Tag Archives: finance

Not Be Sublime

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Investors are starting to shun
The riskiest things one-by-one
So, stocks feel the pain
And bonds, too, feel strain
The dollar, though’s, on quite a run

It’s nearly two weeks since this started
And so far, no ending’s been charted
The impact o’er time
Will not be sublime
Thus, trading’s not for the faint-hearted

Another day and there is no end in sight for the ongoing military action in Iran.  US strikes continue apace and Iranian retaliation also continues, albeit at a lesser rate it seems.  However, the information from the war zone remains difficult to trust as all of it is spun for various audiences with no sense of objective truth.  As such, it is difficult to have an opinion on how long this will continue.

With that in mind, all we can do is observe market behavior and see what we can glean.  Starting with equity markets around the world, the below screenshot from Bloomberg.com this morning shows that risk is clearly off, although not catastrophically so, at least not yet.

So, weakness in the US yesterday was followed by weakness overnight in the major markets in Asia as well as in other regional markets (Korea -1.7%, India -1.9%, Indonesia -3.1%) with the rest having declined by lesser amounts.  It is important to see that all the Asian markets (and European and US markets) have fallen in the past month, but remain higher, in some cases substantially so, since this time last year.  The point is that this move can still rightly be considered corrective, rather than a dramatic change in opinion.

European bourses are demonstrating similar behavior although US futures at this hour (6:45) are slightly higher, about +0.15% across the board.  Thinking about equity markets overall, one of the main features of the US market was that it maintained a relatively high P/E ratio, no matter whether measured on a forward looking or historical basis.  Thus, a correction in equity prices, even absent the war, would not have been that surprising.  The same could not be said about European or Asian markets, which trade at much lower valuations, but then, in Europe especially, prospects for growth remain hampered by individual national domestic policies along with EU wide policies, notably in the energy sector.    Under the rubric a picture is worth 1000 words, it is not hard to understand why US equity markets dominate global markets.

Source: tradingeconomics.com

Germany has averaged -0.3% GDP growth over the past 3 years, and the EU is just above it at +0.4%.  Meanwhile, this morning’s UK GDP data showed weaker than expected outcomes, with Y/Y of 0.8% after a stagnant January.  Are US markets richly priced?  Sure, but what prospects do you have elsewhere?

Turning to bond markets, the traditional safe haven appeal of bonds, especially Treasuries and Bunds, is MIA.  While this morning, Treasuries (-1bp) and most European sovereigns (-1bp across the board) have seen prices stop declining, the picture over the past two weeks has not been encouraging.  The chart below shows the price action in both Treasuries and Bunds and, as you can see, both have seen yields rise sharply since the beginning of the month/war.  Given the ongoing stress in oil markets, and the implications that has for inflation worldwide going forward, it should not be a surprise that bonds don’t appear to offer their ordinary haven characteristics.

Source: tradingeconomics.com

The big question here, and around the world truthfully, is how will central banks respond to the rise in energy prices and subsequent rise in headline inflation?  If they try to address price pressures by raising rates in this scenario, it will almost certainly lead to recessions everywhere.  But will their models allow them to hold their policies if inflation starts to rise sharply?  It’s funny, I have been remarking how central bank policies have lost their luster recently, having been overwhelmed by fiscal policies, but suddenly, monetary policy is back in the limelight.  We shall see how they perform.

In the commodity markets, WTI (-1.3%) rallied sharply yesterday but is giving back a bit this morning.  The big headline yesterday was that Brent crude closed above $100/bbl for the first time since 2022 in the wake of Russia’s invasion into Ukraine.  Of course, that was more about the big, round number feature, than the percentage rise.  After all, is there really a difference of $98/bbl or $100/bbl in the broad scheme of things?  Oil continues to be THE driving factor in all markets right now and that is not likely to change anytime soon.  As long as the Strait remains closed to traffic, this pressure will continue to build. 

In the metals markets, both gold and silver continue to consolidate around their recent levels ($5100 in gold, $85 in silver) and it appears we are going to need another catalyst of note to get that to change.  I see no change in supply metrics, that’s for sure, but if there is a recession, silver demand may well be reduced given its industrial uses.

Finally, the dollar is king of all it surveys, at least in the FX markets.  The euro is below 1.15 (it seems like only last week that pundits were talking about the consequences of the euro trading above 1.25.  The DXY has broken above 100, although we will need to see an extension of this move to be convinced that it is going to head much higher, and USDJPY is now pushing near 160 again, which brought out comments from Katayma-san, the Japanese FinMin, about closely monitoring the yen’s value.  Of course, given the broad-based rise in the dollar, the current yen weakness cannot be seen as that troubling.

But what is a bit more interesting to me, and more definitive proof that the dollar is not about to collapse, is the coincident moves higher in the dollar vs. a number of other currencies.  Look at the chart below of ZAR (-0.15%), SEK (-0.3%) and MXN (0.0%).  Each demonstrates virtually identical trade patterns, and all of them reached their respective peaks (dollar’s nadir) on January 29th.  You may recall that was the day president Trump named Kevin Warsh as the next Fed Chair, and we saw a major reversal in stocks, gold, silver and other markets.  

Source: tradingeconomics.com

My best estimate is that FX markets are pricing in a tighter Fed at this point, which. Based on Fed funds futures, showing just one cut potentially this year in December, makes a lot of sense.  I guess it remains to be seen how other central banks will respond to the ructions in markets caused by the war, but this is the first order consequence.

Source: cmegroup.com

Turning to this morning’s data, we see a bunch as follows: 

Q4 GDP (2nd estimate)1.4%
Personal Income0.5%
Personal Spending0.3%
Durable Goods1.2%
-ex Transport0.5%
PCE0.3% (2.9% Y/Y)
Cpore PCE0.4% (3.1% Y/Y)
JOLTs Job Openings6.7M
Michigan Sentiment55.0

Source: tradingeconomics.com

As with Wednesday’s CPI data, the PCE data does not include the war, so will be dismissed.  My take is the Income and Spending numbers, and the JOLTs number will be the most impactful if they are a long way from estimates.  

And that’s where we stand.  Markets are still unsure of what to believe regarding the war, and when it comes to war, things happen that are unexpected all the time, the so-called unknown unknowns.  In the end, it is hard to bet against the dollar for right now, but that could change in an instant based on the next headline.

Good luck and good weekend

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Rise and Shine

Posted on by 
Though CPI’s print was benign
It’s clear that it didn’t enshrine
The impact of war
That caused crude to soar
Thus, yields round the world rise and shine

But other than yields heading higher
And prospects for peace looking dire
Most markets lack motion
Which leads to the notion
That not very much may transpire

It seems incongruous but despite the war, and a remarkable cacophony from the press, markets are not really doing very much at all.  Certainly, at the margin, there is some movement, and, of course, this does not include oil prices which have been all over the map, but generally, if you look at the charts below, it is hard to get too excited.

Starting with the dollar, as per the DXY, it has traded in a 4% range for basically the past year, touching both top and bottom three times each.  The current rebound looks almost identical to the October rally.  But 4% is just not that much of a move, certainly not one that implies a regime change.  Overnight, the largest move was PLN (-0.4%) with virtually every other counterpart, whether G10 or EMG, +/-0.25% or less.

Source: trading economics.com

Turning to stocks, it is difficult to look at the below chart of the S&P 500 and come away with the conclusion that it is either rallying or declining in any meaningful measure.  For the past 6 months, the range has been about 450 S&P points, which, given the level, works out to less than 7%.  It is no surprise that equity volatility is a bit higher than currency volatility, but this chart does not instill fear of either collapse or breakout to my eyes.

Source: tradingeconomics.com

Yes, this morning there is rising concern and equity markets around the world had a weak session overall, but nothing indicating a collapse.  Consider in Asia we saw the following movement:

  • Tokyo -1.0%
  • Hong Kong -0.7%
  • China -0.4%
  • Korea -0.5%
  • Taiwan -1.6%
  • India -1.0%
  • Australia -1.3%

A weak performance?  Absolutely.  Unprecedented declines?  Not even close.  The same is true in Europe, but even less so, with Spain (-0.7%) the worst offender by far while France (-0.3%), the UK (-0.3%) and Germany (0.0%) all tread water.  Again, where is the fear?  US futures, at this hour (6:50) are lower by just -0.4%, again, soft but not catastrophic.

Turning to bonds, while Treasury yields climbed 7bps yesterday, and have been rising since the beginning of the month, they are just now at the top (and slightly through) the range of the past 6 months.  Now, the recent rise is understandable as we all know that yesterday’s benign CPI reading didn’t include any of the oil price movement since the Iran war began.  My understanding is that the rule of thumb for headline CPI is that every $10/bbl rise translates to 0.2% higher CPI.  So, with this morning’s WTI price at $91.50/bbl, compared with $65/bbl prior to the first attacks, that is about 0.5% higher CPI ceteris paribus.  Now, ceteris is never paribus, so we don’t know how things will actually play out, but it seems a fair bet headline inflation will be higher next month.  (This is the point where I will highlight the best way to take advantage of the rising CPI is through USDi, the fully-backed CPI tracking currency.  We already know that CPI next month is going to be higher because of the catch up from the October government shut down.  Add to that the oil price moves and we are looking at annualized returns in the coin of 4.5+% over the next quarter, well above T-bills!)

Back to the bond market, a look at the chart shows the chopping action described above, just like the dollar’s price action.

Source: tradingeconomics.com

This is the Treasury story.  Elsewhere around the world, things have not been quite as benign.  For instance, German bund yields have, this morning, traded to their highest level since October 2023 as per the below chart, although, in fairness, the rise has been gradual.

Source: tradingeconomics.com

UK gilts, on the other hand, have been somewhat more volatile, although I suspect that has a great deal to do with UK domestic economic policy as the nation continues its effort at suicide by insisting that Net Zero CO2 output is the way of the future, thus crushing economic output while suffering through remarkably higher energy prices, and the corresponding inflation that comes with that.  But even here, while the price action has been choppier, the result so far has been similar, a sharp rise in the post Covid recovery reaching a plateau.  

Source: tradingeconomics.com

The fear here, and across all bond markets, is that the Iran war lasts much longer, that oil prices continue to rise, perhaps back to the post Ukraine invasion levels of $120 or higher, and that inflation reignites.  History has shown that every time oil prices rise swiftly and remain there for any length of time, it leads to a recession or at least coincides with one as per the below chart from the FRED database.

Remember, recessions are called after the fact, so my take is the NBER goes back to include the spike.  But it is not a hopeful chart.

On the subject of oil, this morning it is higher by 4.2% as news that Iran has begun to mine the Strait of Hormuz has the narrative updating to explain that the Strait will be closed for an extended length of time and so some 20% of global oil supplies will be off the market.  Now, this is not strictly true as Iran is still transiting the Strait and sending those cargos to China, and I read that India is trying to negotiate for oil heading there to get through as well.  Nonetheless, there is a significant backup there and production is starting to get shut in, which is never a good sign.  While we remain far below the Sunday night panic peak, there is nothing to say we cannot climb back there if things deteriorate in Iran.

Source: tradingeconomics.com

Which takes us to the metals markets.  After a remarkable run over the past two years, gold (0.0%) appears to be settling into a new trading range, as does silver (+1.75%).  

Source: tradingeconomics.com

The funny thing about this is that gold has historically been seen as an inflation hedge, so with inflation almost guaranteed to be higher for the next several months, at least, one might expect gold to rally more aggressively.  One consideration is that with inflation rising, expectations are for rising interest rates which, correspondingly, are negative for gold, so there is no buying. (H/T Alyosha for that narrative.). But perhaps the explanation is that gold has historically been a hedge for monetary inflation, meaning the printing of more currency.  If inflation is caused by a spike in energy prices, gold typically sits on the sidelines. 

Which takes us to the Fed.  If Powell and friends look at inflation and decide that they need to raise rates to address it, that would be a double negative for gold in my view as not only would interest rates be higher, but it would almost certainly trigger a recession.  Initially, that would not be a gold positive, although their response to the ensuing recession, which would be significant policy ease, would definitely send the barbarous relic soaring again.  

So, that’s how I see things this morning.  some market chop, but nothing really changing.  I suppose that we will need to see a conclusion of some sort in Iran to change opinions because, if things drag on, just like they did in Ukraine, investors forget about it after a while.  For instance, how many of you remember Venezuela, which was just 2 months ago.  Attention spans these days are very short.

On the data front, Initial (exp 215K) and Continuing (1850K) Claims lead this morning alongside the Trade Balance (-$66.6B) and Housing Starts (1.35M) and Building Permits (1.41M).  There is also a 30-year auction today, although nobody has been discussing auctions at all lately.  

You will not be surprised that I am not excited by the current market situation, and in fact, my take is the bigger risk for a large move is a sudden end to the Iran conflict, rather than anything else.  In the meantime, I am hunkering down.

Good luck

Adf

Designed to Ease Nerves

Posted on by 
The IEA, last night, proposed
That since, Hormuz Strait, has been closed
Strategic reserves
Designed to ease nerves
Ought be released and not opposed

But so far, it’s not been approved
Despite the fact it is behooved
So, oil is higher
As every supplier
Embraces their, margins, improved

It is somewhat ironic that the biggest story of the evening, the IEA’s recommendation that nations around the world release between 300 million and 400 million barrels of strategic petroleum reserves has not helped mitigate the rise in oil prices.  After falling sharply yesterday, this morning, WTI (+4.5%) is rebounding sharply again.  A look at the chart below reminds me of silver from late January, and certainly, as the following chart demonstrates, daily volatility in that market has made a significant step higher from its pre runup levels.

Source: tradingeconomics.com

One need only look at the size of the daily candles to understand that movement each day has increased substantially since then.

Source: tradingeconomics.com

Of course, the countervailing news that is driving oil higher is that Iran has begun to mine the Strait of Hormuz, which will make resuming transit more difficult when hostilities cease.  In fact, that appears to be the newest front in the war, with the US attacking the small boats Iran is using to try to lay mines.  It seems this is similar to the drug boat attacks the US carried out in the Caribbean late last year prior to the exfiltration of Venezuelan President Maduro.

Again, the interesting thing to me about Iran’s actions is that by closing the Strait, they cut off 90% of their own revenue, and as they are actively fighting a war, that seems a major hindrance.  After all, Iran is nowhere near self-sufficient in anything a nation needs to continue its existence.

But the fog of war is just that, a situation that prevents clear understanding of all that is ongoing in the area.  As we sit, fortunately, thousands of miles away from the action, and everything we read is spun by whoever is writing it, it remains extremely difficult to get a good understanding of the situation in Iran, either tactically or strategically.  All we have is the market price action as an indicator.  

But before we look at markets, it is worth mentioning that CPI is released this morning with the following expectations: Headline (0.3% M/M, 2.4% Y/Y) and Core (0.2% M/M, 2.5% Y/Y).  The problem with this data is twofold.  First, it continues to be polluted by the impact of the government shutdown last autumn, but more importantly, it is for February, and the Iranian action has been entirely in March, so there will be no impact from the dramatic rise in oil prices in the data.  Ultimately, in this case, the data is almost certainly going to be ignored by the Fed, to the extent they even look at CPI rather than PCE.  Of course, the PCE data will have the same problems.

So, let’s turn to markets now.  Yesterday’s nondescript price action in the US was followed by a more positive tone in Asia, arguably on the IEA news.  While there were some laggards (India -1.7%, Indonesia -0.7%, HK -0.25%), the bulk of the region did just fine with Tokyo (+1.4%) and China (+0.6%) both nicely in positive territory, although that was nothing compared to Taiwan (+4.1%).  Otherwise, the rest of the region was positive somewhere between +0.5% and 1.0%.  Europe, however, is having a less positive morning with most major bourses lower on the day (Germany -0.7%, France -0.3%, UK -0.6%, Italy -0.3%) with only Spain (+0.3%) managing a gain in the session.  Energy continues to be the biggest concern here although as I type at 7:25 this morning, we are getting the first word of SPR releases from several nations including Germany and Japan.  Perhaps there won’t be a coordinated release after all.  Meanwhile, US futures at this hour are basically unchanged.

In the bond market, yields rose yesterday afternoon in the US and have edged another 1bp higher this morning while European sovereign yields all catch up to yesterday’s US move with gains of between 5bps and 8bps on the continent.  It is important to remember that there is a strong correlation between oil prices and 10-year yields, as would be expected based on the direct connection between oil prices and inflation.  The chart below shows the past week’s movement in the two markets.  The long-term correlation averages +0.61% with a range of +0.5% to +0.7% according to Grok.

Source: tradingeconomics.com

Again, referring back to today’s CPI, we can expect that CPI next month is going to be higher than this month, even if the war ends today.

In the metals markets, weakness is the order of the day although gold (-0.1%) is just barely so.  However, those metals with industrial uses are faring worse this morning led by platinum (-2.4%) but both silver (-1.75%) and copper (-1.7%) are under pressure.  A potential explanation here is that continued high oil prices will weaken economic activity and therefore demand for these metals.  The counter argument is that war is inflationary at all times, and metals tend to do well in those periods.

Finally, the dollar is slightly firmer across the board, but movement has been de minimis overall.  The noteworthy exception is AUD (+0.6%) which has been rallying recently on concerns (hopes?) that the RBA is getting set to raise rates at their meeting on Monday (Sunday night here).  In fact, the Aussie has traded to its highest level in almost four years, although I have a hard time understanding the attraction given the softened state of economic activity there (recent GDP reading of 0.8% Y/Y) and an energy policy only the Europeans could love as they continue to prohibit nuclear power and shut down coal despite having abundant resources in both.  But, in the FX world, relative interest rates mean a lot, and the perception of a hawkish central bank is apparently enough to overcome bad fiscal and energy policy.

And that’s really all for today.  We do see the EIA oil inventory data, with a small net draw expected and Fed Governor Bowman speaks, although it is at the ABA’s Summit on Regulation, so there will likely be no monetary policy discussion as this is the quiet period.

Where do we go from here?  Your guess is as good as mine.  We are already seeing oil prices slip a bit with the announcement of the SPR releases, although they remain higher on the day.  The war continues to drive all the narratives so if you are trading, keep abreast of that news.  If you are not trading, though, avoid it at all costs, it will make for much happier days!

Good luck

Adf

A Bad Dream

Posted on by 
While yesterday’s moves were extreme
It seems like t’was all a bad dream
This morning there’s calm
And nary a qualm
Though things may not be what they seem

For now, oil’s price has retreated
And stocks, a round trip, have completed
As Trump has implied
Though not verified
Iran soon will have been defeated

One must be impressed with the price action yesterday, if nothing else.  It is a very rare occasion when the price of anything in a public market behaves like we saw oil behave yesterday.  From Friday’s closing price in the futures market of $90.71/bbl, we saw a $28.70 (31.6%) rally and a subsequent $34.35 (37.9%) decline in the first 24 hours of trading.

Source: tradingeconomics.com

With oil back to Friday morning’s, still elevated, prices, it’s almost as if nothing happened yesterday.  The two stories that appear to have driven the remarkable reversal early Monday morning were first, the discussion about the G7 potentially coordinating a release of strategic reserves, with that meeting slated for this morning.  The other catalyst apparently was a comment from President Trump that, having made significant progress on their objectives, the war could be over “very soon”.  Obviously, that would be a great outcome for all involved, although it remains to be seen if that will be the case.  

The upshot is that while oil saw the most dramatic price movement across markets, prices everywhere synchronized such that those that had declined (stocks, bonds and metals) rebounded, while the dollar, which rose, retreated.  And that’s where we are this morning.

As I read across news sources, there remains no agreement on any aspect of the ongoing war with each side of the argument maintaining their views.  There is a contingent that insists Iran is about to start a major retaliatory campaign that will devastate Israel and Gulf neighbors and a side that insists Iran’s military infrastructure has been so compromised they have nothing left but drones to fire.  As I’m not on the ground (thankfully) nor in any situation room on any side, I am completely in the dark like essentially all of us.  In fact, arguably, market price action is one of the best indicators we have, because institutions don’t invest on hope, but on the best information they have.  This tells me that the worst-case scenario has been priced out for now, meaning a prolonged conflict, but frankly, neither I nor anyone else really knows.

So, let us embrace our ignorance on the issue and simply observe market behavior to see what we can glean.  Starting with equity markets, the below chart shows the S&P 500 futures from Sunday night’s opening through this morning.  While the opening is obvious on the left, the huge green bar on the right at 3:15pm is the other major feature.

Source: tradingeconomics.com

The interesting thing to me is that Trump’s comment about the war ending soon were not made until 5:45pm.  This tells me that there was a major buy order that went through the market shortly before the close, a feature that we have seen more frequently of late.  My point is there is still much more to the markets than just the Iran conflict.  In fact, the cynical view is that the algorithms continue to control things completely and that there is a major effort to prevent a significant decline in equity markets overall, at least US equity markets.  That’s a little conspiratorial, but one cannot ignore the evidence.

At any rate, after positive closes in the US yesterday on the order of +1.0%, we saw gains across the board in both Asia (Japan +2.9%, HK +2.2%, China +1.3%, Korea +5.4%, Taiwan +2.1%,  India +0.8%, Australia +1.1%) as only New Zealand lagged, essentially unchanged on the day, amid concerns of rising inflation and a tighter RBNZ going forward.  Europe, too, is enjoying the session with strong gains across the board reversing yesterday’s declines as Spain (+2.9%) leads the way, but there is strength everywhere (Germany +2.4%, France +1.9%, UK +1.6%).  At this hour (7:10), US futures are also pointing higher, but just by 0.2% or so across the board.

Bonds also reversed yesterday, albeit not quite as dramatically.  So, in a picture remarkably similar to both oil and stocks, the yield on the 10-year gapped higher Sunday night and fell sharply enough to close lower yesterday as per the below chart.

Source: tradingeconomics.com 

Much of that retracement came after Europe closed, though, and so while this morning, 10-year Treasury yields have edged back up by 2bps, European sovereign yields are lower across the board with Italian BTPs (-6bps) leading the continent although UK Gilts (-7bps) have rallied further.  Other nations have seen a mix between -4bps and -5bps although Germany (unchanged) seems to be suffering on a relative basis after its Trade Surplus grew to €21.2B on the back of a substantial decline in imports.  Throughout all this, JGB yields (-1bp) have been the least impacted and show no signs of running away at this point despite much doomsaying for the nation.

Metals markets have reversed their decline from yesterday and are higher across the board (Au +0.9%, Ag +1.6%, Cu +1.0%, Pt +1.9%).  This is all part of the same story with price action virtually identical, although again, not quite as dramatic, as that of oil.

Finally, the dollar, which had significant support yesterday is giving back some of those gains as well.  But let’s face it, if we take a look at the dollar over the past year vs. the euro, it has largely traded withing a 1.1500 / 1.1900 range and doesn’t appear to be making a break in either direction.  

Source: tradingeconomics.com

The very messy chart below shows four key EMG currencies to demonstrate that there is no trend there either.  While CNY and MXN have both strengthened during the year, INR and KRW have both fallen.  All I’m saying is that the idea that the dollar is either collapsing or exploding higher is simply not true.  Different currencies have different drivers, and while sometimes there is a key dollar issue that impacts virtually everything, many times, you need to watch the currency in question.

Source: tradingeconomics.com

Turning to the data, this morning we just saw NFIB Business Optimism print a bit soft at 98.8, exp 99.7, and we are awaiting Existing Home Sales (exp 3.89M).  Tomorrow’s CPI will garner more attention, I think.  Too, the Fed is in their quiet period as they meet next Wednesday, so even though they have been drowned out by events lately, the FOMC meeting will still get a lot of attention.

But that is where we stand.  As has been the case since President Trump’s election, White House bingo remains the biggest risk to markets since one never knows what may come out.  The backdrop of the war continues to be front of mind for all market participants, so new stories will have market impacts.  With that in mind, short term forecasts are even more of a waste of time than they usually are.  The questions I am pondering are about the long-term implications when the military activity ends.  Certainly, any result where Iran gives up its terrorist interests would not only be welcome on the global stage but would open the door for much more oil flow around the world and lower prices across the board.  Of course, a more entrenched Iranian regime would likely see even stricter sanctions there with the need for other sources to help satisfy global demand.  I guess we shall see.

Good luck

Adf

Sometime Soon Become Miffed

Posted on by 
At this point, I think we’d agree
It’s oil that seems to be key
As it keeps on rising
It’s not that surprising
That markets elsewhere lack much glee

So, how might the narrative shift?
One way is a noteworthy rift
Twixt Trump and our friends
Who seek different ends
And might, sometime soon, become miffed

The war continues to be the only story that matters to markets right now, although this morning we will be seeing the payroll report.  And no matter the information we receive from ordinary news sources, all of which have their own biases, the one thing that rings true is market prices.  People can say whatever they like, but when it comes to money, the truth will out.

With that in mind, a look at the oil market this morning is not very optimistic as the black, sticky stuff is sharply higher once again, up by 5.25% as I type at 6:45.  I have highlighted this week that thus far, the rise had not been excessive, but as we look at the chart this morning, that claim may no longer be correct.  While we remain far below the levels seen shortly after Russia invaded Ukraine in 2022, the price has risen 25% this week.

Source: tradingeconomics.com

As others have highlighted, while the price of crude gets all the market press, for the man on the street, it is really the price of gasoline that matters, and that has risen some 17% this week.  Arguably, markets are beginning to price the idea that this war will continue longer than initial thoughts, and that the key chokepoint, the Strait of Hormuz, will remain closed for longer than initially expected.  I have seen several models that indicate the impact on measured inflation if gasoline continues to rise in price, which indicate that we should expect CPI to be jumping in the next few months.  The upshot there is that do not be surprised if inflation is suddenly running above the Fed funds rate by the summer, a forecast that I don’t believe was on any bingo card at the beginning of the year.

Remember, though, the narrative prior to the onset of this military action that there was an oil glut.  Remember, too, there is a significant amount of oil in storage around the world, and as I continue to say, the Western Hemisphere is pumping as fast as they can.  (As an aside, I saw this morning that the US is going to restart diplomatic relations with Venezuela, an indication that things there are working far better than the critics implied.)  Clearly, fear is rampant in the oil markets right now, but that is subject to change in a heartbeat.

In the meantime, let’s see how markets have responded to the latest rise in oil prices.  Stocks cannot make up their mind, it seems, as the below chart of the S&P 500 shows the price action over the past week, since this started.

Source: tradingeconomics.com

I am hard pressed to discern a trend here, with the movement more akin to a sine wave than anything else.  Interestingly, yesterday’s weakness in the US was followed by a mix of strength and weakness in Asia with Tokyo (+0.6%), China (+0.3%) and HK (+1.7%) all gaining although there were declines in India (-1.4%), Australia (-1.0%) and Indonesia (-1.6%).  Not surprisingly, each nation in Asia is impacted by the war differently, although higher oil prices would seem to me to be quite a negative for the big 3 markets given how reliant each one is on imported oil, and how much of it transits the Strait of Hormuz.

As to Europe, this morning is all red, with losses between -0.1% (UK) and -0.5% (Spain) and everywhere in between.  I read a charming article in Bloomberg about how recent unseasonably mild and sunny weather in Germany has resulted in solar power generating more than 40GW of electricity for the 5th consecutive day this week, helping to keep prices in check despite the rise in energy prices elsewhere.  I hope, for the Germans’ sake, the weather stays more like Phoenix than Frankfurt going forward.  But reality is going to be a problem for them going forward, and high energy prices not only hurt consumers, but they are destroying what’s left of Europe’s industry.  As to US futures, at this hour (7:15) they are lower by -0.6% across the board.

Bonds continue to shun their safe haven role in this conflict with yields continuing to climb.  Treasuries are higher by a further 3bps this morning and approaching the 4.20% level that had been the top of the trading range.  European sovereign yields are all higher by between 3bps and 6bps as inflation concerns percolate amid higher energy prices.  Alas for Europe, this morning they released Eurozone GDP growth for Q4 at a softer than expected 1.2%.  I expect we will begin to hear more about stagflation there if the war continues.

In the metals markets, both gold (+0.1%) and silver (+0.1%) are marginally higher this morning although both suffered yesterday.  My friend JJ who writes the Market Vibes Substack made a very prescient statement last evening, “However, when the shit is hitting the fan, you don’t want safe assets, you want safe prices.”  Thus far, gold has not proven to have safe prices, as evidenced by the daily chop you see below, but my belief remains that it will continue to maintain its value over time, especially in a situation like this.

Source: tradingeconomcis.com

Finally, rumors of the dollar’s death continue to be exaggerated.  This morning, it is stronger vs. virtually all its counterparts in both the G10 and EMG blocs, even the traditional havens of CHF (-0.2%) and JPY (-0.3%).  As I have repeatedly written, I don’t believe you can look at the global energy equation without recognizing that the US combination of extraordinary resources and the willingness to exploit them is an unbeatable combination.  After all, despite 25% of global LNG shipping stopped due to the closure of Hormuz, natural gas prices in the US are just over $3.00/MMBtu, certainly above their levels from two years ago, but incredibly cost competitive on a global basis.  Just look at the chart below with European, UK and US gas prices and see how they have behaved.

Source: tradingeconomics.com

Back to the dollar, both the euro (-0.4%) and the pound (-0.3%) have slipped to their lowest levels vs. the dollar since late November 2025.  I believe that is a combination of both fear and the energy situation as it is aggravated by the war.  There are two currencies holding up this morning, NOK (+0.15%) and CAD (+0.15%) with the similarity that both are major oil exporters.  Oil continues to be the story driving everything.  Quite frankly, as long as the war continues, I find it hard to devise a scenario where the dollar declines in any meaningful way.

On the data front, this morning brings the payroll report with the following expectations:

Nonfarm Payrolls59K
Private Payrolls65K
Manufacturing Payrolls3K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Retail Sales-0.3%
-ex Autos0.0%

Source: tradingeconomics.com

Yesterday’s Initial Claims data was in line and the productivity data was better than expected.  Wednesday’s ADP Employment Data was better than expected.  While there continues to be a lot of discussion about the economy setting to crack, at this point the data does not show that to be the case.  Remember, the tax impacts of the OBBB are starting to be felt, and that is a huge stimulus.  Remember, too, last month’s NFP was much stronger than expected.  A strong number will certainly support the dollar, although it will probably support oil prices as if the economy remains strong, it will encourage President Trump that he can continue in Iran for a longer time.

Good luck and good weekend

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A Different Scapegoat

Posted on by 
The war in Iran rages on
But markets are starting to yawn
Initial concern
Led traders to spurn
Risk assets each dusk until dawn

But now, just a few days have passed
And fear mongers all seem downcast
Most stocks have rebounded
And that has confounded
The bears who, gross shorts, had amassed

In fact, today’s story of note
Is China’s decision to float
A lower growth rate
To be their new fate
As Xi seeks a different scapegoat

This morning is the sixth day of the military action in Iran and depending on the source, the US is either kicking ass or setting up for the greatest collapse of all time.  Perhaps the most interesting statistic of this war is the number of casualties reported thus far, which when summed across all the theaters, appears to be somewhere between 1000 and 1200.  It seems to me that given the ferocity of the attacks on both sides, that is a remarkably low number.  I certainly hope it stays low, for everyone’s sake.

In the meantime, market participants have absorbed the ongoing information and much of the initial FUD has been ameliorated.  I only say this because yesterday and overnight, equity markets are almost universally higher, and in some cases, by substantial amounts.  Arguably, this is a bigger disaster for the Iranians than almost anything else.  If financial markets continue to motor along despite the war, it removes a potential pressure point on President Trump to deescalate.  In fact, the only market that is continuing to demonstrate any price concerns is the oil market, where WTI (+2.6%) and Brent (+2.2%) are both back close to the highest levels seen in the first days.

Source: tradingeconomics.com

The Strait of Hormuz continues to be effectively closed, and that remains a problem for both Europe and Asia, especially China.  In fact, this morning I read that China has ceased exporting refined products amid concerns of how long this war will continue.  

Now, permanently higher oil prices would definitely have severe negative consequences for the global economy if that were to be the outcome.  But I don’t see that as the outcome.  Rather, the world is awash in oil as the US and Canada and Venezuela and Brazil and Argentina continue to pump like crazy.  As well, Saudi Arabia has two major pipelines that ship oil to the Red Sea rather than require transit of the Strait, so I am not hugely concerned about a much higher price.  All of the fears of $100/bbl or higher oil in the event of a closure of the Strait of Hormuz have not come to pass, at least not yet, and I see no reason for that to be the case going forward.

But away from oil, things are remarkably ordinary in markets, so much so that the real story of the day, I believe, is that China has targeted GDP growth of ‘just’ 4.5%. – 5.0% for this year.  The WSJ had a very nice graph of the trajectory of Chinese GDP since 1985 showing a 4.5% outcome would be the lowest (excluding Covid) since 1991.

For a good explanation of things regarding the Chinese economy, it is always worthwhile to turn to @michaelxpettis on X and he didn’t disappoint this morning.  In a nutshell, his point is that while the statement claims they will be focusing more on domestic consumption in their effort to rebalance the economy, that has been the stated aim for at least 5 years, and we know that hasn’t happened.  President Xi’s problem is that if that goal were to be achieved, it would result in GDP growth somewhere on the order of 2%, and that is not acceptable.  For my money, nothing has changed there.  Chinese companies will still over produce, prices in China will still be pressured lower and the Chinese trade surplus will remain well in excess of $1 trillion.

And that’s really what we have today.  I am not a war correspondent, so will not be highlighting anything there.  Rather, let’s turn to the markets and see what happened overnight.  under the guise of a picture is worth 1000 words, I give you major equity market performance in the past 24 hours below from Bloomberg.

Of course, this doesn’t consider Korea (+9.6%) which was the biggest winner overnight, and recouped most of the previous day’s losses as per the below.

Source: finance.yahoo.com

But virtually every market in Asia rallied overnight with Taiwan, Indonesia and Thailand all higher by 2% or more.  As to Europe, the euphoria is not as high, but still fear is not evident and at this hour (7:10), US futures are flat to -0.15%, so basically unchanged.

The bond market is having a tougher time around the world with Treasury yields rising yesterday by 4bps and up another 2bps this morning.  European sovereign yields are all higher by between 6bps and 8bps as inflation fears start to get built into investment theses.  Remember, Europe is probably the worst hit regarding the oil/LNG supply disruptions and prices there are likely to climb further than in the US or Western Hemisphere.  Too, JGBs (+4bps) are feeling a little strain, despite (because of?) Ueda-san and his cronies expressing concern over the war’s impact on inflation in Japan and maintaining that a rate hike in April is still a possibility.

Speaking of inflation, the Fed’s Beige Book was released yesterday as well as a NY Fed survey on prices in their region and both pointed to much more underlying inflation than the CPI data currently implies.  Wolf Richter had an excellent write-up here, and the numbers are eye opening.

In the metals markets, gold (+0.6%) really has a remarkable amount of support under all conditions.  Whether I look at a mechanically drawn trend line or the 50-day moving average, the barbarous relic remains in demand and shows no signs of breaking lower.  I continue to believe that the recent volatility and liquidations were the result of leveraged traders in other products needing to sell something to make margin calls, and gold was available for the job.

Source: tradingeconomics.com

As to the other metals, silver (+1.1%) and platinum (+0.9%) are both modestly firmer while copper (-1.3%) is bucking the trend, although I see no good reason for it to decline.  One interesting thing to note is that silver in the COMEX vaults continues to decline which many see as a potential point of supply issues going forward.  Nothing has changed that story.

Finally, the FX markets are once again hewing toward dollars with the DXY (+0.15%) back around 99.00.  The worst performer today is CLP (-1.1%) which is feeling the pressure from copper’s struggles, but ZAR (-0.9%) is also under pressure despite gold’s rebound.  Interestingly, NOK (-0.2%) cannot seem to gain any ground despite oil’s rally, although arguably, the dollar itself has become a major petrocurrency with a positive correlation to oil.  This space is not that interesting right now.

On the data front, I neglected to mention ADP Employment yesterday, which wound up at a better-than-expected 63K.  Too, oil inventories in the US rose again last week.  This morning, Initial (exp 215K) and Continuing (1850K) Claims are due as well as Nonfarm Productivity for Q4 (1.9%) and Unit Labor Costs (2.0%).  But does the data really matter right now?  Perhaps tomorrow’s NFP will have impact, but with the war and higher oil prices, it is very difficult for me to see a scenario where the Fed will impose itself here, not where the market will care that much, at least not the stock market. Bonds would react I suppose.  But it ain’t gonna happen, so don’t worry about it.

Absent a change in the war’s current trajectory, I think investors are going to focus on trying to estimate how long oil prices will remain elevated as that is really the big question for most markets.  I can only hope it doesn’t take that much longer for a conclusion.

Good luck

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Bonds are a Flop

Posted on by

The war has now widened in scope
And though all of us truly hope
It won’t last too long
We could, there, be wrong
As such we must all learn to cope
 
So, oil, right now, knows no top
While havens like bonds are a flop
There’s no place to hide
Thus, you must decide
If trading makes sense or should stop

Carl von Clausewitz, the 19th century Prussian military strategist, is credited with describing the fog of war in his 1832 book, On War.  “…three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”  This is quite an apt description of things, even now with cameras literally everywhere in the world.  Context remains difficult to understand, and, of course, there is an enormous amount of propaganda from both sides of any conflict as the protagonists attempt to sway both their own populations and those of their opponents.

I highlight this because I continue to be amazed at the certitude with which some analysts proclaim to “know” how things will turn out.  As I have written elsewhere, nobody knows nuthin right now.  With that in mind, I would highlight the IMF’s statement yesterday which added exactly zero to the conversation, “It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict.”  Now, don’t you feel educated after that pronouncement?

At any rate, with more than a full day’s trading in financial markets, perhaps we can try to assess how things are going.  The first thing to note is that many alleged haven assets are not performing up to snuff, notably Treasury bonds, Japanese yen, Swiss francs and gold.  In fact, as of this morning, the only traditional haven that is performing as expected is the dollar.

It was just over a month ago when the cognoscenti were explaining that the euro above 1.20 was indicative of the dollar’s long decline into the depths of history.  I recall someone in my LinkedIn feed asking how soon the euro would trade through 1.25 and beyond.  I would argue that timeline has been extended somewhat, if you still believe that is likely to be the case.  Rather, as you can see in the below chart, the single currency (-0.8%) is now back below 1.1600.

Source: tradingeconomics.com

There are several things weighing on the euro right now.  First is the fact that they are energy price takers for every form of energy, so not only are higher oil prices hurting the continent, but NatGas there has exploded higher as per the below chart, rising 37% today and nearly 95% since the weekend.

Source: tradingeconomics.com

Recall, Europe has been trying to wean themselves off Russian gas, have been huge buyers of US LNG but also huge buyers of Qatari LNG, and with the Strait of Hormuz effectively closed (shipowners cannot get insurance so nobody transits the Strait), this is a problem.  Adding to the European problem is the fact that their storage levels of NatGas are extremely low for this time of year, about 30%, when typical levels in early March are near 50%.  We cannot be surprised at this price action.  So, while US NatGas (+6.3% this morning, 10% this week) has risen, it is currently trading at $3.14/MMBtu.  The comparable Eurozone price is $20.28/MMBtu.  Perhaps a weaker euro is not that surprising after all.  (As an aside, one of the reasons I find it difficult to accept the weak dollar story is that the US controls its own energy destiny and given energy is life and the economy, we are fundamentally in better position to perform going forward.)

But the dollar is strong against all comers again today as per the below table from 7:10 this morning.  Will this continue?  While nobody knows, my take is there is still ample room for further strength in the buck, probably another 3%-5% before it starts to impact other things significantly.

Source: tradingeconomics.com

I think the biggest surprise for most of us is the incredibly poor performance of the bond market, which has always been seen as a safe haven.  However, this morning, that is not the case at all as you can see from the Bloomberg table below.

My take is that there is only one thing we truly know about war, it is inflationary.  While the early signs are for energy prices to rise, war is a major consumer of resources that will never be recycled and therefore will require new baseline production.  As well, governments don’t fight war on an austerity budget, so you can be sure that there will be plenty of money around.  All that leads to higher prices and that is why bond markets are feeling pain around the world this morning.  If, as President Trump has indicated, this war ends in the next 4 weeks or so, we will be able to re-evaluate the inflationary and other impacts, but while I had thought bonds were going to perform well, clearly that is not the case right now.

Turning to commodities, oil (+6.75%) continues to rise and I expect will remain well bid until the fighting stops.  The prospects for higher prices from here remain dependent on whether Iran tries to destroy other Middle East production facilities and if they are successful.  Meanwhile, in the Western hemisphere, the US, Canada, and all of Latin America are going to be pumping at full strength for now.  So, while prices may tick higher, it is unlikely we will see any supply issues here.

Metals are another surprising trade this morning with gold (-2.65), silver (-7.8%) and copper (-2.3%) all sharply lower.  Given the sharp decline in equity prices I will discuss below and given the amount of leverage that is rampant in the equity markets, I think gold is a victim of ‘sell what you can, not what you want to.’  Arguably, there is some of that with bonds as well.  In a way, though, I am more surprised about silver and copper given their criticality in fighting the war.  Both are being consumed rapidly via weapons being deployed so this is more baffling to me.  However, I do not believe the longer-term thesis in either of these metals has changed, there is a supply shortage relative to industrial usage for both with no new supply on the horizon.  As such, I do see prices here rallying over time.

Finally, the equity markets are sharply lower almost everywhere.  The below Bloomberg table shows how major markets in Asia performed overnight and how Europe stacks up at 7:30 this morning.

What it doesn’t show is that the KOSPI in Korea fell -7.25%, nor that there were sharp declines in India (-1.3%), Taiwan (-2.2%) and Thailand (-4.0%).  You will also not be surprised that US futures are pointing much lower this morning, -1.5% across the board.  Yesterday’s performance was quite the surprise, I think, but today is much more in line with what we expected.

And that’s where things stand this morning.  obviously, the war is the only story that matters, so data releases are going to be secondary for now, even Friday’s payroll report.  At some point, I expect that traditional havens will play their role, but as leveraged positions continue to get unwound, it may take a few more sessions before we see that.  If you’re trading, smaller sizes make sense.  If you’re hedging, stick to longer term fundamentals I think.

Good luck

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No Longer the Same

Posted on by

The world is no longer the same
So, now everyone must reframe
Their views on positions
And whether conditions
Allow them to still play the game
 
Most markets have priced fatter tails
With stock markets seeing net sales
But oil and gold
Seem likely to hold
Their gains across longer timescales

Here we are on Monday morning in a very different world than we left on Friday evening.  While there was much talk about whether a peace would be reached then, obviously that never happened.  Of course, at this point, there is no other story than the ongoing military action in Iran and the Middle East.  As this is not a news commentary, but a financial markets one, that is all I will discuss here.

Not surprisingly, we have seen some large moves across markets, and largely in the direction one would have expected regarding risk.  So, oil prices (+7.5%) have exploded higher as shipping through the Strait of Hormuz has ceased for now and there is no timeline for it to reopen.  Given ~20% of the daily global consumption of oil flows through that waterway, there should be no surprise here.  You can see from the chart below that as concerns grew regarding military action, oil’s price climbed and then, of course, gapped on the opening last night.

Source: tradingeconomics.com

Perhaps a bit more surprising to me is that Brent Crude (+7.5%) has moved virtually the exact same amount as WTI.  I only say that because Brent is the price basis for global oil outside the US which is obviously going to be more impacted than the US markets.  But the Brent chart is virtually identical to the WTI above.  As to the future, clearly, no market is more dependent on the Middle East conflict than this one, but at this point, there is no indication it is going to end very soon, so I expect prices to remain at least at current levels for now, and if the conflict starts to target oil production facilities, we could go quite a bit higher.

While we are looking at commodities, it should also be no surprise that gold (+2.1%) is higher this morning as it performs its historical role as a safe haven.  While not quite as extreme as the oil chart, the similarities between the two, as you can see below, are significant.  Of course, it was a bit more than a month ago when we had that dramatic sell-off in the precious metals, so this has all been a recovery from there.  But a grind higher punctuated with a gap last night is the gold story as well.

Source: tradingeconomics.com

Arguably, gold will have more staying power than oil as when the conflict ends, and my initial take is it will not be a forever war, oil will once again flow more freely.  Gold, however, remains a haven in an uncertain world and nothing seems likely to reduce uncertainty anytime soon.

The other two traditional haven assets are the dollar and Treasury bonds so let’s look at them next.  Starting with the dollar, it has done what it regularly does in an uncertain situation, it has rallied sharply.  As you can see from the below table, shot at 6:39 this morning, the dollar is firmer against every single major currency this morning.

Source: tradingeconomics.com

Too, using the euro as our proxy for the dollar writ large, you can see that the chart below looks almost identical to that of both gold and oil above.  (I have inverted the Y-axis to highlight the similarities.)

Source: tradingeconomics.com

It appears that markets began pricing in this event back in the middle of February, although the real move required the onset of the military action.

As to the last haven asset, US Treasuries, they are not really doing the job today.  Yields there have edged higher by 2bps this morning and we are seeing similar price action across the entire European sovereign space.  The two exceptions today are UK Gilts (+8bps), which seem to be trading on concerns the BOE is less likely to cut rates as higher oil prices will prevent inflation from continuing lower and JGBs (-4bps) which are serving their haven role well, arguably given the distance from the action and the fact that with yields above 2%, investors seeking safety feel they have some cushion.

Source: tradingeconomics.com

The treasury move was interesting as the initial trade, at last night’s opening, was for lower yields as per the chart above, but that has since reversed.  It could be investors are concerned over additional defense spending blowing out the deficit further but there is no clear signal or commentary I have seen yet on the subject.

Finally, it should not be surprising that equity markets around the world are mostly lower this morning as investors pull in their wings and await more clarity on the outcome and how long this will continue.  The exception to this was mainland China (+0.4%) which managed to edge higher, but otherwise, all of Asia and Europe are down on the day, some pretty substantially.  Below you can see a screenshot of futures markets at 7:00 with the type of movements ongoing.

Source: tradingeconomics.com

The MOEX is Russia’s stock market, so it is not clear what value that adds to the conversation and the TSX, Toronto, does not have a futures market, so the price represents Friday’s close.  But as you can see, all of Europe and all of Asia ex-China have fallen sharply.

And that’s where we sit this morning.  Ironically, there is going to be a significant amount of data released this week, including the NFP report on Friday, but it is not clear market participants will be paying close attention.  For good orders’ sake, I will list the data releases anyway.

TodayISM Manufacturing51.8
 ISM Manufacturing Prices59.5
WednesdayADP Employment45K
 ISM Services54.0
ThursdayInitial Claims216K
 Continuing Claims1840K
 Nonfarm Productivity Q44.8%
 Unit Labor Costs Q40.2%
FridayNonfarm Payrolls60K
 Private Payrolls65K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.5%
 Retail Sales-0.2%
 -ex autos0.1%
 Consumer Credit$11.8B

Source: tradingeconomics.com

To me, market dynamics now are entirely restricted to the ongoing Middle East conflagration.  Ultimately, war is inflationary, and for many firms it is quite profitable.  But right now, investors are mostly hiding under their desks, waiting for the smoke to clear.  Institutional investors are typically unwilling to buck a key narrative trend, and I see no reason to believe this time will be different.

While much of this price movement will likely reverse when the bombing stops, until then, be prepared for more volatility, not less.

Good luck

Adf

Not Existential

Posted on by

The story that has the most traction
Continues to be the reaction
To stories AI
Will force firms to try
To profit from worker subtraction
 
The tech nerds see naught but potential
For robots plus, workers, essential
But history’s shown
Employment has grown
And new tech’s threat’s not existential

Block, the payments processing company announced during its earnings call that it would be laying off 4000 employees, nearly half its workforce, by the end of Q1 this year.  This was not a response to weak performance, but rather the founder, Jack Dorsey’s, belief that AI has reached the point where his company can be more effective with much fewer staff.  Of course, this is the entire AI argument compressed into a single event.

Recall Monday’s note and market response to the Citrini Research article that explained one scenario from AI adoption would be massive layoffs, a recession and a major stock market decline by 2028 as companies eliminated people from their processes.  This brought about a tremendous amount of back and forth with economists and historians explaining that every major technology creation (e.g. electricity, the automobile, the internet) was both disruptive but instrumental in expanding economic activity.  This morning’s WSJ had a nice summation by Greg Ip of the entire discussion.

It strikes me that this discussion is only beginning and we are going to hear from proponents of both sides for many months to come, although I imagine it will not be the top story every day.  As I consider the issue, I think back to John Maynard Keynes forecast in 1930 that the rapid advancement of technology would lead to a 15-hour workweek as all our needs could be met with much less effort.  Obviously, that was not his best forecast.  Rather, Jevon’s Paradox comes to mind, which states that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases, it doesn’t decrease.  In this discussion, that resource is human labor.

FWIW, my view is AI is a remarkable tool for certain things but is neither sentient nor capable of breakthroughs on its own.  It is a wonderful research tool, and a wonderful computer programming tool, but as my experience taught me, people like to deal with people, not with machines, even when there are machines available to do the job.  Economic dislocation in certain areas is likely going forward, but not collapse, at least not because of greater usage of AI tools.

I highlight this because, while Block’s stock price rallied sharply in the aftermarket, up more than 20%, US futures are lower this morning by -0.5% or so as there continue to be fears about the dystopian outcome.  Remember, Nvidia had terrific earnings and the stock fell as well.  Of course, this could also be a response to the fact that the price of many equities is extremely rich on a P/E basis or a P/S basis, and we are simply seeing a little reversion to the mean.  

At any rate, as no war in Iran has begun and there have been no other changes on the geopolitical map, let’s tour markets to see how things look as we head into the weekend and month end.

Yesterday’s desultory equity performance in the US was followed by a mixed picture in Asia with the Nikkei (+0.2%) and Hang Seng (+1.0%) closing the month higher, but China (-0.3%), Korea (-1.0%) and India (-1.2%) all falling.  Malaysia (-1.4%), too, stands out for a poor session but the rest of the region was mixed with much smaller moves.  Given the tech heavy makeup of most of these nations’ bourses, I suspect that volatility will be the main feature going forward.  As to Europe, it’s a sleeper with continental bourses all +/- 0.2% or less while the UK (+0.35%) managed a modest rally after a by-election resulted in PM Starmer’s Labour party coming in 3rd place in a seat they have held for 100 years.  This appears to be adding pressure on Starmer to do something, or on Labour to remove him, but a key concern is they will move further left, something which I doubt will help the UK economy or stock market.

Turning to the bond market, yields are declining all around the world with Treasuries slipping -5bps yesterday and another -2bps this morning, now below the 4.00% level.  In fact, a look at the chart below shows a pretty strong trend lower in yields.

Source: tradingeconomics.com

But we saw European sovereign yields slide yesterday and continue lower by another -1bp to -2bps this morning and last night, JGB yields fell -4bps and showing a very similar trend to Treasury yields as per the below.  It seems that concerns over too much debt issuance driving yields higher have been put on the back burner for now.

Source: tradingeconomics.com

In the commodity space, it appears that Iran fears are making a comeback as oil (+2.1%) has rebounded sharply from the levels seen in the wake of the massive inventory build I described yesterday morning. It sure looks like somebody bought a lot of oil yesterday morning at around 9:45am, although I have no guess as to who it would have been.

Source: tradingeconomics.com

Interestingly, the news from Geneva is that the talks are going to continue next week, so while both sides are disputing the other’s version of things, the fact they are still speaking is a huge positive.  I fear given the military buildup, some type of action will occur, but we can be hopeful. 

Meanwhile, in the metals space, gold (+0.1%) is little changed for the past several sessions, consolidating just below the $5200/oz level.  Whatever the narrative may be here, regarding central bank buying and the end of the dollar system, this tells me that the market is tired and needs some R&R before moving forward.  I remain bullish, but not today.

Source: tradingeconmics.com

Silver (+1.7%) is showing very similar price action to gold, albeit with a bit more daily volatility.  The story here about a short squeeze for COMEX delivery is fading from the FinTwit feeds, but the structure remains not enough of the stuff for industrial usage going forward.

Finally, the dollar, this morning is, net, doing very little.  But there are two stories to note.  The first is CNY (-0.2%) where the PBOC changed its risk reserve rules for foreign exchange holdings for Chinese banks, reducing the required reserve to 0% from 20%.  In practice, this means that Chinese banks can run forward positions without a capital charge and allows them to be more competitive pricing forward sales of CNY for local hedging counterparts.  Obviously, this is a huge adjustment and speaks to the fact that they must be getting a bit uncomfortable with the speed with which the renminbi has been rising over recent months.  Ironically, there was a Bloomberg article highlighting how options traders were paying up for 6.50 CNY calls/USD puts anticipating further CNY strength.  Perhaps the PBOC didn’t like that!

The other story is from Hong Kong, where the currency is usually not an issue as it is pegged in a very tight band to the USD, allowed to trade between 7.75 and 7.85.  The HKMA (HK’s central bank) is committed to buying and selling HKD as necessary to maintain that band.  This has been a key feature of Hong Kong’s financial attractiveness for the past decades.  The way this operates is there is an exchange fund that is designed to be used only for FX intervention, and it has ~HKD 4 trillion in balances (~$510 billion) which, given their GDP is only $400 billion or so, seems like plenty.  Well, as always seems to be the case, the government there is proposing taking some of that money to use for financing a government project, a technology hub being built, and since they don’t want to raise taxes, they thought raiding that fund would be the answer.  The concern is the precedent it sets as if that goes through, what is the next project that will be determined to need the funding.  If we know one thing about governments it is that if they find a pot of money they can tap to spend more without raising taxes, they are going to do it!  The amount in question is a small fraction, just $19 billion, so would not likely impact the HKD peg.  But this is something to watch as it will not be a positive if we see this a second time.

Otherwise, NOK (+0.5%) is gaining on oil’s gains while KRW (-0.5%) is slipping on the equity market decline and foreign sales.  Beyond that, nothing.

On the data front, this morning brings headline PPI (exp 0.3%,2.6% Y/Y) and core (0.3%, 3.0% Y/Y) as well as Chicago PMI (52.8).  Regarding the last, a look at the chart below shows that last month’s reading was the highest since November 2023 and is arguably a good sign that we are seeing increased industrial activity in the middle of the country.  Recall, the Chicago number is often seen as a precursor for the economy as a whole.

Source: tradingeconomics.com

And that’s it.  Given equity market performance this month has been flat to slightly negative, it seems unlikely there will be large rebalancing flows.  I continue to look for quiet markets although the trend in bonds does seem like it is building up some steam.

Good luck

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No Desire

Posted on by

Some days markets have no desire
To move, lacking seller or buyer
But don’t be concerned
The one thing we’ve learned
Is narratives always point higher

While it is clearly not summer as I look out my window and see a snow-covered yard, the doldrums seem to be the best description of markets right now.  A dearth of data, and in truth, a lack of commentary by all the usual players, at least new commentary, has both investors and traders looking elsewhere for signals.

Now, this is not to claim that there is nothing happening in the world, but right now, it all seems to be on hold.  With the SOTU behind us, we have had nothing new from the White House regarding virtually anything, tariffs, taxes, Iran, you name it.  Nvidia earnings last night beat expectations, but apparently not by enough to get people excited.  And virtually every other story is a warmed-over version of things we already know.

I think the most interesting market related news that I saw this morning was that the most hawkish member of the BOJ, Hajime Takata, said the BOJ needed to raise rates to fight Japan’s “heated” inflation.  This seemed a response to Takaichi-san appointing two doves to the board there.  However, the market response was essentially nil, as it should be, with the yen (+0.2%) edging higher while JGB yields (+2bps) also edged higher.  

Other than that, seriously, I cannot find a single thing that seems to matter to markets.  And it’s not like we have that much to look forward to today in the US, with Initial Claims the only data, so there is no reason to go on too long.

Here is a recap of the overnight session.  As I touched on JGB’s above, I will start with the rest of the government bond markets. What we see is that yields are literally unchanged this morning from yesterday’s closing levels.  All of them!  I am hard-pressed to describe a less exciting market than this.

Turning to equities, yesterday’s solid US performance was followed by mixed outcomes in Asia (Tokyo +0.3%, HK -1.4%, China -0.2%) in the major markets while most other regional bourses saw modest gains or losses with no driving stories.  The exception to this was Korea (+3.7%) which has been on an amazing tear lately, as the two largest market cap stocks there, Samsung and SK Hynix, continue to explode higher on demand for memory chips.  In fact, I think it is worthwhile to visualize this move as it is rare for equity markets to go parabolic like this.

Source: finance.yahoo.com

Of course, remember what happens to parabolic markets.  We just saw that in silver one month ago as per the below, so traders beware!

Source: tradingeconomics.com

Turning to Europe, France (+0.9%) is rallying on some earnings data from key companies, but the rest of the continent, and the UK, are doing little (Germany +0.4%, Spain -0.2%, UK +0.1%).  Fittingly, US futures are also unchanged at this hour (7:00).

In the commodity space, oil (-1.7%) has softened substantially this morning as the absence of a war in Iran weighs on long positions, but more importantly, I believe, yesterday’s EIA data showed a massive build of inventories of 16mm barrels, far higher than expected and the largest build since February 2023.  Back then, it appeared to be the residual response to the Russian invasion of Ukraine as there was a scramble for barrels.  Perhaps this is a signal that in the event of a war, there is supply around.  If you look at the inventory chart below, we have certainly seen a net build over the past three years.  Again, it is hard for me to look at things like this and see significantly higher prices in the future.

Source: tradingeconomics.com

In the metals markets, gold is unchanged this morning, though trading well above the $5000/oz level and seems like it is consolidating before moving higher.  Silver (-2.5%) is sliding as there continues to be a discussion regarding deliveries into COMEX contracts with the first notice day for the March contracts tomorrow.  There are many pundits who claim there is insufficient silver available to handle the likely deliveries which, if true, would likely cause a significant short squeeze.  However, I have no insight into how this will play out.  My longer-term view remains that there is a structural shortage of the stuff for industrial applications and the price trend will continue higher, but we have learned how volatile it can be.

Finally, the dollar is modestly stronger this morning with the yen’s rise the exception in the G10 space (EUR -0.1%, GBP -0.2%, AUD -0.2%, CHF -0.3%, NOK -0.3%).  In the EMG bloc, we are seeing similar modest weakness across the board (PLN -0.2%, ZAR -0.3%, MXN -0.2%) with the outlier here being CNY (+0.2%).  Regarding the renminbi, the Chinese have been marching it slowly higher for the past year, as per the below chart.  My take is President Xi is very focused on convincing others the CNY is a viable reserve currency candidate despite all the capital flow restrictions.  I’m not sure how that would work, but that is the best I can come up with.

Source: tradingeconomics.com

And that’s all we have in markets this morning.  On the data front, Initial (exp 215K) and Continuing (1860K) Claims are the only releases and we hear from Fed governor Bowman, although to the best of my knowledge, nobody is listening to Fedspeak right now.  The market continues to price just one 25bp cut for 2026 at this point, although that seems likely to change once we get a better idea as to what Mr Warsh would like to do when he gets the Chair.

My guess is that if there is going to be an attack on Iran, it will happen this weekend, so until then, given the absence of data, I think we drift in all markets and wait for Monday.  Today, and tomorrow, ought to be quiet.

Good luck

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