Tag Archives: europe

Most Enthralling

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

 

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

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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The Winds of Change

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Takaichi-san
Her pronouns so very clear
Brings the winds of change

 

Japan has a new Prime Minister, Sanae Takaichi, the first woman to hold the position.  She was deemed by most of the press as the most right-wing of the candidates, which fits with a growing worldwide narrative regarding nationalism, antagonism toward immigration and concerns over China and its plans in the region.  However, in the waning days of the campaign, she moderated a number of her stances as she does not have a majority in either house of the Diet, and will need to persuade other, less rigid members to vote with her in order to pass legislation.

However, the initial market response has been remarkable.  The Nikkei opened in Tokyo +5.5% and held most of those gains, closing higher by 4.75%.  USDJPY gapped 1.3% on the Tokyo opening and is currently higher by 2.0% and back above 150.  Perhaps the most interesting thing is that despite dollar strength, the precious metals have roared higher with both gold and silver gaining 1.4% as gold touches yet another new all-time high and silver pushes ever closer to $50/oz. Meanwhile, JGB yields are little changed as I imagine it will take a few days, at least, for investors to get a better sense of just how effective she will be at governing in a minority role.

Below is the chart for USDJPY, demonstrating just how big the gap was.  This appears to be another chink in the ‘end of the dollar’s dominance’ armor.  Just sayin’!

Source: tradingeconomics.com

In Europe, the powers that be
Have found citizens disagree
With most of their actions
Thus, building up factions
That want nothing but to be free
 
The most recent story is France
Where Macron’s PM blew his chance
He’s now stepped aside
But Macron’s denied
He’ll willingly exit the dance

However, the dollar’s gains today are not merely against the yen, but also, we have seen the euro (-0.7%) slide sharply with the proximate cause here being the sudden resignation of French PM LeCornu.  And the reason it seems like it was only yesterday that France got a new PM after a no-confidence vote in September, is because it basically was only yesterday.  PM LeCornu lasted just one month in the role as President Macron didn’t want to change the cabinet there, thus making LeCornu’s job impossible.  While the next presidential election is not scheduled until April 2027, and Macron is grasping to his role as tightly as possible, it appears, at least from the cheap seats over here in the US, that the vote will happen far sooner than that.  He appears to have lost whatever credibility he had when first elected, and France has now had 4 PM’s in the past twelve months, hardly the sign of a stable and successful presidency.

Like the bulk of the current European leadership, Macron has decided that nearly half the country should not have their voices heard by banning Madame LePen’s RN from government.  And while President Biden was never successful imprisoning President Trump, in France, they managed to convict LePen on some charge and ban her from running.  But that has not dissuaded her followers one iota.  We see the same behavior in Germany with AfD, and the Merz government’s attempts to ban them as a party, and similar behavior throughout Europe as the unelected Brussels contingent in the European Commission struggles to do all they can to retain power.

In fact, if you look at the most recent polls I can find for France, from Politico, you can see that RN, LePen’s party, is leading the polls while ENS, Macron’s centrist party has just 15% support.  The far left NFP is in second place and the center-right LRLC is at 12%.  It is difficult for me to believe that Macron can hold on until 2027, at least 18 months away, and if he does, what type of damage will he do to France?

The point of the story is that whatever you may think of Donald Trump, he has the reins of government and is doing the things he promised on the border and immigration, reducing government and reducing regulations.  In Europe, the entrenched bureaucracy is fighting tooth and nail to prevent that from happening with the result that economic activity is suffering and prospects for future growth are stunted.  And all that was before the US change in trade policy.  With that in mind, absent a massive Fed turnaround to dovishness, which doesn’t seem likely in the near term, the euro has more minuses than pluses I think and should struggle going forward.

Ok, two political stories are the driver today, and neither one has to do with Trump!  Meanwhile, let’s look at how everything else has behaved overnight.  Friday saw a mixed session in the US, and all I read and heard over the weekend was that the denouement was coming, perhaps sooner than we think.  The recurring analogy is Hemingway’s description of going into bankruptcy, gradually, then suddenly, and the punditry is trying to make the case that the ‘suddenly’ part is upon us.  I’m not convinced, and would argue that, at least in the US, things can go on longer than they should.  This is not to say the US doesn’t have serious fiscal issues, just that we have better tools to address them than anyone else.

Elsewhere in Asia, China is still on holiday while HK (-0.7%) could find no joy in the Japanese election.  But Korea (+2.7%), India (+0.7%) and Taiwan (+1.5%) all rallied nicely with only the Philippines (-1.8%) showing contrary price action as investors grew increasingly concerned over a growing corruption scandal with the government there and infrastructure embezzlment allegations.  I didn’t mention above but the rationale behind the Japanese jump is that Takaichi-san is expected to push for significant fiscal expansion on an unfunded basis, great for stocks, not as much for bonds.

In Europe, though, you won’t be surprised that France (-1.6%) is leading the charge lower, although in fairness, the rest of the continent is doing very little with the other major exchanges +/- 0.1% basically.  As to US futures, at this hour (7:15), they are all pointing higher by 0.5% or so.

In the bond market, Treasury yields have moved higher by 4bps this morning, adding to a similar gain on Friday as it appears there are lingering concerns over what happens with the government shutdown.  (Think about it, that issue hasn’t even been a topic of discussion yet this morning!). But remember, the government shutdown does not impact the payment of coupons on Treasury debt, so the issues are very different than the debt ceiling.  As to European sovereigns, not surprisingly, French OATs are the wors performers, with yields jumping 8bps (they have real fiscal problems) but the rest of the continent has tracked Treasury yields and are higher by 3bps to 4bps as well.

I’ve already highlighted precious metals, although copper (-0.7%) is bucking the trend, albeit after having risen more than 10% in the past month.  Oil (+1.4%) is also continuing to bounce off the bottom of the range trade and remains firmly ensconced in the $61.50 to $65.50 range as it has been for the past six months.  In fact, looking at the chart below from Yahoo finance, you can see that except for the twelve-day war between Israel and Iran, nothing has gone on here.  The net price change in the past six months has been just -0.19% as you can see in the upper left corner.  While this will not go on forever, I have no idea what will break this range trade.

Finally, the dollar is stronger across the board with the pound (-0.4%) and SEK (-0.5%) the next worst performers in the G10 while CAD and NOK are both unchanged on the day, reflecting the benefits of stronger oil and commodity prices.  In the EMG bloc, the CE4 are all softer by between -0.6% and -0.9%, tracking the euro, and we have seen APAC currencies slip as well (KRW -0.5%, CNY -0.15%).  MXN (-0.2%) and ZAR (-0.3%) seem to be holding in better than others given their commodity linkages.

And that’s all we have today.  With the shutdown ongoing, there are no government statistics coming but we will hear from 8 different Fed speakers, including Chairman Powell on Thursday morning, over a total of 15 different venues this week.  Again, there is a wide dispersion of views currently on the FOMC, so unless we start to see some coalescing, which given the lack of data seems unlikely in the near term, I don’t think we will learn very much new.  As far as the shutdown is concerned, the next vote is scheduled for today, but thus far, it doesn’t seem the Democratic leadership is willing to change their views.  Funnily, I don’t think the markets really care.

Overall, I see more reasons to like the dollar than not these days, and it will take a major Fed dovish turn to change that view.

Good luck

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Declines and Duress

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

 

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

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

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

Source: tradingeconmics.com

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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