Likely to Bleed

Posted on April 15, 2025 by fxpoet

By now, everyone is aware
The world we had known is not there
While populist views
Are turning the screws
On governments ‘bout everywhere

The upshot is capital’s lead
O’er labor is like to recede
So, wages will rise
With yields, and surprise
Risk assets are likely to bleed

For the first time in quite a few sessions, certainly since ‘Liberation Day’, market activity has calmed down a bit. It is not that markets have stopped moving, just that the wild gyrations have disappeared for the moment. I would estimate that for most investors, and certainly for risk managers with hedging requirements, this is a blessing. However, for the trading desks at Wall Street firms, maybe not so much. I couldn’t help but notice the lead headline in the WSJ this morning, “Bank Trading Desks Are Minting Money From Tariff Chaos”

Now, we cannot be surprised by this, as volatile markets are what traders, especially bank traders with customer flow, live for. This is where they truly have an edge, even over the algos, because they have information the algos don’t have, the order flow. This got me to thinking about the idea, one which I have embraced, that President Trump is concerned with Main Street, not Wall Street. Well, if Wall Street is going to play second fiddle, I’m sure many there are perfectly comfortable with this situation. Arguably, if this continues, we are going to see many internecine battles at the big Investment Banks as traders gain power at the expense of bankers, but the firms overall will be just fine. (I know you were all worried 🤣.)

But let’s go back to the Main Street, Wall Street question. Someone who I have been following on Substack, Russell Clark, a UK hedge fund manager, has described this point very well. In the battle between labor and capital for corporate resources, Wall Street benefits when capital is favored by legislation/regulation while Main Street benefits when the rules turn in labor’s favor.

For the past 25 years, the rules have been helping capital at labor’s expense. Especially since the GFC, when the financialization of the economy really took off, this has been the case. Just look at the extraordinary rise in corporate profits during this period compared to the long history. This is a direct result of the globalization effort, with the outsourcing of much manufacturing to China and other low-wage nations.

Source: fred.stlouisfed.org

But let us consider what we have seen fomenting for the past decade, arguably since President Trump’s first election and Brexit occurred in 2016. Those were populist outcomes. And we have seen populism rise around the world. It is couched as right-wing fascism by many in the media, but whether in Germany, France, Italy, the Netherlands, here in the US or many other Western nations, the people’s voice is being heard. And what they are saying is, labor wants a bigger piece of the pie.

This idea offers solid explanations for several current situations. Labor, aka Main Street, wants government to work for them, to protect their jobs and incomes. They care far less about a company’s share price and far more about the company investing in the business and expanding. Capital, aka Wall Street, wants the government to work for them, to keep financing costs down to increase capital productivity and drive share prices higher, whether through share repurchase or reduced expenses (aka job cuts).

Right now, labor is in the ascendancy. (It is ironic that labor’s ascent has been deemed right-wing, given the long history of its left-wing tendencies, but there you go). As long as this remains the case, I think we need to consider how it will impact markets going forward. Russell’s short-hand trade idea has been long GLD vs. short TLT (the long-bond ETF) and it has worked well for quite a while. Can bond yields continue the rise that began in 2022? Certainly. Can gold continue its rally? Of course. Look at the chart below of gold and 10-year Treasury yields over the past 5 years. There is nothing about the chart that says we are topping in either case. Higher yields and higher gold prices seem contradictory, but they have been the reality for three years already. I have explained numerous times that the world we knew is gone. This may well be part of the new reality. What about equities? I have to believe multiples will be compressed which will not help them at all. And the dollar? While higher rates seem like they should support the greenback, the case for capital flows leaving the US equity market is very real. We could easily see the dollar decline further over time.

Source: tradingeconomics.com

Ok, let’s look at markets overnight. Green continues to be the theme today after solid rallies yesterday in the equity markets. I know this is not what I discussed above, but that is the long-term perspective, not the day-to-day. Right now, the tariff pauses have traders and investors feeling a little more secure, as well as word that several nations are close to new trade deals with the US with significantly lower tariffs. Yesterday’s modest US rally was followed by similar modest gains in Asia with the Nikkei (+0.8%) leading the way while both Hong Kong (+0.2%) and China (+0.1%) managed to gain, but only just. Meanwhile, in Europe, the gains are somewhat better as the DAX (+1.0%) and IBEX (+1.2%) are leading the way with the FTSE 100 (+0.8%) and CAC (+0.25%) lagging a bit. We did see some solid employment data from the UK with employment rising 206K over the past 3 months while earnings and the Unemployment Rate remained unchanged. However, Germany is a bit more confusing given the ZEW Economic Sentiment Index there fell from 51.6 to -14.0, as the trade concerns really start to bite. As to US futures, at this hour (7:20) they are slightly higher, about 0.15%.

In the bond markets, Treasury yields have edged higher by 1bp but remain below the recent peak at 4.50%. In Europe, we are seeing yields climb everywhere except the UK, where gilt yields are unchanged. But Italian BTPs (+5bps), French OATs (+3bps) and German bunds (+3bps) are all under a bit of pressure this morning. Perhaps this is a day where risk managers feel more comfortable about things, so bonds feel less compelling.

Oil (-0.4%) had a pretty big trading range yesterday but closed close to unchanged. This morning it is slipping a bit as we continue to see demand forecasts reduced by various analysts with the IEA the latest culprit. Personally, I see prices declining from here. As to the metals markets, gold (+0.25%) which slipped yesterday morning and rebounded all day and through the night continues to have significant support. Silver is little changed this morning and copper (-0.7%) is backing off some of its recent gains, although is still higher by ~14% in the past week.

Finally, the dollar, which has been under general pressure lately, is stabilizing with the DXY clinging just below 100.00. This morning, we see the euro softer but the pound and Antipodean currencies rallying, albeit not that much. But generally, after several days of very large moves, with 2% gains for the euro and Aussie last week, most movement is 0.5% or less today and the randomness implies we are seeing positions being adjusted rather than new activity.

On the data front, here is what the rest of the week brings.

Today	Empire State Manufacturing	-14.5
Wednesday	Retail Sales	1.3%
	-ex Autos	0.3%
	IP	-0.2%
	Capacity Utilization	78.0%
	Bank of Canada Rate Decision	2.75% (unchanged)
Thursday	ECB Rate Decision	2.25% (-0..25%)
	Initial Claims	225K
	Continuing Claims	1870K
	Philly Fed	2.0

Source: tradingeconomics.com

The only release yesterday was the NY Fed inflation expectations data which, it should be no surprise, rose to 3.6%. I suppose that the virtual nonstop reporting that the tariff regime is going to raise inflation is having an impact. From the Fed, yesterday we heard that patience remains a virtue and Governor Waller is in the transitory impact of tariffs on inflation camp. There are two more Fed speakers today, Barkin and Cook, but nothing has changed my view that they are not that relevant now.

Big picture, my take is this is a reprieve before the next bout of risk selling. The selling can last into the summer as I think it will take until then before we get a better understanding of the outcome of the trade situation. Maybe that will be the bottom, or if trade relations worsen, perhaps another leg lower is to come. As to the dollar, while I don’t see a collapse, I do think lower is the way.

Good luck

Adf

Their Own Ego Trip

Posted on April 10, 2025 by fxpoet

The talk of the town is the “Pause”
Which led to much market applause
Though naysayers still
Say Trump’s actions will
Result in bad outcomes…because

But yesterday saw markets rip
And all those who did buy the dip
Are feeling quite smart
When viewing the chart
Of prices, their own ego trip

See if you can guess when President Trump posted that there would be a 90-day pause on tariffs for everyone but China.

Source: tradingeconomics.com

By now, you are almost certainly aware that equity markets in the US rebounded massively in the US, with one of the biggest gains on record as the S&P 500 rose 9.5% and the NASDAQ 12.2%. Of course, that merely retraced the bulk of the losses seen since the beginning of the month. In fact, the S&P 500 is still lower by about 200 points since then. Regardless, moods are much brighter today than they were yesterday at this hour. And those equity gains are global.

I’ve seen several interpretations of the sequence of events and like virtually everything these days, it appears to have a partisan bias to people’s views. There are those who claim President Trump could not stand the pressure of a declining stock market and “blinked” in the game of chicken he was playing. There are also those who claim this was part of the strategy all along, essentially moving the Overton Window substantially in his preferred direction and now he is ready to reap the benefits of this move.

Arguably, there is evidence for both sides of this argument and I suggest we will never really know. Remember, Trump is quite comfortable making outlandish pronouncements as he level sets for a negotiation. But he is also quite the realist and while I do not believe he was concerned with his personal or family fortune, recognized that the speed of the pain inflicted could be damaging overall. In the end, it is not clear the rationale matters, the action stands on its own merits.

But remember this, equity valuations were very high before the decline last week, and were still quite high, although obviously less so, after the decline. The rebound put them back in very high territory, especially with equity analysts revising profit forecasts lower on the back of the still 10% tariffs being imposed. A truism is that the biggest rallies in the stock market occur during bear markets. Keep that in mind as you assess risk going forward.

But let us turn our attention to a player who is not getting much attention these days, the Fed. Many questioned the Fed’s rate cuts back in Q4 and attributed the moves to a partisan effort to help VP Harris get elected. Certainly, there is no love lost between Chairman Powell and President Trump. Of late, though, the commentary has focused on patience regarding any further policy ease as the impacts of Trump’s tariff policies are unknown at this stage. Yet, it is not hard to read these comments and get a sense that the Fed is going to work at cross purposes to Mr Trump.

For instance, yesterday, Minneapolis Fed President Neel Kashkari released an essay with the following comments, “Given the paramount importance of keeping long-run inflation expectations anchored and thelikely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economyand potentially increased unemployment is higher. The hurdle to change the federal funds rate one way or theother has increased due to tariffs.” While the words here don’t appear partisan per se, Mr Kashkari is one of the most dovish FOMC members and dismissed inflation concerns regularly for a long time. This sudden change is interesting, at the least.

At any rate, the market, which had been pricing a 50% probability of a rate cut next month just a few days ago and a total of at least 4 cuts this year, is back down to a <20% probability of a cut in May and about 3 cuts this year. Truly the pause that refreshes.

So, let’s look at how other markets responded to the pause. Markets everywhere, including China, rallied last night and this morning, with Tokyo (+9.1%) and Taiwan (+9.2%) leading the way in Asia although gains were universal. Hong Kong (+2.1%) and China (+1.3%) were the laggards with gains between 2.5% and 5.0% the norm. In Europe, too, equities are flying this morning as the threat of much higher tariffs is removed, at least temporarily, with the UK (+4.6%) the laggard and gains between 5.0% and 6.5% the story there. Alas, futures this morning, at 7:00am, are pointing lower by -2.0% or so. Is that profit taking or a harbinger of the day to come?

In the bond market, which has expressly been Trump and Bessent’s main concern, yields are a bit lower this morning, -3bps in 10-year Treasuries. But the story in Europe is confusing to me, or perhaps not. German bunds (+6bps) have seen the largest rise while UK Gilts (-10bps) have seen a sharp decline. Too, Italy (-4bps and Greece (-2bps) have seen yields decline. Could this be an illustration that bunds are a better safe haven than Treasuries? And now that haven status seems less important today, they are being sold off? JGB yields (+9bps) are also rising, perhaps on the same notion. The corroborating evidence is that nobody thinks Gilts are a good investment, so with risk back on, they are in demand given their highest yield in the G10.

In the commodity markets, oil rebounded sharply alongside equities yesterday although it has slipped 2.4% this morning. I have altered the Y-axis on the chart below to percentages to give an idea of the magnitude of these moves in the past days, especially relative to the past 6 months. Despite being the most liquid commodity market around (both figuratively and literally), it is far less liquid than bonds or FX or even stocks, so as commodities are wont to do, sometimes the moves are breathtaking.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) continues its march higher, recovering more than 5% from the lows Tuesday morning. I maintain that much of that selling was margin based, with positions liquidated to cover margin calls in other markets. Now that the panic has passed, demand is likely increased given the new uncertainties. However, both silver (-0.5%) and copper (-1.3%), which rallied sharply yesterday, have slipped back a bit. These are different stories.

Finally, the dollar is lower this morning, having yo-yoed like every other market on the tariff news. CHF (+1.9%) and JPY (+1.4%) are the big gainers in the G10 although the euro (+1.2%) is having a day as well. However, there are currencies with less pizzazz this morning, notably ZAR (-0.9%), KRW (-0.6%) and MXN (-0.5%), as it remains difficult to know how to proceed going forward. JPMorgan has a global volatility index which is a useful barometer of how things are going. As you can see below, it is not surprising that volatility in this space has also risen sharply.

Once again, I return to the idea that President Trump is the avatar of volatility, and you must always remember that volatility can happen in both directions. While financial assets tend to collapse (yesterday being the exception) when things get out of hand, commodities go the other way as supply interruptions are the big risk. Writ large, volatility simply means a lot of movement.

We finally get some meaningful data this morning with headline CPI (exp 0.1%, 2.6% Y/Y) and Core (0.3%, 3.0% Y/Y) along with the weekly Claims data (Initial 223K, Continuing 1880K). Given all the focus on the tariffs, though, it is not clear to me what this data will imply on a forward-looking basis. As we have seen with the Fed getting sidelined by Mr Trump, his tariff policies have also served to overshadow economic data, at least for now. There are a couple of more Fed speakers and a 30-year bond auction as well. Interestingly, I expect that auction may be the most important outcome of the day. Will there be real demand or are investors shying away?

I expect that over the next few months, tariffs will be discussed on a nation-by-nation basis as new deals are struck. But that will impede any medium-term views on the economy as until we have a much better sense of the end results, it will be difficult to assess things. The upshot is, we may be entering a period where we chop up and down, but don’t go anywhere until the global trade situation is clearer. Volatility with no direction is great for traders, less so for investors. Headline bingo is still the game we are playing.

Good luck and good weekend

Adf

End of Days

Posted on April 9, 2025 by fxpoet

The one thing about which we’re sure
Is risk assets lost their allure
It’s not clear quite yet
How big a reset
Is coming, and what we’ll endure

Now, I don’t think its end of days
And this could be quite a short phase
But don’t be surprised
If answers devised
Result in a lack of real praise

Chaos continues to reign in the markets as volatility across all asset classes has risen substantially. Perhaps the best known indicator, the VIX, is back at levels seen last during the Covid pandemic. Remember, the VIX is a compilation of the implied volatility of short-term equity options, 1mo – 3mo. While markets can technically be volatile moving in either direction, the VIX has earned the sobriquet of ‘fear index’ as equity volatility most typically rises when stock markets fall. As you can see from the below chart, the movement has not only been large, but very quick as well.

Source: finance.yahoo.com

The key thing to remember is that while volatility levels can rise very quickly, as the chart demonstrates, their retracement can take quite a long time to play out. Part of that is that even when things start to calm down, many investors and traders are worried about getting burnt again, so prefer holding options to underlying cash positions. At least until the time decay becomes too great. My point is that look for trepidation amidst the trading community and markets in general for a while yet, even if by Friday, the tariff situation is made perfectly clear. Of course, with that as background, we cannot be surprised that the Fear & Greed Index has made new lows.

Source: cnn.com

However, arguably of more concern is the price action in US Treasuries, which despite the havoc in the market, are not playing their historical safe haven role. Instead, Treasury bond yields are rising, actually trading as high as 4.50% around midnight last night although they have since retraced a bit. The bond market has a generic volatility index as well, the MOVE index, and it, too, is trading at very high levels, the highest since the GFC.

Source: finance.yahoo.com

In many ways, this is of much greater concern to markets, as well as both the Treasury and the Fed. The 10-year US Treasury is the benchmark long-term rate for the entire world. A rise in the MOVE index may indicate that there is something wrong with the bond market and its inner workings, or it may be an indication that inflation expectations are rising quickly. Whatever the reason, you can be certain the Fed is watching this far more carefully than the VIX.

I have heard two explanations for the bond market’s recent performance as follows: first, there are those who are saying that China is selling its Treasury bonds and using the dollar proceeds to buy gold. Now, while their holdings have been slowly shrinking, they still have just under $800 billion, so that is a lot of paper and would clearly have an impact. The thing about this thesis is we will be able to determine its reality when China next reports their reserve numbers next month.

The other explanation rings truer to me and that is the bond basis trade may be unwinding. Briefly, the bond basis trade is when investors, typically hedge funds, arbitrage the difference in price between cash Treasury bonds and Treasury bond futures on the exchange. The current positioning is these funds are long cash and short futures, and since it is a basis trade, they typically lever it up significantly, with leverage ratios of up to 100x I understand. The total size of this trade is estimated at > $1 trillion. Now, if this arbitrage disappears, or these funds are forced to liquidate this strategy quickly, it could be a real problem for the Treasury market.

Ever since the GFC and the Dodd-Frank legislative response, banks no longer carry large bond risk positions and are not able to absorb large transactions seamlessly. During Covid, you may remember that Treasury yields were all over the map, crashing and then exploding higher one day to the next, and that was caused by this basis trade unwind. Back then, the Fed purchased nearly $1.7 trillion in QE to stabilize the market, and by all accounts, the basis trade was half the size then that it is now.

Remember, too, arguably the most important part of the Fed’s mandate is to maintain Treasury bond market stability. Without this, the US will not be able to fund its debt and deficits. So, whatever your view of how Chairman Powell may respond to the tariff story, which seems to be patience for now, if the bond market starts to break, you can be sure the Fed will step in. QT will reverse to QE in a heartbeat as they offset the impact of this position unwinding. If that is the case, I anticipate we will see further weakness in equities and the dollar, while gold will truly shine both literally and figuratively. I’m not saying this is what is going to happen, just that this explanation makes more sense to me.

Ok, now that tariffs have officially kicked in as of midnight last night, let’s see how markets are responding this morning. Most equity markets continue to struggle after yesterday’s disappointing US session, where higher opens eroded all day with the major indices all closing on their session lows. This bled into Asia where Japan (-3.9%) gave up most of yesterday’s gains although both China (+1.0%) and Hong Kong (+0.7%) held up well amid government support. As to the rest of the region, Taiwan (-5.8%) was worst off, but other than Thailand and the Philippines, both of which managed gains, every other index was lower, often sharply. In Europe, the realization of the tariffs is hurting with declines of -3.0% to -4.0% across the board. As to the US futures market, at this hour (7:25), all three major indices are lower by at least -1.0%.

Bond yields are all over the place this morning with Treasuries (+8bps) continuing their recent climb amid the fears discussed above. However, in Europe, things are such that German yields (-1bp) are doing fine while UK Gilts (+9bps) are suffering along with Treasuries. The rest of the continent, save the Netherlands, has also seen yields rise, but much less, between 2bps and 5bps. Overnight, JGB yields were unchanged as players are uncertain as to the next steps by the BOJ there.

In the commodity market, oil (-5.6%) is once again under major pressure. This feels like a confluence of both technical factors (the price has broken below long-term support at $60/bbl and is now testing for lows) and fundamental factors, with OPEC raising output and the mooted recession likely to reduce demand. Interestingly, lower oil prices are a tremendous geopolitical weapon for the US as both Russia and Iran are entirely reliant on them for financing their activities. As to the metals complex, gold as regained its luster (sorry 😁) rallying 2.8% and well above the $3000/oz level. This has taken silver (+3.1%) and copper (+3.5%) along for the ride. It seems to me the copper story is not in sync with the oil story as a recession would likely drive copper prices lower, but that is this morning’s movement.

Finally, the dollar is softer again this morning with the euro (+0.8%) trading through 1.10 and the yen (+1.0%) back below 145.00. It’s interesting because there was a story last night about how the new Mr Yen, Atsushi Mimura, was speaking to the BOJ amid concerns that the yen has been too volatile. However, to my eye the movement has been relatively sedate, strengthening gradually and still, as can be seen in the chart below, substantially weaker than for the many years prior to the Fed beginning to tighten policy in 2022.

Source: finance.yahoo.com

The other noteworthy move is CNY (+0.5%) which after slipping to levels not seen since 2007, has retraced somewhat. If Treasury bonds are not seen as haven assets for now, the dollar has further to fall.

On the data front, the FOMC Minutes at 2:00pm are released, but given all that has happened since then, it is hard to get excited that we will learn very much new. We also see EIA oil inventories with a modest build expected, but this market seems likely to have adjusted those numbers outside any forecasting error bars.

The tariff story will continue to drive markets for now as investors try to determine the best way to protect themselves until things settle down. And things will settle down, but when that will happen is the $64 trillion question. FWIW, which is probably not much, my sense is that we have a few more weeks of significant chop, as we await clarity on the tariff policy (meaning its goals). I still believe there will be a number of deals that will reduce the initial numbers, but the ultimate goal is to isolate China. It is going to be messy for a while yet. As to the dollar through all this, my sense is lower, but not dramatically so.

Good luck

Adf

Hair All on Fire

Posted on April 7, 2025 by fxpoet

There once was a group of old men
Who spoke via paper and pen
Last week, this odd choir
With hair all on fire
Explained that the world would soon end

I wonder if this week we’ll learn
This group now has nought left to burn
If so, we may find
That all of mankind
Could yet weather any downturn

I have no idea how this is going to play out and truthfully neither does anybody else. While I am happy to admit that fact, my sense is others will not be so forthcoming. President Trump made clear that he wanted to change the way things are done. He was explicit in his efforts to rearrange the global trading system, and by extension the global economy, so that it was less punitive to American businesses. At least in his mind.

I think the other thing to remember is he was elected by Main Street, not Wall Street. The MAGA movement was originally composed of small-town folks who had not benefitted from the financialization of the economy that really accelerated with the GFC. And most of these folks don’t look at the stock market every day, nor the bond market nor the value of the dollar in the FX market. They do see the price of gasoline at the pump, and the price of groceries in the store, but otherwise, market activity is not a primary focus.

I mention this because I think it is critical to remember Trump’s primary audience if we are to understand why he is doing what he is doing. Bill Ackman screaming on X is not the president’s concern. Redeveloping the US manufacturing base is his goal.

Now, will his actions lead to that outcome? There are many naysayers and most of them write for major news outlets or are politically motivated (isn’t that the same thing?). But remember, Trump doesn’t have to run for office again. I suspect the fact that the Senate passed their version of the “big, beautiful bill” for taxes and the budget last week was of far more interest to the President than the fact that Senator Chuck Schumer is calling his actions reckless.

My point here is to highlight that all those who believe that President Trump will succumb and change his stance because equity prices have fallen are still not listening to the man.

Speaking of prices at the pump, there was news last week that was missed by many, if not most, people, and that is likely to have a significant impact on oil prices. It turns out, that in the wake of the tariff announcements, OPEC explained they would be increasing production by 411K bbl/day beginning in May with potentially larger increases going forward. It appears that the loss of market share is becoming untenable in their eyes, and so they are on their way to regaining that, even if prices are to decline further.

There are some who speak of a deal with President Trump, who you may recall has been seeking to lower oil prices, and I suppose that is quite possible. But, regardless of the driving force behind the action, as my friend Alyosha on Substack explains eloquently, it is quite possible that we are entering a new regime in oil prices. This chart from his most recent Substack posting is instructive.

In essence, his theory, which this chart describes, is we may well be heading into a new long-term range of oil prices that is far below what we have been used to, especially since the Russian invasion of Ukraine. Remember, if energy prices decline, that reduces cost pressures for the entire economy. And here we are this morning with oil (-4.0%) breaking below $60/bbl and down -10% in the past month. Despite all the headlines that tariffs are going to raise prices, this is something that will clearly offset any general rise in price pressures.

But markets are still digesting the tariff news and are not happy about it. Apparently, several nations have reached out to the president to discuss what can be done to address this change in tariff behavior, including the UK, Japan and Taiwan. As a negotiating tactic, it strikes me that Trump will not want to waver if he is to achieve better trade deals for the US. And while he may be subject to the slings and arrows of a negative press in the US, there is nobody on the planet who is more capable of absorbing those and continuing on his merry way.

Ok, let’s see the damage wrought in the overnight markets, where adjustments are still being made. Before we start, though, remember, US share prices were at extremely high valuations prior to all this with just seven companies representing nearly one-third of the value of the S&P 500. The common refrain was that these conditions could not be maintained forever. That refrain was correct, but the speed of the adjustment has clearly been more rapid than many had ~~hoped~~ expected. The below reading of the Fear and Greed Index speaks for itself. But remember, this is seen as a contra-indicator, where extreme fear is seen as a buying opportunity.

Source: cnn.com

Ok, now to markets. The nearly -6% declines across the board in the US on Friday have been followed by even large declines in Asia, with the Nikkei (-7.8%), Hang Seng (-13.2%) and CSI 300 (-7.1%) all suffering greatly. Taiwan (-9.7%) and Singapore (-7.6%) were the other largest movers with the rest of the region declining on the order of -4.0% give or take a bit. In Europe, the losses are not quite as severe, with declines on the continent averaging -6.2% or so and UK shares slipping “just” -4.8%. interestingly, US futures, which had been down as much as a further -6.0% in the early part of the overnight session, have rebounded slightly and now (5:40) sit lower by around -3.4% or so. It appears we are seeing the first nibbles of value buyers.

Bond yields continue to decline as the flight to the relative safety of government debt is rampant. While Treasury yields (-4bps) are only a bit lower, in Europe, German bunds (-12bps) and French OATs (-8bps) are leading the way. Recession concerns have risen everywhere, with the punditry now highly convinced a recession is a given and the only question is whether or not this will turn into a depression. That feels premature to me, but I’m just a poet. As to JGB yields, they, too, have tumbled further as funds flow back to Japan, and are down a further -8bps this morning, now yielding just 1.09%, a far cry from the 1.60% level just two weeks ago.

I’ve already discussed oil so a look at metals shows gold (-0.3%) consolidating last week’s declines and still above $3000/oz. My take is gold’s decline was a result of equity losses and margin calls being covered by gold positions. I do not believe the barbarous relic has seen its highs. As to the other metals, silver (+2.3%) is bouncing this morning, although it did fall more than 10% in the past week, and copper (-1.4%) is under increasing pressure on the weakening economic growth story.

Finally, the dollar is all over the map, showing net strength this morning, but weaker vs. the two main havens, JPY (+0.55%) and CHF (+0.9%). Interestingly, the euro is unchanged on the day as it appears traders cannot decide who will be more greatly impacted, the US or Europe. But otherwise, the dollar is generally firmer with NOK (-1.75%) suffering alongside oil, MXN (-1.5%), ZAR (-1.3%) and CLP (-1.7%) all feeling the pressure from the tariffs. Other G10 currencies are softer, but not as dramatically, with AUD and NZDZ (both -0.5%) and CAD (-0.3%) moving more in line with a normal session. While we have gotten used to the idea that the dollar rallies on a risk-off thesis, given the nature of this particular version of risk-off, I have a feeling the dollar’s gains may be capped. However, my previous thesis on the declining dollar is much harder to discern given the changing nature of economic outcomes.

As an aside, the Fed funds futures market is now pricing a 50% probability of a Fed cut in May and a total of 113bps of cuts by the end of 2026. However, this will all depend on the evolution of things going forward, and, similar to the fear and greed index above, may represent an extreme view right now.

On the data front, Friday’s better than expected NFP data was lost in the shuffle. The front of this week doesn’t have much although we do get CPI on Thursday.

Today	Consumer Credit	$15.2B
Tuesday	NFIB Small Biz Optimism	101.3
Wednesday	FOMC Minutes
Thursday	Initial Claims	224K
	Continuing Claims	1915K
	CPI	0.2% (2.6% Y/Y)
	Ex food & energy	0.3% (3.0% Y/Y)
Friday	PPI	0.1% (3.3% Y/Y)
	Ex food & energy	0.3% (3.6% Y/Y)
	Michigan Confidence	54.7

Source: tradingeconomics.com

It’s hard for me to believe the FOMC Minutes will matter much given all that has transpired since then. We do hear from seven more Fed speakers this week, but their comments have been swallowed by the ether as none of them, Chairman Powell included, has any inside track as to how things will evolve going forward.

My experience is that markets have a great deal of difficulty remaining in max fear mode for very long as it is simply too tiring for market participants. I don’t ever recall seeing the fear and greed index at 4, even during Covid (it is only about 12 years old), but my take is we are likely to see at least a respite here, before any significant further declines in risk assets. As to the dollar, if that is the case, I expect it will cede some of its recent gains, at least vs. the EMG bloc.

Good luck (we all need it!)

Adf

Squealed Like Stuck Pigs

Posted on April 4, 2025 by fxpoet

What many just don’t comprehend
Is tariffs are not near the end
Of policy changes
As Trump rearranges
The world into foe and to friend

And while Wall Street squealed like stuck pigs
Trump’s boosters just don’t give two figs
They’re willing to try
The Trump calculi
If they see it hurts the bigwigs

I’m old enough to remember when Nonfarm Payrolls were the most important thing to market participants regardless of the asset class. Ahh, those were the days. It is remarkable that across major business headlines, I haven’t seen anything discussing the release for later this morning. Don’t misunderstand me, I’m not upset about that fact, I think there has been far too much focus on that data point for far too long, but I am surprised. This may be the best indicator that we are in a new regime for finance and economics. It appears that most of the things the analyst community used to consider important are now merely afterthoughts.

I thought the WSJ had the most consequential article in this morning’s ‘paper’ asking, who is going to buy the $400 billion of stuff that China makes that will no longer be price competitive in the US? They weren’t mentioned explicitly, but I imagine that Temu and Shein are both going to find their business models significantly impaired. But will other “free trading’ nations allow all that stuff across their borders tariff free? The Chinese mercantilist model was built with the idea that if they could produce stuff more cheaply than other nations, whether through subsidy or efficiency, other nations would welcome that stuff. It remains to be seen how well that model holds up given the changes wrought by President Trump.

On a different note, I have read many comparisons of yesterday’s market declines to the March 2020 Covid panic, but my take is it is far more akin to the September 2008 Lehman Brothers collapse, at least from the tone of the market. Covid was an exogenous event while Lehman and the tariffs were home-made. The issue with the GFC and the current time was/is that they are systemic alterations which means that things will be different going forward in finance and economics. Covid clearly changed our lives based on the government response, but it didn’t change the way markets behaved.

At this point, there is no indication that President Trump is going to change his tune, and why would he? Again, amongst the key financial market goals he and Secretary Bessent have touted were a reduction in 10-year yields, lower by 75bps since inauguration, (✔️), a reduction in the price of oil, lower by $14/bbl or 18%, (✔️) and a lower dollar relative to other currencies lower by 6.5%,(✔️). Ask yourself, do you really think they are unhappy with the current situation?

I have no idea how things will play out from here, and in reality, neither does anybody else. Reliance on models that were built with past assumptions does not inspire confidence. As well, we have barely seen the response to these tariffs, although just moments ago China indicated they would be imposing 34% tariffs on all US goods entering their country. But anybody who believes they know the end game is delusional. This is the beginning of the change, and there will be much more to come across many different aspects of the economy and markets as the year progresses. Interesting times indeed.

With that in mind, let’s see how day two of the new world order is playing out (and to think, there were all those conspiracy theories about a new world order before, but this was not what they had in mind.) Green is a hard color to find on screens again today as after yesterday’s rout in US markets, the follow-through in Asia was almost complete. Indonesia (+0.6%) managed a gain somehow, but every other major market declined, some quite substantially. Singapore (-3.0%), Thailand (-3.6%) and Tokyo (-3.1%) were the biggest losers, but shares everywhere fell with most declining more than -1.0% on the session. Interestingly, European shares are having a much worse session today than yesterday with Italy’s FTSE MIB (-7.1%) leading the way although Spain’s IBEX (-5.5%), the DAX (-4.5%), CAC (-3.8%) and FTSE 100 (-3.5%) are not exactly loving life today either. As to US futures, they are pointing much lower again today, -3.0% or so for all the major indices.

Bonds, however, are in great demand with yields virtually collapsing as investors seek anyplace that is not equities to find shelter from this storm. Treasury yields have fallen a further 15bps this morning and you can see in the chart below, just how large this decline has been. In fact, yields have almost retraced to the level just before the Fed started cutting rates last September!

Source: tradingeconomics.com

But bonds everywhere in the world are in demand with yields on European sovereigns lower by between -7bps (Italy and Greece) and -15bps (Germany) as credit quality has also entered the picture there. Finally, JGB yields have also tumbled, down -18bps overnight, as Japanese investors flee global markets and bring their money home.

Arguably, though, the biggest move has been in oil (-6.9%) which is now down to levels not seen since it was rebounding from Covid inspired lows back in 2022.

Source: tradingeconomics.com

I would contend this is almost entirely a recession fear, lack of forward demand story, although I believe OPEC+ is still planning on reducing its production cuts as the year progresses. I imagine the latter is subject to change based on the economic outcomes. In the metals markets, gold (+0.15%) after a sell-off yesterday, is consolidating for now. Given the amount of leverage that abounds and given that when margin calls come, folks sell what they can, not what they want to, I suspect much of gold’s selling yesterday was forced rather than based on fear. Rather, I suspect gold will outperform as it maintains its ultimate haven status. The same, though, is not true for other metals with silver (-1.5%) and copper (-4.2%) both sharply lower this morning. Certainly, in copper’s case, given the increased recession fears, it can be no surprise that its price is declining.

Finally, turning to the dollar, after a sharp decline yesterday, largely across the board, this morning the picture is a bit more mixed with a rebound against some currencies (AUD -3.0%, NZD -2.5%, SEK -1.7%, NOK (-2.1% although also inspired by oil’s precipitous decline.). However, both the yen (+1.0%) and Swiss franc (+1.25%) are continuing to display their haven attributes, while the euro (-0.1%) seems caught in the middle. In the EMG bloc, though, the dollar is quite solid this morning with MXN (-1.9%), ZAR (-1.7%) and CLP (-1.0%) all falling. Of note, CNY (0.0%) has barely moved throughout the entire process.

As I mentioned above, today we do see the NFP report, although my take is a strong report will be ignored as old regime, while a weak report will be ‘proof positive’ a recession is near. Here are the expectations as of this morning:

Nonfarm Payrolls	135K
Private Payrolls	127K
Manufacturing Payrolls	4K
Unemployment Rate	4.1%
Average Hourly Earnings	0.3% (3.9% Y/Y)
Average Weekly Hours	34.2
Participation Rate	62.4%

Source: tradingeconomics.com

Will the data really matter? I don’t think so, at least not to policy makers as they realize (I hope) the world today is different than when this data was collected. At this point, the market is now pricing in a full 75bps of rate cuts by year end from the Fed with a ~30% probability of a cut early next month. But Powell and company don’t have any idea how this will play out either. I fear that we are in a market situation where volatility is the dominant theme, in both directions. Remember, Donald Trump is best thought of as the avatar of volatility. He has earned that nickname. This is why I harp on maintaining hedges, the world is a tricky place.

Good luck and good weekend

Adf

Quite Miffed

Posted on April 3, 2025 by fxpoet

By now, each of you is aware
More tariffs, the Prez did declare
Some nations will scream
While others will scheme
To Trump, though, in war all is fair

The market reaction was swift
With equities in a downshift
While Treasuries rallied
Pure gold, lower, sallied
And everyone worldwide’s quite miffed

Once again, President Trump did exactly what he told us he was going to do from the start. He applied reciprocal tariffs on virtually every nation in the world, although at a rate claimed to be ~50% of their tariffs on the US, (as calculated by the White House and which included quotas and non-tariff barriers as well.) In addition to Israel, which pledged to reduce tariffs to 0% on US goods if the US would do the same, it appears Canada has also agreed that deal. I expect that we will hear different responses from nations all around the world, but remember, the one thing the president has made clear is that retaliation by other nations will be met with a significantly higher response from the US. I expect that smaller nations may find themselves in very difficult straits, although larger ones have more potential to respond. But, in the end, the US remains the consumer of last resort, and every nation on the list realizes that losing the US market will not help their economies.

The market response was immediate with US equity futures plummeting on the open of the evening session and sharp declines in Asian equities as well. Treasury yields fell along with the dollar, while gold after an initial rally, reversed course and is now lower on the day as well.

Analysts around the world are out with early forecasts of the “likely” impacts of these tariffs although I would take them with a grain of salt. Remember, analyst macro models have been pretty useless for a while, ever since the underlying conditions changed as I described earlier this week, so it is not clear to me that applying broken models to a new event is likely to offer accurate estimates of future activity. However, there is a pretty clear consensus, which is that inflation is going to rise while economic activity is going to decline, probably into a recession. Personally, I am confused by this analysis as every one of these analysts continues to believe that a recession drives prices lower and reduces inflation, but I’m just reporting on what I have seen.

If pressed, I expect that we will see several nations reduce their tariff structures in response to this, similar to Canada and Israel, and US tariffs will decline there as well. Other nations will dig in their heels and trade activity between the US and those nations will decline. But I will not even hazard a guess as to which nations will do what. Political pain is a funny thing, and different leaders respond differently.

My sincere hope is that now that the tariffs have been imposed, we can move on with our lives and discuss other issues because frankly, I am really tired of this topic.

Masked by the tariff mania was news that the US Senate has moved forward on its budget resolution bill which if passed and combined with the House, will allow the process to start to legislate for fiscal year 2026. Both versions maintain the 2017 tax cuts, both seek unspecified spending reductions and while each has a different price tag, my take is this process will be completed before too long. It would truly be miraculous if Congress actually submitted department spending bills on a timely basis, rather than the omnibus bills that have been the norm for quite a while. That would be true progress in how the government works.

Anyway, let’s see where things stand this morning. The one thing we know is that despite President Trump’s constant discussion on tariffs, market participants were not prepared. Ironically, yesterday saw modest gains in US equity indices but as of now (6:40) US futures are sharply lower (NASDAQ -3.8%, SPX -3.6%, DJIA -2.6%). Of course, the damage has been significant everywhere with equities lower worldwide.

In Asia, Vietnam (-7.2%) was the worst hit index, actually the worst in the world, as tariffs there rose to 46%. Given Vietnam has been a way station for exports from China to the US, I expect that we will see some swift action by the government there to address the situation. But elsewhere in Asia, while the losses were universal, they were not as bad as might be expected. Tokyo (-2.6%) led the way lower with Chinese shares (Hang Seng -1.5%, CSI 300 -0.6%) also falling, but not collapsing. Korea (-0.8%) and India (-0.4%) fell but were also not devastated.

In Europe, though, the pain is more consistent and larger, net, than Asia as per the below snapshot from Bloomberg. This will be the most interesting thing to watch as there has been a great deal of huffing and puffing about a response, but will European nations, who sell a great deal into the US, risk a worse outcome, or will they reduce their own tariffs?

Something else that has declined sharply is bond yields around the world. Treasury yields are lower by a further -6bps, and that is the basic decline seen across Europe as well. Asia saw even greater drops in yields with JGB’s (-12bps) breaking the trendline that had been in place since the BOJ first started hiking rates last year and Governor Ueda made clear his intention to continue to do so.

Source: tradingeconomics.com

It appears that investors are anticipating a global recession, at least based on the movements in government bond yields around the world.

In the commodity space, oil (-4.7%) has reversed much of its recent gains as the recession narrative has eclipsed the Iran war/sanctions narrative. However, despite the sharp decline, oil remains nearly $3/bbl above the lows seen at the beginning of March, just one month ago. In the metals market, gold, which initially traded to new highs on the tariff announcement reversed course about lunchtime in Asia and is now down by more than -2.0%. My take is this is a short-term impact as investors sell liquid assets with gains to cover margin calls, rather than any negative feelings about gold in the wake of the news. Instead, I suspect that the barbarous relic will regain its footing shortly as the ultimate haven asset in difficult times, and clearly many now see difficult times ahead. Silver (-3.9%) and copper (-0.4%) are also softer, much more on the economic concerns than the risk concerns.

Finally, the dollar, shockingly, is broadly lower this morning. While we have been consistently informed that a very clear response to the US imposing tariffs would be other currencies weakening vs. the dollar to offset the impact, apparently that model is also broken. Versus it’s G10 counterparts, the dollar is under severe pressure today. EUR (+1.75%), JPY (+1.7%), CHF (+2.1%), SEK (+2.1%) and even NOK (+1.1%) despite the collapse in oil prices, have all moved to within 1% of the dollar’s lows seen last September. But to keep things in perspective, I don’t know that I would call the dollar “weak” here. The below chart of DXY shows that even over the past 20 years, the dollar has been MUCH lower and only spent a relatively small amount of time above current levels.

Source: Koyfin.com

Interestingly, other than the CE4, which track the euro closely, most EMG currencies have not seen the same boost vs. the dollar, although most are somewhat higher. MXN (+0.6%), KRW (+0.6%) and INR (+0.5%) have all gained modestly. ZAR (0.0%) and CNY (-0.2%) are the only currencies that have bucked the trend and followed the economic theory.

Turning to the data, this morning brings the weekly Initial (exp 225K) and Continuing (1860K) Claims as well as the Trade Balance (-$123.5B) at 8:30. Then at 10:00 we see ISM Services (53.0). The thing about this data is it ought to have no impact whatsoever as last night’s tariff announcements completely changed the playing field. So whatever things were, they are not representative of the future, at least the near future. There are also a couple of Fed speakers, but again, there is no way they can determine how they will react until the real economic effects of these tariffs start to play out.

There have been many analysts who continue to believe that President Trump will not be able to tolerate a substantial decline in the equity market despite the fact that he has not discussed it at all, and he, along with Treasury Secretary Bessent have consistently said their goal is a lower yield on 10-year Treasuries. Well, they are getting their wish right now, regardless of the reason.

The president has done virtually everything he said he was going to do regarding the border, government efficiency and now tariffs. There are many skeptics who believe that he is out to force economic change on the backs of the bottom 90% of earners to benefit himself and others in the top 1%. But he has consistently said his goal is to help the middle class. His view of reindustrialization and more self-sufficiency while reduced international adventures continues to be the driving force of his policies. There is no reason to believe he is going to change that view. Do not look for a reversal of what he has done simply because the S&P 500 declines. I think the trend is going to be for the dollar to continue to decline along with interest rates, while commodities rally. Equity markets are going to be a tale of two markets, likely with previous highflyers suffering and previously overlooked companies benefitting.

The world is changing a lot, so the best thing you can do is maintain your hedges to mitigate the impact.

Good luck

Adf

Stress and Dismay

Posted on April 1, 2025 by fxpoet

The only discussion today
Is how badly tariffs will weigh
On stocks and on growth
As certainly both
Will feel some more stress and dismay

But hopefully, once they’re in force
It will change the pundits’ discourse
‘Cause I’m sick and tired
That it’s now required
We all, tariffs, hate or endorse

A funny thing happened on the way to the market collapsing yesterday, especially given the early morning portents, and that is the market didn’t collapse at all. Equities opened lower and rallied all day with the Dow even having a quite respectable 1% gain when all was said and done. I think the lesson that needs to be taken from this is markets have a tendency to get ahead of the news and reversals are pretty frequent. In fact, this is a perfect example of ordinary market behavior, a sharp move in one direction is suddenly reversed for no obvious reason. Certainly, there was nothing said or done yesterday that seemed a specific catalyst for a short-term rebound. That, my friends, is simply how markets work.

However, for now, with tomorrow being President Trump’s “liberation day” when tariffs will be announced, they remain the major story across both financial markets and political narratives. As I sit here in the cheap seats, observing the back and forth, what has become abundantly clear is that the politicization of economic actions is the true reality. Yesterday I highlighted the difference between Democrat and Republican views on future inflation. Reading through the commentary on X, as well as stories in Bloomberg and the WSJ, I think this is the same situation, with Democrats certain tariffs will be the downfall of the economy and lead to rampant inflation, while Republicans believe they will help the nation recapture lost manufacturing capacity. Personally, I’m just looking forward to moving on to a different story as we have been discussing tariffs for more than two months straight and it is tiresome.

Here’s the one thing of which I am confident, however, and that is nobody has any idea what the impacts will ultimately be on either markets or the economy. I maintain that pretty much every model that has been in use for the past two decades, all of which were developed based on data during a period of low inflation and declining interest rates as well as significant increases in central bank provided liquidity, no longer work. After all, those underlying conditions no longer exist. Inflation remains much higher than during the pre-pandemic decades;

Source: tradingeconomics.com

Interest rates are much higher;

Source: fred.stlouisfed.org

And central banks have been reducing net liquidity for some time now (think QT).

Source: tradingeconomics.com

So, if all the underlying conditions have changed, it seems unlikely that the models based on those conditions will add much value. After all, nobody really knows how elastic prices are for any given goods directly, nor how willing companies will be to sacrifice margin to maintain sales. As such, forecasting short-term movements is a mugs’ game here. In fact, yesterday’s price action is a perfect example of how things are not necessarily how they appear.

With that in mind, let’s see how yesterday’s risk reversal in US equity markets fed into the rest of the world. Asian equities saw a wide range of price action overnight. While Japan, Hong Kong and China were all tantamount to unchanged, Korea (+1.6%) and Taiwan (+2.8%) saw significant bounces while India (-1.8%) fell after concerns that President Trump’s mooted additional sanctions on any nation that buys Russian oil hit home as India buys, I read, 44% of their oil from Russia. Meanwhile, in Europe, screens are green this morning with gains across the board of between 0.7% and 1.0%. This is despite weaker PMI data, with every nation in Europe reporting a sub 50 manufacturing number. However, inflation fell a tick more than expected with Core falling to 2.4% and headline down to 2.2% and this has encouraged traders to believe that the ECB will be cutting again later this month despite some commentary to the contrary from several ECB members. As to US futures, at this hour (7:15) they are pointing lower by about -0.4% across the board.

In the bond market, 10-year yields continue to slide around the world with Treasuries (-5bps) falling back to their lowest level in a month and prior to that since early December. Too, European sovereigns are seeing yields fall sharply, with declines of between -6bps and -10bps as the combination of slowing inflation and weak PMI data has overwhelmed the previous concerns about German defense spending. In fact, that is a story we have not heard in a while, eh? Last week, that was the end of European bond markets, today it is ancient history!

Turning to commodities, oil (+0.1%) is consolidating after a sharp $2/bbl rise yesterday that was fomented by Trump’s threats to both Russia and Iran (he threatened to bomb them if they didn’t renounce their nuclear ambitions). The thing about oil’s price action is since late 2022, it has remained in a trading range of $65/$80 more or less, so despite the large move yesterday, I would argue no new ground has been covered. Certainly Trump’s efforts to open up more area for drilling is likely to weigh on prices over time, but over what timeframe remains to be seen. As it is a day ending in “y”, gold is higher again, this morning by 0.3%, but there is no indication this trend is running out of steam. The remarkable thing is the steadiness of the move. However, the other two major metals, silver (-0.35%) and copper (-0.3%) have slipped a bit this morning.

Finally, the dollar remains confused. Versus the euro (-0.25%) it is stronger, but versus the CHF (+0.25%) and JPY (+0.5%) it is weaker. Now, you might say that is a sign of a risk-off trade, but equity markets are rallying in Europe along with bonds. So, is this a move to havens or risk? The biggest mover this morning is CLP (-0.9%) but it has been one of the biggest gainers YTD, so with copper soft, this looks a lot like some profit taking. Otherwise, movements of +/- 0.2% are the order of the day.

Here’s a crazy theory, perhaps President Trump is seeking to drive the economy weaker in order to force the Fed to cut rates. After all, that appears to be the Fed’s bias, but recent inflation data has made them uncomfortable to do so. If Trump can drive up Unemployment, maybe it does the trick!

Ok, let’s see the data the rest of the week as yesterday’s Chicago PMI (47.6) while modestly better than expected really didn’t seem to matter that much.

Today	ISM Manufacturing	49.5
	ISM Prices Paid	65.0
	JOLTS Job Openings	7.63M
Wednesday	ADP Employment	105K
	Factory Orders	0.5%
	-ex Transport	0.7%
Thursday	Initial Claims	225K
	Continuing Claims	1860K
	Trade Balance	-$123.0B
	ISM Services	53.0
Friday	Nonfarm Payrolls	128K
	Private Payrolls	110K
	Manufacturing Payrolls	1K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.4%

Source: tradingeconomics.com

In addition to all this, we hear from six Fed speakers including Chairman Powell Friday morning at 11:30am. For today and tomorrow, tariffs will be the primary story, although it is not clear it is the primary driver. However, once they are announced, I expect we will move onto the next big thing, although I have no idea what that will be. But the one thing on which we can count regarding President Trump is there will be another big thing. Stay hedged is all the advice I can give because uncertainty is extremely high.

Good luck

Adf

Nobody Knows

Posted on March 31, 2025 by fxpoet

The punditry’s now out in force
As they hope, their views, we’ll endorse
When tariffs arrive
On Wednesday they’ll strive
To claim they were right, but of course

The problem is nobody knows
Exactly what Trump will propose
So, models will fail
While Trump haters wail
More chaos is all that he sows

Well, folks, it’s month and quarter end today and many are decrying that President Trump’s policies have derailed the bull market in risk assets. And they are almost certainly correct. Yet, at the same time, there has been a broad recognition across a wide spectrum of analysts and politicians that the situation he inherited was unsustainable. Whether the 7% budget deficits, the $36+ trillion in government debt or the ongoing inflationary pressures, the only people who were happy were those who saw their equity portfolios rise against all odds. (I guess the gold holders have been pretty happy too, in fairness.)

However, the underlying reality of a situation is rarely enough to alter a good story, or a story that somebody wants to tell. For instance, the Michigan Consumer Survey was released on Friday, and it fell more than expected to a reading of 57.0, its lowest reading since July 2022, when inflation was peaking.

Source: tradingeconomics.com

But the story that has been getting all the press is the extraordinary rise in inflation expectations. As you can see below, both 1-year (blue line) and 5-year (grey line) have risen sharply in 2025. Conveniently for the mainstream media this has been blamed on President Trump’s policies given their efforts to discredit everything the president does.

However, the Michigan Survey, while having a long pedigree, isn’t that large a survey. As such, it is possible that non-economic factors may be impacting the results. For instance, when the survey is taken, the respondents’ political leanings are asked as well. Now, take a look at the data when split by political views as per the below. Perhaps, we need to take this survey with a grain or two of salt as it appears the question may be seen as a way to express one’s opinion about the current administration rather than unbiased views of future inflation.

This is especially true when we look at other measures of expected inflation, like the NY Fed’s Consumer inflation survey shown below with the green line compared to that Michigan survey in red.

Source: zerohedge.com

My point is, we need to be careful to notice the non-economic factors that enter into things like expectations surveys. As well, the idea that inflation expectations are a critical driver of future inflation, although a staple of current central bank thinking, does not have much empirical backing. For instance, my friend Mike Ashton, the Inflation Guy™, explained in this article way back in 2015, that inflation expectations do not have much empirical proof of effectively forecasting future inflation. But perhaps, if you don’t believe him, you will consider a scholarly paper by a Fed economist, Jeremy Rudd, written in 2021 that is pretty damning with respect to the idea that the Fed relies on this data as part of their policy toolkit.

In the end, the one truism of which I am highly confident is that pretty much all the models that have been utilized for the past twenty plus years are no longer reflective of the reality on the ground today. Not just for inflation, but for growth and trade and every other aspect. President Trump has not merely upset the applecart; he has broken it into pieces and burned them all to cinders. All the fiscal problems mentioned above are still extant, but President Trump appears set on changing them in the direction desired by almost all mainstream economists. They don’t like his methods, but it’s not clear how changes of this magnitude can be made smoothly. So, perhaps the proper question is just how rough things are going to be. If the overnight session is any indication, they could get pretty rough.

The dominant feature today
Is fear is what’s now holding sway
As markets decline
More pundits consign
The blame on Trumps tariff pathway

Investors have risk indigestion this morning, as their appetite to own equities anywhere in the world has significantly diminished. After a rough week ending session on Friday in the US, equity markets in Asia have almost universally declined led by Tokyo (-4.05%) but with sharp declines seen in Korea (-3.0%), Taiwan (-4.2%), Australia (-1.75%), Malaysia (-1.45%) and Thailand (-1.5%). Chinese (-0.7%) and Hong Kong (-1.3%) shares also fell, although perhaps not quite as far as others. The entire conversation today is about President trump’s promise to impose tariffs around the world on Wednesday, with many analysts trying to estimate what damage will occur despite no clarity on the size and breadth of the tariffs. But investors have decided that havens are a better place to hide for now.

European bourses are also sharply lower, although more in the -1.7% to -2.0% range, with every major index in Germany, France, Spain and Italy down by those amounts. There continues to be a great deal of discussion amongst the European leadership about how they will respond to the mooted tariffs, but of course, like everybody else, they have no idea exactly what they will be. As to US futures, at this hour (6:45) the picture is grim with declines between -0.6% (DJIA) and -1.3% (NASDAQ). Right now, the only people who are happy are those holding puts.

Of course, in this risk-off environment, it should be no surprise that bond yields have slipped a bit as, at the margin, investors are flocking to own Treasuries (-5bps) and European sovereigns (Bunds -3bps, OATs -2bps, Gilts -4bps). Even JGBs (-5bps) saw yields decline last night with any thoughts of the BOJ hiking rates in the near term fading away completely.

On the other hand, commodities are finding a lot more interest this morning with gold (+1.15%) leading the way higher and proving itself to continue to be one of the most consistent safe havens available. Interestingly, oil (+0.5%) is rallying this morning despite a number of Wall Street analysts upping their estimate of the probability of a US recession. However, offsetting the potential future demand weakness is the news that President Trump is “pissed off” at Vladimir Putin for his ongoing aggression in Ukraine and seeming unwillingness to move to a ceasefire. This has raised the specter of further sanctions on Russian oil output, potentially reducing supply. As well, the Trump administration continues to tighten the noose on both Iranian and Venezuelan oil sales, so potentially reducing supply even further. I guess this morning, the supply story is bigger than the demand story.

Finally, as we turn to the currency markets, the dollar is generally firmer this morning, although by widely varying amounts depending on the currency. For instance, in the G10, NOK (-0.75%) is the laggard despite oil’s gains, followed by AUD (-0.6%) and NZD (-0.55%), with all three of these being major commodity producers at a time when commodities are doing well. As to the rest of this bloc, JPY (+0.35%) is off its best levels, but behaving as a haven, and the others are just marginally changed from Friday’s closing levels. In the EMG bloc, ZAR (+0.25%) is the exception this morning, clearly benefitting from gold’s ongoing run to new all-time high prices, but otherwise, most of these currencies are modestly softer (MXN -0.2%, PLN -0.2%, KRW -0.25%).

Speaking of currencies, though, there is an article on this morning’s Bloomberg website that is worth reading, I believe, for everyone involved in the FX market. The gist of the article is something that I have been discussing for the past several years, the fact that market liquidity here, despite the extraordinary volumes that trade on average each day (currently estimated by the BIS at $7.5 trillion across all FX products) is not nearly as deep as might be anticipated.

My observation from my time on bank desks was that while there was a great deal of electronic flow, likely driven by HFT firms seeking to extract the last tenth of a pip out of thousands of transactions, when a real client, generally a corporate, had a need to do something specific to address a business need, and that amounted to more than $100 million equivalent, the liquidity situation was far more suspect.

My personal theory was as follows: bank consolidation reduced the net amount of risk-taking appetite as larger banks did not increase their risk-taking commensurate with the reduction that occurred by small banks being gobbled up. Combining this with the introduction of high-frequency trading firms in the business, who had no underlying client base to whom they owed a price, and therefore, could turn off their machines in a difficult market, further reducing liquidity, led to a situation where liquidity was a mile wide and an inch deep. My point is for all the corporates out there who have significant transactions to execute, you must carefully consider the best way to approach the situation to avoid a potentially significant increase in execution costs.

Turning to the data, before we look at this week, which ends with NFP, a quick word on Friday’s core PCE data, which came in at a hotter than expected 0.4% taking the YY number to 2.8%. The Fed cannot be happy with this outcome as a quick look at the recent readings makes it hard to accept inflation is continuing its decline from the 2022 highs. Rather a look at the below chart, at least to my eye, shows me a stability in Core PCE of somewhere between 2.5% and 3.0%, well above the Fed’s target range, and hardly a cause to cut rates further.

Source: tradingeconomics.com

As this note has already gotten a bit longer than I like, I will list the week’s data tomorrow but note that Chicago PMI (exp 45.4) is the only noteworthy data point to be released today.

Absent a complete reversal of Trump’s tariff plans, I see nothing positive on the horizon for risk assets, and expect that equities will maintain, and probably extend the overnight losses while gold and bonds both rally, at least for now. As to the dollar, my take is it will not benefit universally in this risk-off scenario, although there are currencies that will clearly suffer. Remarkably, despite the performance of Aussie and Kiwi overnight, I do believe the commodity bloc has the best prospects for now.

Good luck

Adf

Aren’t Just Rumors

Posted on March 28, 2025 by fxpoet

Give plaudits to President Xi
Who’s trying to show it is he
That’s offering deals
To help grease the wheels
Of trade, which he claims will be free

The problem is Chinese consumers
Have not been in very good humors
And history shows
The Chinese impose
Restrictions that are aren’t just rumors

Market activity can well be described as lackluster, with equity indices generally slipping lower while bond markets wobble and the dollar retraces some of its recent losses. In fact, the only markets really showing a trend right now are gold (+0.4%), silver (-0.1%) and copper (-0.2%), all of which have rallied sharply over the past month and year. Obviously, the major discussion point is President Trump’s tariff policy and how that will impact economies around the world. Recent focus has been on how other nations will respond with a variety of poses taken by different leaders, from conciliatory to combative.

So, it is with great interest that we see another impact of the Trump administration, the sight of China’s communist party leader, Xi Jinping, trying to convince foreign company CEO’s that investing in China is a good deal. A lead article in Bloomberg this morning describes a large gathering in China where President Xi hosted CEO’s of numerous companies from around the world in an effort to portray China’s policies as investment friendly.

This makes sense given the trend in foreign direct investment toward China over the past years. As can be seen in the chart below from the Bloomberg article, it has not been a pretty sight. And remember, this all occurred before President Trump was elected. Clearly, there were concerns prior to Mr Trump escalating the trade conflicts with the US.

I find it somewhat ironic, though, that Xi is trying to promote Chinese policy as an island of stability in the world. Consider how he has capriciously destroyed the private education market, or even the tech market until reversing course after the DeepSeek announcement, all while the housing market continues to implode. Given the rest of the world has lost patience with China’s mercantilist policies and the flood of cheap goods they produce with government support, I am at a loss to understand the appeal of investing in China. Using it as an export base is a nonstarter, and history has shown that nearly every foreign company that looked at China’s population as a great untapped market for their products has been hugely disappointed. The exceptions are the luxury goods makers, where the global brand and cachet were too strong for domestic competitors to overcome. But that is a small segment of the market.

Instead, the usual outcome is forced technology transfer which results in a state-supported competitor for their products around the rest of the world. I am confident there will be companies that choose to invest, if for no other reason than to curry favor with Xi and open the doors to further potential sales, but the trend of late is not promising. Ultimately, property laws and their enforcement are the keystone for inward investment into any nation and China has no history of treating foreign companies fairly, or domestic ones for that matter.

But really, the flow of direct market news and economic data has been secondary with far more political news leading conversations. The impact of tariffs on economic activity and inflation, as well as on market performance remains unclear with arguments being made on both sides as to potential benefits or detriments. FWIW, which is probably not much, my take is the impacts will be very unevenly spread, and how that impacts broad based numbers is unknowable at this time. I fear we will all need to be reactive for now, although for those with outstanding exposures, there is no better argument for maintaining robust hedge ratios given the overall uncertainty.

Ok, let’s take a look at the overnight action in markets. After yesterday’s US declines, we saw much of Asia follow suit with Tokyo (-1.8%) particularly hard hit as PM Ishiba thought that he was making headway with President Trump but found out that Japanese auto manufacturers were going to be subject to those tariffs as well. Adding to the pressure were the “Minutes” from the last BOJ meeting which implied further rate hikes are on the horizon. Both Hong Kong (-0.65%) and China (-0.45%) also slipped and, in fact, almost every major market in Asia (Korea, India, Taiwan, Malaysia, Singapore and Thailand) also fell, some quite sharply. Apparently, Xi’s efforts at creating that stability haven’t yet been successful.

In Europe, red is also the dominant color with most continental bourses lower by around -0.6%, also on the tariff story. The one exception here is the UK, which released a passel of data showing growth was modestly firmer than expected at 1.5% led by Retail Sales growing 1.0%, rather than declining by -0.3% as expected. As to US futures, at this hour (7:15) they are pointing slightly lower, about -0.2%.

In the bond market, yields are backing off around the world with Treasuries (-3bps) lagging European price action where sovereigns have seen yields decline between -4bps and -6bps. Even JGB yields have slipped -4bps. In Europe, inflation data from France and Spain came in softer than expected which has encouraged the move there, and we even heard arch ECB hawk, Robert Holzmann, explain that funding defense spending via bond purchases (i.e. QE) was viable.

In the commodity markets, oil (-0.2%) which rallied yesterday to touch the elusive $70/bbl level is slipping back a bit, but the trend remains clearly higher as per the below.

Source: tradingeconomics.com

Finally, in the currency markets, the dollar is firmer once again with modest rallies vs. the euro (-0.3%) and pound (-0.2%) as well as strength against the Scandies (SEK -0.6%, NOK -0.3%). However, the picture in the EMG bloc is more mixed with ZAR (+0.35%) showing strength alongside gold’s rally, and INR (+0.2%) bucking the trend after having agreed to reduce tariffs on US products. Throughout the rest of the bloc, there has been generally little change.

Turning to the data this morning, there is plenty that will be keenly watched. Personal Income (exp 0.4%), Personal Spending (0.5%) and the PCE data (headline 0.3%, 2.5% Y/Y and core 0.3%, 2.7% Y/Y) all get released at 8:30. Then at 10:00 we see Michigan Sentiment (57.9) and you can be sure people will be talking about the Inflation Expectations piece (1yr 4.9%, 5yr 3.9%), especially if it syncs with their narrative. There are two more Fed speakers, Governor Barr and Atlanta Fed president Bostic, but nothing any Fed speaker has uttered has mattered at all, maybe since Trump was inaugurated.

My read on overall sentiment is that investors are wary of the future, but not yet ready to abandon the stocks only go up narrative. Regarding the dollar, the recent trend remains modestly lower, as per the below, but it is hard to get excited about large moves, at least for today. Again, Trump clearly wants it lower and seems likely to get his way, at least to some extent. The one thing I truly do like is commodities, which I believe will remain well bid overall.

Source: tradingeconomics.com

Good luck and good weekend

Adf

Demoralizing

Posted on March 26, 2025 by fxpoet

Complaints among traders are rising
That markets are demoralizing
Liquidity’s shrinking
And now they are thinking
They might need to alter trade sizing

But can anyone be surprised
That markets are not immunized
From ongoing impacts
Of tariffs and new tax
Which President Trump advertised?

While headlines around the world have focused on the ongoing trade ~~war~~ negotiations, and peace talks between Russia and Ukraine and all of the political machinations in the US as President Trump continues to fight both the courts and Democrats to implement his agenda, markets are generally at a loss as to what to do. Is the news bullish for stocks? Bearish? What about bonds or the dollar or oil? I cannot remember a time when there was so little clarity on expected future outcomes. Well, I can actually, but it was a very long time ago. Prior to the Black Monday stock market crash in the US in October 1987, the reality was there were many views fighting to be heard, but rarely consensus as to what would happen in markets. Successful traders were those with trading intuition and positions were sized much smaller because you never knew when you might need to reverse course.

Since then, however, we have seen a steady diet of central bank intervention every time there is an indication that growth may be slowing, or markets may be having a bad day. This process went into overdrive in the wake of the GFC (which, BTW, was a product of that central bank intervention warping markets) when QE was implemented in the US and then elsewhere throughout the G10. In fact, then Chairman Bernanke was explicit that this was his goal. He called it the portfolio rebalance channel and the idea was the Fed would buy all the Treasuries, driving yields lower and promise to keep rates very low for a long time thus ~~forcing~~ encouraging investors to move up the risk scale to corporate debt, high-yield debt and equities. As well, QE pumped enormous amounts of liquidity into the financial system. This combination of actions led to a huge expansion of risk taking and the creation of strategies like risk parity which were designed to lever up assets to increase returns.

It was all great as long as the Fed and other central banks kept expanding the available liquidity. Alas, trees don’t grow to the sky and when the Fed, in 2018/19 tried to finally reduce the balance sheet and initiated their first QT program, things got hairy in September and halted them in their tracks. It turns out that markets had become addicted to liquidity continually increasing and like any addict, responded negatively to the loss of its fix.

Of course, Covid ensued and the next gusher of liquidity, this time both fiscal and monetary, was initiated by governments and central banks around the world, so any idea that investors and traders were chastised by the events of 2019 were quickly forgotten and position sizes ramped up again along with market performance.

But there is a new sheriff in town, as has been mentioned by many in the Trump administration, and the old rules are not likely to work in the new environment. As the US government has taken hold of virtually all the market’s bandwidth, relegating the Fed to a sideshow, traders and investors are suddenly finding that the old ways of doing things, buy the dip and lever up, are no longer the best way to get along. With the ongoing efforts by the Trump administration to shrink the government and reduce flows to financial markets, the lessons of the post-GFC financial market are losing their validity.

This was perfectly expressed in a Bloomberg article this morning where traders were complaining that when they wanted to adjust a position they had to “wait longer to execute an order until there’s better liquidity in certain instances.” Of course, we all know how difficult it is to wait so I’m sure that you are just as sympathetic towards these traders as I am. There was an interesting chart in the article (below) showing that futures liquidity in S&P 500 contracts had fallen to the lowest in two years and was clearly at the lower end of the recent spectrum. Doesn’t your heart just bleed?

I have been clear that President Trump is the virtual avatar of volatility and one of the key characteristics of a volatile market is that liquidity dries up. While prices may not move much on a particular day, trends disappear and when moves occur, they tend to be large, and often discontinuous. This is true in all markets, so be prepared as we go forward.

As it happens, yesterday was a day with very little net movement, although some decent gyrations intraday in some markets. For instance, in the bond market, yields, which opened the day much higher fell sharply after weaker than anticipated data then rebounded throughout the day finishing little changed from Monday’s levels. The chart below shows the 7bp range resulting in zero movement net.

Source: tradingeconomics.com

Too, US equity markets traded both sides of unchanged all day, with some choppiness but no net directional movement.

Source: tradingeconomics.com

My point is that this is likely a portent of the future. There are too many known unknowns for traders and investors to have confidence in taking a side. Now, we are only two months into the new administration, and they have been working hard to get things done quickly. It is possible that the fight drags on for the rest of the year or longer, with no clear outcomes on key issues regarding extending the tax cuts and a finalized tariff policy. In this case, I would anticipate market activity to continue to be lower volumes and choppy price action with a lack of direction. Or perhaps, lower risk asset prices as investors get scared. The lesson is the processes that had become normalized in the post GFC world are clearly no longer in play. Hedge accordingly.

So, as we look at overnight activity, yesterday’s US market activity didn’t inspire much movement in Asia where we saw some gainers (Nikkei +0.65%, Hang Seng +0.6%) and laggards (CSI 300 -0.3%, India -0.9%) but no consistency at all. The PBOC is subtly altering their monetary policy toolkit which some are seeing as a modest ease, but clearly equity markets didn’t get that message. Meanwhile, comments from the newest BOJ member, Koeda, explained she was not sure her previous analysis of the economy leaving the zero-rate world is valid now that rates are all the way up to 0.50%!

European shares are softer on the continent, down about -0.5% in most places but UK shares have gained slightly, +0.2%, after inflation data was released a tick lower than expected across both headline and core measures. While the BOE stood pat last week, as expected, this has encouraged some traders to believe that a cut could come sooner than previously thought. As to US futures, at this hour (7:45), they are basically unchanged.

Treasury yields, after yesterday’s choppiness, are creeping higher today (+3bps) but that is not following through in Europe, where sovereign yields are all flat to slightly lower today. It seems difficult for investors to get excited about Germany’s rearming plan if the overall economy remains in the doldrums. As well, tariff tensions have investors uncertain what to do, so doing nothing is the default.

In the commodity markets, oil (+0.9%) is higher from the close yesterday, but yesterday’s close was slightly softer than when I last wrote. As such, we have still not quite made it to $70/bbl. There are many crosscurrents in this market between tariffs, sanctions, potential Ukraine peace and Trump’s goal of drill, baby, drill. As to metals, the star of the show continues to be copper (+1.5% today, +15% in the past month) which is now trading at all-time highs across the entire curve. This has helped support both gold (+0.3%) and silver (+0.3%) although the former doesn’t need that much help, I think.

Finally, the dollar is mixed this morning, with the pound (-0.3%) lagging on the idea that the BOE may ease again sooner than previously thought, while AUD (+0.3%), CAD (+0.2%) and CLP (+0.3%) are all firmer on the commodity market strength. Here, too, I expect that liquidity will diminish and trends will be hard to find until there is more clarity on policy outcomes in the US.

On the data front, this morning brings Durable Goods (exp -1.0%, +0.2% ex Transport) and then the EIA oil inventory data with a small build expected. We also hear from two more Fed speakers, but they are just not driving markets right now. Choppiness is the rule here, with short-term direction very difficult to discern. I am still on board my ultimate lower dollar, higher commodity train, but that is subject to change if policies change as well.

Good luck

Adf

	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on Talk of the Town

fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: finance

Likely to Bleed

Their Own Ego Trip

End of Days

Hair All on Fire

Squealed Like Stuck Pigs

Quite Miffed

Stress and Dismay

Nobody Knows

Aren’t Just Rumors

Demoralizing