s fiscal future.  Riots continue there and are spreading to Barcelona and Italy in Milan I understand, and the Macron government can do nothing to change the fiscal accounting as it does not have the strength to pass legislation to address the issues.  This seems much more like a trading move with some profit taking than anything fundamental.

In the commodity markets, oil (-2.1%) is slipping as reports are coming through that more oil is transiting the Strait of Hormuz than before the Iran war began!  I cannot confirm that, but it is a widely read story this morning.  Remaining in the energy sphere, the dichotomy between US NatGas and TTF is extraordinary with the divergence accelerating as per the below chart from tradingeconomics.com.

At its current level, TTF is priced at ~$31/MMBtu, more than 12X US Henry Hub gas, and apparently, Asia is outbidding Europe for US LNG cargoes even though European storage is far below targeted levels.  If it is a cold winter in Europe, it could be quite problematic as their energy policy insufficiencies will make themselves very clear.    As to the metals markets, gold (+0.5%) is bouncing a bit as it trades either side of $4000/oz and silver and copper are little changed this morning.  There has been a story going round that gold has been successfully synthesized which is a reason that it cannot go higher, however, asking Grok, it is estimated to cost $1,000,000,000,000,000/oz to make it this way, so perhaps it is not an immediate threat.

Finally, the dollar is modestly higher this morning with the most exciting prospects remaining in Brazil when that opens in a bit.  The BOVESPA stock market doesn’t open until 9:00 EDT but I think the FX markets there will open an hour earlier than that, so pretty soon.  I suspect the BRL will weaken on the opening.

On the data front, there is plenty to digest this week as follows:

TodayChicago Fed National Activity-0.1
TuesdayDurable Goods1.5%
 -ex Transport0.6%
 Case Shiller Home Prices2.5%
 Consumer Confidence81.0
 New Home Sales650K
WednesdayGoods Trade Balance-$130B
 FOMC Rate Decision4.0% (unchanged)
ThursdayQ3 GDP3.2%
 Personal Income0.3%
 Personal Spending0.5%
 Initial Claims200K
 Continuing Claims1730K
 PCE0.5% (3.6% Y/Y)
 Core PCE0.3% (3.1% Y/Y)
FridayBOJ Rate Decision1.25% (Unchanged)
 Employment Cost Index0.8%
 Chicago PMI55.5

Source: tradingeconomics.com

So, while two major central banks meet, no action is anticipated.  I have maintained that things would remain range bound ahead of the elections here next week and nothing has changed that view.  I also believe that if the Democrats sweep both House and Senate, equities will suffer greatly, although I don’t believe that is going to be the outcome.  However, as we just learned yesterday, we won’t know until the votes are counted.  In the end, nothing has changed to make the dollar the least worst alternative, that’s for sure.

Good luck

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Ruining Our Dream

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Most days there’s a singular theme
To energize which reigns supreme
But sometimes the news
Does naught but accuse
All parties of ruining our dream

So, French Revolution is back
And Houthis keep up their attack
While AI gets smashed
And metals all crashed
It’s Friday so let’s all step back

Yesterday was a pretty clear risk-off session although to my eye, it seemed an accumulation of issues rather than a singular concept driving the bus.  Under the guise of, if it bleeds, it leads, we continue to see graphic video of the ongoing rioting in France and there is ongoing discussion amongst the analyst community about just how much further French bond yields can rise before the ECB needs to step in.  However, this situation is different than the Eurozone crisis of 2011-12 as back then, Germany was still an economic powerhouse while today, they are enfeebled by their own energy policies.  The point is made very clearly below by one of the smarter folks I follow on X, Michael Arouet.

The point is that while the post WWII history has been Germany saves the continent because of its healthy economy, that may not be an option anymore.  Again, another reason to dislike the euro over time.

Adding to the French Revolution, part deux, is the growing concern about an increase in military action in Iran and the Persian Gulf.  The WSJ headline, “Iran Threatens Retaliation on Economic and Civilian Targets if US Attacks” says it all with the article highlighting the specifics and trying to prognosticate on the likelihood of the outcome.  Oil prices (+1.7%) are higher again this morning and back above $100/bbl, although I read that prompt prices for physical delivery have been slipping as it appears the US Navy has been successful in escorting a significant number of ships through the Strait and flow are back above 80% of the pre-war level.

Turning to the equity markets, yesterday’s downdraft (S&P 500 -1.2%, NASDAQ -2.6%) was blamed on further concerns over the AI story.  During the summer, it was all AI, all the time and the idea was that there was going to be a nonstop inflow of capital to the sector.  But as interest rates globally rose, financing those dreams became more difficult and then the naysayers were able to get their message out that AI was a bubble.  Adding to the sectors problems has been the anti data center movement and all the controversy surrounding the impact data centers have on retail electricity prices.  Of course, this fits nicely with the ‘crisis of affordability’ that gets so much airtime as well.

Now, yesterday was the 21st time the S&P 500 fell more than 1% this year.  That may seem like a lot but the average number of days that has occurred over time is…29 days.  In other words, this is hardly new ground.  And remember, it is still higher by nearly 14% YTD.  The world is not ending, just look at the chart below, but it would not be surprising to have a period of range trading before the next major catalyst arrives.

Source: tradingeconomics.com

Looking at the metals markets, I believe the idea of a picture is worth 1000 words is very clear here.

Source: tradingeconomics.com

I cannot tell if this is long liquidation or short initiation, we will know more after the Commitment of Traders report is released this afternoon, but there are clearly more aggressive sellers than buyers here.  However, a look at the history of metals markets, especially precious metals, is one of long periods of stagnation followed by significant rises over time.  There are those who believe we are entering a deflationary economy, but I disagree with that view.  While productivity enhancements are very likely to be a result of AI adoption, the biggest deflationary force over the past 25 years has been globalization and the movement of so much manufacturing to China.  As more and more production gets returned to other nations, that price pressure will decrease and inflation will rise.  Personally, I have not observed much in the way of deflation, or even disinflation.  I’d be interested in hearing if you have.

One last thing about yesterday, which perhaps should have been at the top, is US Treasury yields.  While this morning they have edged higher by 4bps, that is after a 16bp decline yesterday as per the below chart.

Source: tradingeconomcis.com

If ever there was a clear sign of flight to quality/safety, yesterday’s bond market activity is Exhibit A.  Perhaps the more interesting feature of this was that the dollar did not rally in sync with the bond market.  In fact, it slipped a bit yesterday, although is higher by 0.2% this morning.  again, history has shown that in a significant risk-off session, the dollar typically rises sharply if for no other reason than international buyers of Treasury bonds need to buy dollars.  So, either they already had those dollars, or all the movement was domestic.  At least those are the two best theories I can come up with for now.  The yen did rally 0.9% yesterday, showing its haven status while the Swiss franc rallied 0.5%, although that has given it all back this morning.  It appears that many long-standing relationships are coming under pressure lately.

OK, let’s look at how other markets behaved overnight and what they are doing this morning.  in the equity markets, Tokyo (-0.3%) slipped a bit and we saw weakness throughout many of the other regional bourses (India -0.2%, Taiwan -1.8%, Philippines -0.9%), but China (+1.7%) and HK (+0.7%) were the beneficiaries of the Plunge Protection China National Team buying aggressively as they try to halt the months’ long slide that had really accelerated over the past month as per the below.  Since its high in late June, the CSI 300 had fallen more than 20% before last night’s official action.

Source: tradingeconomics.com

Alas for the Europeans, they don’t have enough money to support their own stock markets, and every major bourse is lower there this morning ranging from the DAX (-0.7%) to Spain’s IBEX (-0.2%).  The news of note was that the Flash PMI data was released at weaker than last month, and weaker than expected levels, notably France was very weak, not surprisingly.  As to US futures, they are somewhat softer this morning, with the DJIA (-0.6%) the laggard although yesterday that was unchanged.  The other two major indices are only slightly lower.

In the bond markets, European bonds are little changed to 1bp higher this morning and only some of them benefitted from that haven trade yesterday.  But JGBs (-7bps) and AGBs (-9bps) both saw real demand.  Again, the bond market story appears to be a growing willingness to own with the current yield structure.

We discussed commodities already and the dollar remains lackluster at best.  While it is slightly higher against other G10 currencies this morning, we are talking about 0.2%, nothing to get excited about.  In the EMG space, ZAR (-0.7%) is today’s laggard as it continues to suffer from weak gold prices and high oil prices, a deadly combination for that country, and it has its own internal fiscal issues as well.  However, my observation is that the FX market, which for the past decade, at least, had become tightly intertwined with other markets, seems to be breaking away to its prior status as a very large, liquid place but living on its own stories rather than broad market themes.  Perhaps this is just a short stint of this, but we will need to watch closely going forward.

On the data front, this morning brings Flash PMI here (exp Mfg 55.5, Services 58.0) and then Michigan Confidence (46.3).  As next week is central bank week, we will touch on those things then, but for now, the market assumption is no Fed action next week.

And that’s really it.  My portfolio hedge did its job yesterday, but I do not anticipate a wipeout today, rather a fairly dull market seems the most likely outcome.  It’s a beautiful weekend in NY, don’t be surprised if markets slow down early as traders look to get out for a late season break ahead of the coming winter.

Good luck

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Feeling the Heat

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Risk assets are feeling the heat
As equity markets retreat
And gold is a mess
While most bonds feel stress
And crude hurts the man on the street

It seems that the drumbeats of war
Are louder than they’d been before
Now rumors abound
The US will pound
Iran with munitions galore

Risk is under pressure this morning as equity markets worldwide retreat, gold is falling and the only asset rising are US Treasuries.  Well, that and oil prices which seem to be the proximate cause of the whole story.

I guess we should start with oil (+2.0%) which is rebounding from yesterday’s decline as the story gaining traction is the US and Israel are going to resume military action in Iran shortly.  In fact, President Trump commented in questions yesterday that something would happen “pretty soon”.  This is of a piece with my expectation that in the wake of the mid-terms in two weeks, Trump would feel he had a free hand to go after Iran again, and I have seen this story from several generally reliable sources on X this morning.  I also read that another aircraft carrier group was heading to the Persian Gulf area, further supporting the idea.

This story coincides with the WSJ headline, “Iran’s Fleet of Shadow Tankers Has Run Out of Oil After Monthslong US Blockade” which is a serious problem for the mullahs as, according to the article, some 40% of Iranian government revenue comes from oil sales (I wonder where the rest comes from, pistachios?) and so renewed US/Israeli attacks will be far harder to absorb.  With this driving the narrative, it is not surprising that oil prices are higher and uncertainty has risen.

This has manifest itself in the following ways.  In equity markets, the below tradingeconomics.com screenshot at 7:08 this morning shows pretty clear evidence of what the mood is today and how things felt overnight (notice Shanghai, Hong Kong and Australia).

Investors are clearly getting a bit nervous everywhere around the world right now.  We can see that in bond markets as well where those nations who are still perceived as safe havens, US, Canada, Germany, Netherlands, Japan) have seen that flight to safety.  Even UK gilts have managed to rally, but the story on the continent is a far more concerning one.  Looking at the below Bloomberg.com screenshot, you can see that the problems in France are really starting to hurt.

It’s funny, I saw an argument(?), maybe a discussion, on X this morning where one person said traders are treating the situation in France as though the ECB is not going to step in and save the day by bailing out the French, and the response was that the only way for the ECB to do that was if the market behaved in just that manner.  The ECB will only jump if the situation looks untenable, at which point they will create yet another program with another acronym, something like European Activity Security Event (EASE) which will instruct central banks to purchase OATs, and possibly BTPs.  Now that the Bund-OAT spread is >175bps, it is a virtual guarantee that this will happen.

The other odd thing is that US Treasuries appear to be in demand.  It was not that long ago that the bond market narrative was that with US debt climbing above $40 trillion and showing no signs of slowing down, it would soon be worthless.  Foreign nations were selling their holdings and the end was nigh.  And yet, according to TIC data, the August records (latest available) show that foreign ownership of Treasuries rose ~$83.3 billion.  In fact, here is a table to consider.

It is true that both the UK and Belgium are clearinghouses, so it is not certain who is the ultimate owner of those bonds, but Canada is far more interesting, and I have read, although it is unsubstantiated, that China has been holding Treasuries there.  It is certainly believable that is the case given their ongoing trade surpluses and the need to put the dollars somewhere.   In the end, I wouldn’t write off the bond quite yet!

As to other markets, the rout in metals continues, which given the decline in most yields seems odd to me especially as the rationale had been given that higher yields were driving a replacement of gold with bonds.  Given its long history as a haven, I have trouble understanding the rationale to sell gold, and my sense is this could be short selling in an environment where risk assets are declining.  But I have written before that this is a very new paradigm through which we are living, and it appears this is a new response.  My personal view is that this is a short-term phenomenon and the precious metals will regain their luster again, but it may be a while yet.  So, gold (-1.9%), silver (-3.8%) and copper (-2.5%) are all on the schneid this morning.

I think it is also worth discussing natural gas, which has been falling sharply over the past several weeks, at least in the US.  In fact, the below chart shows a comparison of US and European natural gas prices.  If you were wondering what kind of problems Europe is in for this winter, as I have written elsewhere, I hope they have lots of warm sweaters!

Source: tradingeconomics.com

Finally, the dollar, which spent much of the evening doing nothing, has rallied as NY walks in the door, a reasonable response to a haven driven market.  But that rise is far more evident vs. EMG currencies than G10 as the DXY futures are essentially unchanged on the day, caught between modest EUR weakness (-0.3%) and more impressive JPY strength (+0.7%).  But, in the emerging markets, ZAR (-1.1%), MXN (-0.8%), INR -0.8%), CLP (-1.0%) and PLN (-0.6%) are all under more severe pressure, as overall risk concerns along with declining commodities prices are the drivers.

As it is Thursday, this morning we see Initial (exp 200K) and Continuing (1720K) Claims along with Leading Indicators (-0.1%).  And that’s really it.

Under the heading, I’d rather be lucky than good, yesterday afternoon I bought some SPY puts set to expire after the election as a portfolio hedge.  My concern is that while I believe the Republicans will do far better than currently forecast, I could easily be wrong and based on the stated policy objectives of the Democratic party, equity markets seem likely to fall if they are elected.  I truly hope my puts expire worthless, but for today, they are doing their job. (THIS IS NOT INVESTMENT ADVICE!)

It is certainly reasonable to expect the dollar to test its recent highs, but there doesn’t appear to be enough momentum to break those in any meaningful way, at least absent a major equity market dislocation.

Good luck

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Set For a Fall?

Posted on by 
The question that’s facing us all
Are stocks getting set for a fall?
Has pundits opining
That red lights are shining
And crisis the crux of their call

It could be they’re finally right
And traders lose risk appetite
But this poet thinks
That absent high jinks
In voting, the market takes flight

As I look across markets this morning, it is difficult to get excited about too much.  While there are several ongoing trends, notably French yields rising, the euro falling and oil rising, across most of the rest of the financial space, my take is that investors are waiting for the outcome of the midterm elections in the US.  Between now and then, I certainly don’t expect peace in either Ukraine or the Middle East, so those situations will continue along, and I must wonder if we will see peace in France either.  (As an aside, this short video is hilarious: What to expect on your next Paris vacation).  Sure, the Brazilians go to the polls this week, and Flavio Bolsonaro appears set to win, completing the sweep of right leaning governments across South America, but other than the BOVESPA and the BRL, which have seemingly priced in that outcome based on the first round voting from two weeks ago (see chart below), it is not clear what else that vote will impact.

Source: tradingeconomics.com

In 2016, I forecast Donald Trump would win the presidency after watching the Austrian presidential election and the Brexit vote, both of which demonstrated, to me at least, that people were tired of the situation and wanted change.  My take on the current electoral cycle is that left wing parties around the world are increasingly under pressure as the violence that their followers promulgate is not appealing to most people.  We have seen that in Germany, where AfD, despite extraordinary efforts by the CDU and Social Democrats have won recent state elections and we have seen it in France where Marine LePen has seen her Kalshi odds of winning the vote next April rise to 52%.

It is this global trend that underlies my call that the Republicans retain both the House and the Senate.  Most people don’t want to see their cities burn and that has become closely aligned with the left as of late.

So, let’s look at the markets that are moving, starting with French bonds.  To give a sense of where we are I had to dig a bit to find a longer-term chart, rather than just the past 5 years of data.  Below, you can see that French 10-year yields have risen to levels not seen since pre-GFC and even during the Eurozone bond crisis, things never got this bad.

Source: marketwatch.com

The spread over German bunds is up to 155bps with history having shown when that reaches 170bps or so, the ECB will step in.  I wonder though, unlike Mario Draghi who had the ultimate respect of the market, can Madame Lagarde turn the tide without spending an enormous amount of money?  I’m skeptical.  Yet there is nothing occurring in France that would have one believe the situation is going to change.  Recall, France has a long history of protests, and they can last for a very long time and get bloodier than they are now.

If we turn to the euro, while it has stabilized over the past two weeks, the recent trend here has been clear, lower, as you can see from the below chart.

Source: tradingeconomics.com

I think this is of a piece with the French yield story, although as I have maintained for a while now, the Eurozone economy continues to lag amid an ongoing energy crisis that was created by their own policies.  Absent a complete change of heart from the net zero insanity that drives what little decision making exists there, it is very difficult to see a bright future for the single currency.  In fact, it appears the leadership there recognizes this fact as they have just outlawed cash transactions in excess of € 10,000 as they seek to impose a CBDC and take more control of spending and money, overall.  I would argue this is a bright flashing sign of policy failures from the past.  The statistic I saw that cemented this view is that since 2010, when the Eurozone and the US had similar sized economies, the US has grown 50% faster with incomes changing apace, as per the below chart posted on X.

As to oil, well, neither conflict appears to be in its final stages and, if anything, both appear to be seeing increasing military activity.  As I wrote yesterday, I believe Iran is trying to goad President Trump into reacting ahead of the election as they believe it will undermine his prospects, but as of yet, Trump has not responded.  If I look at the chart below of WTI over the past year, while it is well off its summer lows, it is also well below its spring highs.  My observation from driving some 3000 miles round-trip a few weeks ago is that there is still significant traffic of all types, passenger and commercial, on the roads.  People may grumble, but they have not stayed home.

Source: tradingeconomics.com

This is not an attempt to say that all is well in the US, there are clearly manifest fiscal and spending issues as well as deeply partisan divides on nonfinancial issues.  I find it interesting that political threats are being made by one party now, a sign to me that they see their base support waning and are becoming desperate.  In fact, in the presidential debate in Brazil, Lula threatened Bolsonaro with jail if Lula wins.  Politics has always been a blood sport but there was a genteel veneer for a while, that has clearly disappeared.

This brings me back to my view that until the US election, most markets here are going to tread water as the ramifications of the various potential outcomes are quite large.  Perhaps all the put buying last Friday was not a response to a Black Monday reprise, but a sign of increased portfolio protection being added ahead of the vote.

Other than those three markets, I didn’t think there was much worthy of discussion.  Earnings continue apace and there are more good numbers than bad.  Everybody hates the metals and bonds, despite the strong belief that the US fiscal situation is untenable, have found a new home.  The Fed next week is a nonevent in my mind, as it seems clear they will not act.  So, whatever your view, just make sure to get out and vote.  These prices are going to be available for trading for a few weeks yet.

Good luck

Adf

Not Paying Heed

Posted on by 
Seems markets are not paying heed
To France where the riots proceed
Instead, it’s AI
And bonds gone awry
Where fears are replacing past greed

So, is this the end of the run
Which two decades past had begun?
Or is this a blip
Which soon will round-trip
As recent downdrafts are undone?

While there are always a group of voices singing a song of doom right around the corner, Keynes’ saying that markets can remain ‘wrong’ longer than you can remain solvent continues to be the reality.  One need only look at the barchart.com 20-year chart of the NASDAQ below to realize that since the GFC, while there have been two pretty sharp blips along the way, Covid and the Liberation Day, with the latter really short-lived, this is a chart that has been largely unidirectional.  Everyone who has explained that valuations are too high, and that earnings are shaky and that rising interest rates will undermine the structure of the market has basically been wrong for nearly 20 years.  I understand that there were calls for another Black Monday today, as this is the 39th anniversary of that remarkable day, but is this time different?

Those four words are the most dangerous in markets, there is no question about that.  You can make the case that AI has changed everything about the economy and that the old rules are no longer valid, but whatever AI’s capabilities may turn out to be over time, it’s still people who control the money, and the one thing of which I am certain is that people haven’t changed in the past 20 years.

Now, last week was a tough one for the Pollyannas who have been cheerleading the rally, and you can see that in the history of the CNN Fear & Greed Index below.  It has fallen quite sharply, from 46 to 18 in just a week.

Arguably, part of that has been the movement in the price of oil (-0.6%), which while modestly lower this morning, has rallied >14% during the past two weeks as Iran has increased its attacks on ships in the Strait of Hormuz while the Houthis have increased their attacks on Saudi Arabia.  It appears they are trying to goad President Trump to respond in an effort to help the Democrats take control of the House and the Senate, but so far, Trump has let things play out.  I suspect that no matter who wins the election, come November 4th, things in the Persian Gulf are going to intensify.  In fact, it would not surprise me if the Democrats win that the military campaign will be that much more intense.

Adding to the pressure of higher oil prices were hotter than expected inflation data last week with both CPI and PPI printing at higher-than-expected numbers.  But a funny thing happened, bond yields stopped climbing, at least for the moment, as it seems investors are both far more comfortable with the current yield structure as real yields reach multi-year highs, and the riots in France, that seem to be spreading elsewhere in Europe, have investors turning away from European sovereigns as an alternative.  After all, 10-year Treasury yields are down by 30bps from the highs reached just two weeks ago.

Source: tradingeconomics.com

This is not to imply that things are great, clearly multiple problems and concerns remain, but I still cannot see the end of days.  So, let’s turn to the market behavior from last night and this morning as we open.

Friday’s weakness in the US raised concerns that we were on the cusp of the end of the bull market run.  But as we have consistently seen over the past many years, those fears have abated just as quickly as they arrived.  Overnight, equity markets were mixed in Asia as while the Nikkei (-0.6%) slid a bit and that weighed on India (-1.2%), Taiwan (-0.6%) and several other smaller regional markets, China (+0.5%), Korea (+1.7%) and Australia (+0.4%) all managed gains.  As an aside, recall I mentioned the Jakarta Index last week?  Well, as you can see below, investors are still fleeing the country with the index now down -15% in the past three sessions.

Source: tradingeconomics.com

However, there is a region that is feeling the heat from the rioting in France, and that is Europe.  The below screenshot is eloquent in its depiction of today’s trading on the continent.

Apparently, there are several concerns, notably the fact that growth continues to be anemic while fiscal spending grows uncontrollably, but then the rioting in France, which seems to be spreading is adding pressure to governments across the continent.  As to the US, both SPX (+0.6%) and NASDAQ (+1.1%) futures are higher as I type (6:45am), hardly the stuff of Black Monday.

Perhaps the bond market is making a better case for apocalypse today.  Alas for those seeking such an outcome, other than French OATs (+8bps and now the widest spread vs. Germany since the Eurozone crisis in 2012, see below) which have dragged Italian BTPs (+4bps) higher as well, the rest of the continent has seen only a marginal movement today, +1bp or 2bps.

Turning to the commodity sector, while oil, as mentioned above, is pretty benign this morning, a note about Natural Gas, (+1.0%) which is seeing increased demand as the weather cools off.  Now, even though we have seen prices here increase nearly 20% since early August, that is a seasonal outcome entirely expected.  And let’s face it, $3.15/MMBtu is still an order of magnitude lower than European prices of nearly $30/MMBtu.  If you wonder why European growth is stagnating, look no further than this.  As to the metals sector, modest gains this morning are the order of the day, (Au +0.1%, Ag +1.2%, Cu +0.3%).  Nothing has changed my longer-term view that the supply-demand imbalance in metals markets remains firmly in the lack of supply situation.  Ironically, in oil, it is just the opposite, with ample oil around, it is simply the politics of war that is creating this price event.

Finally, the dollar is mixed this morning, with commodity currencies like AUD (+0.6%), CAD (+0.4%), NOK (+0.25%) and ZAR (+0.25%) all gaining while the euro (-0.15%) and yen (-0.1%) slip a bit.  It doesn’t feel to me like FX is the focus right now.  Rather bond markets and the question of the next Black Monday have a lot more press.  I imagine the euro will be an interesting case study going forward depending on how the ECB responds to the ongoing unrest in Europe.  Can more fiscal spending supported by more ECB bond buying be far away?  I have a feeling the euro may be setting up for another leg lower.

On the data front, it is an extremely quiet week:

TuesdayHousing Starts1.31M
 Building Permits1.40M
ThursdayInitial Claims200K
 Continuing Claims1712K
 Leading Indicators-0.2%
FridayFlash Manufacturing PMI55.5
 Flash Services PMI57.9
 Michigan Confidence46.3

Source: tradingeconomics.com

With the FOMC meeting a week from Wednesday, there are no Fed speakers this week.  Interestingly, despite the higher-than-expected inflation readings last week, the market is pricing only a 15% probability of a hike although there is virtual certainty that there will be a hike in December.  One other data issue to note was last night’s Chinese data as follows:

The situation there remains one of weak domestic activity alongside excess manufacturing capacity with China’s growing Trade Surplus becoming an issue in more and more nations around the world.  Alas for President Xi, the two choices to achieve his GDP goals are the current mercantilist process or a true effort to focus resources on the Chinese people.  I don’t see any changes coming despite some lip service to the contrary.  Even the WSJ wrote about it this morning.

My view remains that while there are many problems extant around the world, both economically and politically, we will get through this period just like we have made it through tough times in the past.  And undoubtedly, the US remains extremely well positioned to continue its economic strength given the willingness to utilize its natural resources.  While there are political divisions here, they don’t rise to the level of what we are currently witnessing in Europe.  Overall, it is hard not to like the dollar as the cleanest dirty shirt in the laundry for a while yet.

Good luck

Adf

Screed After Screed

Posted on by 
Seems I just can’t leave you alone
Lest havoc and fear you’ll have sown
So, now that I’m back
Let’s try to change tack
And work on a positive tone

But seriously, what I read
Is doomsters in screed after screed
All preening and bragging 
That all their chin-wagging
Was right while the markets recede

All I can say is, it’s so good to be home.  While the past three weeks have been enjoyable and traveling across half the country by car offers a great perspective on just how amazing this nation really is, I’m sure all of you will agree that there is nothing more comfortable than sleeping in your own bed.  And this is just as true for Marvel, as it is for the rest of us.

But seriously, I appreciate your patience as it is tough to keep up while driving 10 hours a day.  But now that I’m back, I think it is worthwhile to take a look at how things have moved since I first left back in late September.  Between closing on Friday, September 25 and last night at 9:00pm, these are the moves across major markets that I discuss.

Frankly, it is hard to look at this and conclude that the world is ending.  In fact, despite constant discussion about how the AI (or is it SI?) trade is imploding, the NASDAQ has fallen just -2.5% over the past three weeks and is less than 5% from its all-time highs.  I don’t see the reason for all the excitement.  In fact, the biggest mover, by far, has been silver, which is the least liquid and least important of all these markets.  Despite the end of days discussion about Treasuries, yields have slipped, as have JGB and Bund yields.  One other thing to note is the decline in gasoline prices given the political implications.  I’m confident the White House would like to see them fall further, but there is no indication there is a supply issue there.

I’m just trying to level set here.  I’m sorry if I’m not breathlessly describing the apocalypse, but I just don’t see it. Perhaps I’m simply blind.  But the data continues to lean toward economic growth, not weakness, at least based on the Retail Sales and Initial Claims data we saw yesterday, as well as the ISM and other numbers.  And inflation, to the extent that growth is a driver of that, remains well above the Fed’s 2% target, although based on its causes (read the Inflation Guy’s blog to really understand it), hiking rates is not going to be the solution to inflation, although it certainly has the opportunity to impede growth.

Anyway…

The rules of the road used to be
That nothing defied gravity
But Elon replied
We oughtn’t be tied
To earth, and his car, he set free!

I am sure there is a parable in the contrast between the doom and gloom that consistently dominates the discussion, the vibe as it were, and the fact that the richest man in the world continues to build extraordinary things.  I’m sure you have all seen the video clip of the new Tesla roadster that actually flies, but if not, it’s right there.  No matter your view of the man, you cannot dismiss his extraordinary genius when it comes to building things.  I guess the question is, will the flying car be a metaphor for the economy?  The markets? Or will it crash a burn?

So, now let’s turn to the markets, and I feel like bonds are the right place to start.  The below chart of the 10-year over the past week is remarkable given the CPI, PPI and Retail Sales data released.

Source: tradingeconomics.com

The huge gap was the immediate response to Wednesday’s CPI release which came in a tick hotter than forecast.  Yet much higher-than-expected PPI and Retail Sales data saw yields decline sharply.  Ostensibly, I continue to read about a flight to safety trade, but that seems at odds with the idea that Treasury debt is going to implode because there is so much of it.  I wish the punditry would get their stories straight.  No matter the cause, yesterday saw a complete reversal of the yield rally from Wednesday.  Maybe, and I’m just spit balling here, the punditry doesn’t have any idea about the way things work but simply try to drive a preferred narrative.  And given the underlying visceral hatred of the US administration, specifically President Trump, are very keen to do all in their power to make things worse for him.

Regardless, it appears that despite the higher-than-expected inflation data, yields at current levels represent an attractive opportunity to some investors.  While this morning, 10-year yields have bounced 4bps from yesterday’s closing levels, as I showed above, they are still lower on the month.  And it is no surprise that European sovereign yields have also rebounded this morning, although more on the order of 2bps across the board.  Frankly, it seems to me there is far more risk in owning Bunds or OATs or BTPs than in owning Treasuries.  At least the US is growing pretty well compared to the utter lack of growth in Europe.  Exactly how are the French going to repay their debt, or maybe more importantly service their debt, if growth remains <1%?

As to equities, they, too, have stopped tumbling for now with markets higher yesterday in the US and almost the entirety of Asia and Europe this morning with the one glaring exception of Indonesia (-10.8%) which suffered from MSCI explaining they could downgrade the country to standalone market status (a decisive negative outcome regarding the lack of transparency and liquidity) offering the potential for significant capital outflows.  I understand that there are AI names that have had problems and the banking sector, despite mostly strong earnings, has underperformed, but the end has not shown itself yet.

Gold (+0.2%) is another market that seems confused, or at least the trading of it seems so, as its relationship with oil (+0.1%), which had a very clear negative correlation for quite a while, arguably since the beginning of the Iran war, (although according to Grok, the numbers show that correlation to be -0.1% to -0.15% over the past year, hardly a strong relationship), are both higher this morning.  But looking at the chart below, the direction of travail since the summer has been largely opposite directions.

Source: tradingeconomics.com

Obviously, oil is a far more important commodity than gold, which can be seen as a sentiment indicator more than anything else.  But despite the recent rebound in oil prices, economies around the world seem to be figuring out how to cope.  Now, the recent uptick in Iranian and Houthi attacks on ships in Hormuz and Saudi infrastructure are having a clear impact and given the fact that the IRGC literally wrote an open letter to the US to elect Democrats to try to impede President Trump’s ongoing campaign, I have to believe things are getting a lot tougher over there.  It is not impossible to believe that after the election, especially if the Republicans hold both Houses of Congress, that the Iran conflict may end soon.  It does seem that the blockade has starved Iran of the one thing they need, capital, and that is running out quickly.

As to the FX market, I find it interesting that even though yields are rising around the world, the dollar has been the main beneficiary here.  In the wake of the CPI and PPI data, the probability of a rate hike at the end of the month has jumped to 85%, as per the below cmegroup.com table.

At the same time, Chairman Warsh spoke last night at the IMF meeting in Bangkok but once again, refused to discuss potential Fed moves going forward. “I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings we have in the balance of this year. It’s a new chapter at the Fed, and we’re not in that business anymore.” While virtually every other member of the FOMC likes the fame/notoriety they get by speaking, Warsh has remained true to his initial comments.  I guess the question is, has the data been sufficient to drive another hike?  It all depends on the membership’s view of economic activity.  If they see strength, I imagine that is what we will get despite the fact it is unlikely to do anything positive for the economy.

Back to the dollar, while it has backed off a bit this morning, with the DXY (-0.85%) the leading decliner despite the fact its components haven’t moved nearly that much (EUR -0.35, JPY unchanged), I guess broadly it is following the 10-year yield.  It is worth noting that while most currencies have not done very much in my absence, (MXN +0.1% today, -5.6% since Sept 25) has suffered on expectations that Banxico is going to cut rates further, thus reducing one of its key supports, the carry trade.

On the data front, this morning we see IP (exp 0.4%) and Capacity Utilization (76.5%).  Those tend not to be market movers so as is frequently the case, the FX market will take its cues from equities and bonds.  Right now, equity futures are essentially unchanged, so if the positivity we saw yesterday fades, perhaps the dollar will rally back some on that flight to safety trade.

Good luck and good weekend

Adf

Growth Outlives Politics

Posted on by 
As much as the pundits keep trying
To tell us that nobody’s buying
The Dow hasn’t crumbled
And though bonds have stumbled
There’s no sign that they’re really dying

But negative stories get clicks
And that’s how the punditry ticks
Though there are concerns
‘Bout short-term returns
O’er time growth outlives politics

Over the past several sessions, basically until yesterday afternoon, the vibe was distinctly negative.  Oil prices had rebounded, bond yields continued to rise and there was red all over the equity market screens.  It’s funny, the dollar was rallying and one explanation was investors were fleeing to the dollar for safety, but if they were, it wasn’t clear what they were buying with those dollars.  It wasn’t stocks, bonds or gold, so I guess they were holding cash.  That seems odd in this day and age, but maybe.

The punditry was in its glory, though, explaining how everything that every government was doing, especially the Trump administration, was destined to fail and that we all must be very afraid.  And then it stopped.  Certainly, a key catalyst to this reversal of fortune was President Trump’s tweet late yesterday morning as per the below:

However, while there was an initial spike on the news, risk sold off further for the next hour, as you can see in the below chart, until the Iranians confirmed discussions were ongoing.  It seems that while neither Trump nor Iran is believed by themselves, markets are willing to take a flyer on the two of them saying the same thing.

Source: tradingeconomics.com

And that’s basically where we are this morning.  All the doom and gloom has been put on hold for the moment because, once again, hopes have been raised that there will be a conclusive outcome to the ongoing conflict in Iran and energy markets will be able to get back to a more normal functioning process.  Of course, the Russia/Ukraine war continues and that is also having a significant impact, maybe more than Iran, as Ukraine continues to destroy Russian refining capacity. But the punditry will wait until Iran is settled before they refocus there for their next negative stories.

But as I type this morning, that’s really all there is.  The election remains background noise so far, at least from a market perspective, and likely won’t have a direct market impact until the results are in on November 4th.  The dearth of data this week meant there were no economic fundamentals on which to define a view, so the old trend, which had turned negative, was the default position.  Now, if things really do settle down in Iran, I suspect that will drive renewed interest in both stocks and bonds while the dollar drifts lower.  But we shall see.

In the meantime, let’s tour how markets have responded to the change in tone.  Equity markets are looking much better this morning as per the below screenshot from tradingeconomics.com.  Other than the Nikkei, which was basically unchanged, green is this morning’s color.  And while the Nikkei slipped ever so slightly, every other index in Japan rose.

Maybe we are not all doomed after all.  In the bond markets, yesterday afternoon in the US saw yields back off sharply from their recent highs, falling -7bps on the day although they are unchanged this morning.  But that price action has been the driver around the world as you can see in the below Bloomberg screenshot.

This is not to imply that everything is better around the world, clearly there are still manifest fiscal and monetary issues as well as little things like riots on the streets of France, Belgium and Spain, but those are not yet impacting markets, I believe.  (Of course, if I were Emmanuel Macron, I would be making sure I have an escape route given the outcome of the leadership during the last French Revolution!)  But it seems that at current levels, investors are getting comfortable with the idea of owning bonds.  And the other positive for the bond market is The Economist’s cover this week, a near perfect negative indicator, looks like this:

In the commodity markets, oil (-0.9%) is continuing yesterday afternoon’s slide and sitting right on $90/bbl.  Not surprisingly, between the slide in oil and the fall in interest rates, precious metals markets have rebounded nicely (Au +1.25%, Ag +2.25%, Cu +2.0%).  Certainly, this price action is consistent with what we have seen of late.

Finally, turning to the dollar, it is the one thing breaking the trend as it is marginally higher this morning vs. most of its G10 counterparts.  Recent price action would have you think it should sell off with oil falling and gold rallying, but maybe the stories about fleeing to dollars is correct.  The two outliers here are BRL (+0.5%) and ZAR (+0.5%) with the former seemingly anticipating a Bolsonaro electoral victory and a move toward more conservative fiscal policies while the latter is simply responding to both oil’s decline and gold’s rise.  I continue to have a hard time getting excited about a significant move in the dollar for now although also believe that modest strength over time is the way forward.

On the data front, yesterday’s Initial Claims came in low, just 197K, which continues to point to a labor market that is not under huge stress.  I wonder, too, how quickly the impact of the administration’s crackdown on H1-B visas is going to be seen in the data as the numbers I read this morning, 700K US workers were laid off in the tech space and the same number of H1_B visa’ed immigrants were hired in their place could portend another step lower in this series.  As to this morning, Michigan Sentiment (exp 47.6) is the only thing on the docket.  However, I wonder how much of that particular indicator is a political statement vs. how much as an economic outlook.

The weekend is upon us, and I see no reason for this morning’s positive vibe to dissipate.  I know all the arguments about the lack of breadth in the market and the massive dichotomy between the tech space and the rest of the economy, but following the numbers, there is no indication to me that the end is nigh.  While I disagree with much of Keynesian monetary philosophies, (I lean Austrian there) he was certainly correct when he told us that ‘markets can remain irrational longer than you can remain solvent.’  I’m not betting against a continuation of the equity rally, and am long bonds as a trade, thinking yields have peaked, at least for a while.

Good luck and good weekend

adf

On the Boil

Posted on by 
The Minutes were pretty benign
As everyone toed the hike line
But this was old news
And Payrolls did bruise
The view Funds would soon rise and shine

As well, Bessent sold 10-year debt
And yields, buyers’ hunger, did whet
It seems there are some
Who think it’s not dumb
To grab these real yields they can get

And lastly, this morning’s ‘bout oil
Whose price is now up on the boil
The Strait of Hormuz
Is not safe to cruise
And this, major markets, did roil

Starting at the top, the FOMC Minutes were released yesterday and it’s not clear to me how much we learned.  The unanimous vote to raise rates was accompanied by commentary that prices were an ongoing concern while the labor market seemed ‘balanced’.  Of course, that was prior to the release of last week’s NFP report which showed that the balance may be tipping toward the downside, but that was just one report.  The weekly claims data (exp today at 200K) hardly speaks to a serious problem there.  As I type this morning, the probability of a hike at the end of this month is ~20% and has been so since last Friday’s release.  Frankly, I don’t think we learned a great deal here.

Turning to yesterday’s 10-year Treasury auction, though, things were a bit more interesting.  You may recall before my hiatus that there was a 5-year auction that had a relatively long tail, meaning that the final yield was 3.1 basis points higher than the when-issued price at the time of the release.  That was seen as a very negative sign for the bond market.  Well, yesterday, the 10-year auction saw a 1.7 basis point improvement on the when-issued price, a sign there was much more demand than anticipated.  In fact, dealers took down only 2.5% of the auction with the rest going to investors of all kinds.  That type of price action is quite positive and certainly puts paid to any discussion that investors don’t want to own Treasuries.  It seems that at 5.3%, with a real yield of 2.5% or so, investors feel quite comfortable owning Treasuries, despite all the talk of too much debt leading to a calamity.

But today is all about oil (+4.5%) and the recent increase in attacks on ships through Hormuz.  While last week, data showed that the flows had resumed to nearly pre-war levels, that has changed.  Add to that the news that President Trump has ostensibly asked the Pentagon for updated plans for renewed military action soon, and nerves are jangling across markets.  The below chart of WTI shows the reversal of price declines, but we are only back to levels seen last week.  This is not extraordinary, especially given the volatility we have seen in this market.  In fact, as you can see in the chart, the 1 week move shows oil higher by just 0.7%.

Source: tradingeconomics.com

But every day is a new one, and today’s markets are being driven by the oil situation.  You can see that clearly in the equity markets via the screenshot from tradingeconomics.com showing every market that is open (Toronto and Mexico are still closed) lower on the day by a pretty substantial amount.

Adding to the woes in the oil market is that the first hurricane of the season, Isaias, has formed in the Gulf of America and has forced the shut-in of about 25% of drilling activity there.  Of course, that will be gone by Sunday and those rigs restarted, but for now, no bueno.

If we head back to the bond market, despite the strong auction results, this morning we are seeing yields rise everywhere in the world, albeit not as dramatically as yesterday.

Source: Bloomberg.com

One thing to note is that the spread between German and French debt has widened to its greatest gap since the Eurozone bond crisis in 2011 as concerns over French fiscal policies are really starting to bite.  The protests in the street there are not helping, and investors are looking forward to the presidential election next spring where both the leading candidates are talking about lowering the retirement age to 60 from the current 62.  I assure you, that will not help the fiscal situation either.

But let us consider this for a moment, why yields are rising.  Is it entirely inflation concerns or is it something else?  Earlier this week I discussed the fact that inflation breakevens remain pretty well anchored in the 2.3% to 2.5% range, indicating inflation is not the main concern.  Rather, it appears to me that the factors driving yields higher are far more positive, namely stronger growth as currently symbolized by the hyperscalers borrowing massive amounts of money for their AI efforts, but arguably a reflection of the fact that the US economy is growing strongly.  Izabella Kaminska (@izakaminska on X), former financial editor at the FT, made a very good point this morning on this subject.

In essence, running it hot means stronger private sector growth pushing demand for financing higher.  However, it should also push up tax revenues reducing requirements for government borrowing.  It can work out so they offset, but that will be tough, so there are going to be bumps.  But, with Kevin Warsh not signaling great concern over the higher yields in the bond market, rather than financial repression (President Trump’s favored strategy), perhaps we just get back to a functioning economy and market with less interference from the government…well, one can always hope!

It should not be a surprise, then, that the dollar remains a major beneficiary of the current state of affairs.  This morning it is higher yet again, albeit not dramatically so, only 0.1% against most major currencies.  But let’s talk about the strength of the dollar.  Is it really that strong?  You all know how much I love to take a longer-term view on these things and this is no different.  So, look at this chart of the DXY from barchart.com from its inception in 1974, and tell me if you think the dollar looks “strong”.

I remember getting the data and the average of the DXY is around 104.00, so we are not even there.  In fact, the greenback is in a very ordinary place.  Now, the DXY is representative of G10 currencies but not necessarily EMG currencies.  However, that story has been quite divergent depending on the currency in question.  For instance, if we look at the next two charts, we can see that movement across key currencies in this bloc have been very different.

Source: tradingeconomics.com

You can see INR and KRW, until very recently, have weakened substantially, while below, BRL and CNY have both shown real strength over the past 18 months, although had been more mixed prior to that.

Source: tradingeconomics.com

My point is, aside from the rupee, which is at long-term historic lows, we have seen all these prices before.  There is no reason to panic about the dollar collapsing or becoming “too” strong.

We get our only real data of the week this morning with Initial (exp 200K) and Continuing (1710K) Claims and Wholesale Inventories (+0.7%), although nobody pays any attention to that.  There is no doubt that market participants are nervous about a lot of things and that is why risk assets are under pressure.  If the Iran conflict escalates, I expect we will see that play out for a longer time, but I have no opinion on whether that will be the case or not.  To me, I take heart in the fact that economic activity appears to be moving along well, and ultimately, that is a huge positive for the country, and by extension, will support the dollar.

Good luck

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It’s Been Hell

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Despite all the angst ‘round the earth
The one thing of which there’s no dearth
Is risk appetite
As both left and right
All want to increase their net worth

However, at times it’s been hell
To choose what to buy or to sell
The dollar is strong
So, best to be long
But what if yields here quickly fell

And what about stocks, can they rise
From their now historic new highs?
And let’s not forget
The government debt
Or ‘bout a November surprise

It is very confusing these days, as if you read or listen to the news, the sky is falling.  But if you look at market prices of so many assets, things look pretty good.  Now, I understand the iron rule of media is, if it bleeds, it leads, and so in a world where getting clicks is far more important that recounting a coherent story about what is happening in the world, there is little, if any, effort to produce the latter.  Alas, while sentiment is clearly an important part of all markets, I remain enough of a curmudgeon to continue to believe that the fundamentals still matter.

So, what are those fundamentals?  Well, if we look at the economy writ large, even after a weak payroll report last week, the Atlanta Fed’s GDPNow estimate remains at 3.7% for Q3 as per the below chart.

And interestingly, despite all the positive data, notably things like the ISM Surveys, Retail Sales and Personal Spending, we continue to read headlines about problems in the economy.  A great example was yesterday’s Trade deficit which printed at a higher than expected -$105.6B, which was the worst reading since the month before President Trump’s tariffs were inaugurated last year.  But ask yourself, why is our trade deficit growing?  The answer is because the US is growing far faster than other nations and so not only are we sucking in more imports, but export markets are weak.  As it has been said before, if you want to close the trade gap, send the country into a depression, then we won’t buy any imports, although that seems like an extreme solution.

But that US economic strength shows itself in various ways.  For instance, Treasury yields continue to rise, up 5bps this morning, although that is dwarfed by moves in Europe (France +16bps, Italy +13bps, Greece +12bps, UK +10bps).  The question to ask here is, why are yields rising?  While the most recent generation of traders and economists continue to believe this is a sign of fears over inflation, or perhaps excess government debt, given the lack of movement in TIPS breakevens, it very much appears this is all about higher real rates.  Demand for capital in a growing economy seems to be driving yields higher.  Again, I harken back to my youth in markets when the strong belief was that 10-year yields should trade right around nominal GDP growth.  At 5.33%, we remain far below that level.

Investors are buying the US writ large.  You can see that in the dollar, where the euro (-0.8%) has fallen to its lowest level since May 2025 as per the below chart.

Source: tradingeconomics.com

But look at this chart.  The euro is nowhere near its lows of the past 2 years, let alone historic lows, so the idea that the dollar is overly strong remains laughable.  In fact, if the US continues to grow its economy the way it has been doing, and if investment keeps flowing into the US like it has been, the dollar can get much stronger.  While the yen has been depreciating for a long time, the same has not been the case with the euro or other G10 currencies, and I see no appetite for any official action to stem the dollar’s strength here.  If I consider the insanity of European energy policy leading to its ongoing deindustrialization, I see no reason that parity in the euro is not a real target.  Not right away, but by sometime next year for sure.  And this is especially so if the Republicans hold the House and Senate next month.

In fact, there are only two currencies that have shown any strength vs. the dollar, the BRL, which I discussed yesterday and is rallying on the back of a positive view of a Bolsonaro presidential victory in two weeks’ time, and the KRW, which has been the beneficiary of consistent inflows for investment into its semiconductor sector.  And while the euro has been the worst performer today in the G10, virtually every currency is weaker vs. the dollar this morning as the news flow continues to point to problems overseas rather than in the US.

Which takes us to equity markets and the fact that both the S&P 500 and NASDAQ made new all-time highs yesterday, although futures this morning are pointing a bit lower.  

Source: tradingeconomics.com

In fact, I think we can look at the US performance relative to that in Europe and Asia and learn the same lesson, capital continues to flow into the US.  A look at the below Bloomberg screenshot tells the story well.

Which takes us to commodity markets.  While oil is off its recent lows, it remains well below the 
$100/bbl level that sets hair on fire as you can see below.

Source: tradingeconomics.com

In fact, I couldn’t help but notice the announcement from the IRGC that they would be closing the “illegal” routes through the Strait of Hormuz shortly, of course implying the Strait is, in fact, basically open.  While President Trump has been saying this for several weeks, the media doesn’t like that outcome so has tried to refute it.  I wonder what they will say now.  Meanwhile, gold (-2.2%) continues in its funk and has been dragging silver (-3.5%) down with it.  Frankly, with real yields at 2.9%ish in the 10-year and 3.5% in the 30-year, those are pretty attractive alternatives to the barbarous relic.  While I still think they have room to rise (metals, that is) I guess now is not the time.  Copper (-0.3%) however, continues to hover just below its recent all-time highs on ongoing fundamental demand in the growing US economy.

In the end, the world is not ending, and in fact I’m positive going forward.  But then, I’m just a poet.  On the data front, on the calendar today we see EIA oil inventories with a small build expected and the FOMC Minutes at 2:00pm.  I imagine a lot of effort will go into parsing those Minutes, but the market has already decided there is no hike coming this month although they still see December as quite likely.  A backing off from equity highs is no surprise, and I do not see this as the beginning of a new trend lower.  In fact, until the election results, I think we are more likely to rally risk assets then sell them.

Good luck

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