Tag Archives: #gasoline

Decidedly Iffy

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Though war in Iran keeps on going
The impact is not really showing
Risk assets seem fine
And oil’s benign
So, bubbles still need some more blowing

As I often say, markets are perverse and recent price action is a perfect example of this reality. As the US struck Iranian targets for the 10th consecutive day, and risk appetite during yesterday’s US session clearly waned such that all three major indices closed slightly in the red after solid openings, it was easy to expect a continuation of a risk-off attitude this morning.  But as you can see from the tradingeconomics.com screenshot below at 6:45 this morning, only Australia last night did not get the memo.

So, for now, it appears that everything is just fine.  The big banks all reported blow-out earnings last week and next week we are looking forward to the big tech names’ earnings reports.  Now, recent price action has shown that companies that miss their estimates are punished severely, so there is ample opportunity for more fireworks this week.  But so far, a look at the chart of the NASDAQ below shows the line in the sand that must hold in many market technicians’ eyes to keep the party going, and it continues to hold.

Source: tradingeconomics.com

It’s funny, yesterday afternoon I was considering buying some QQQ puts as my concern was that we were about to break down and a 5%-8% correction would be quite reasonable.  My read on the sentiment was turning decidedly negative, although I didn’t pull the trigger, deciding to wait for the actual break before acting.  And last night I wrote the following limericks, expressing my sense of things.

The mood is decidedly iffy
With stock market bulls getting miffy
And now we’ve heard calls
For much further falls
With bears’ attitudes, oh so sniffy

So, two things have risk-takers tense
The first is the increasing sense
That war in Iran
Has no master plan
And may cause, more problems, immense

The second is whether AI
Has peaked, or has further to fly
If we’ve seen the top
The ensuing drop
Will bring a Wall Street hue and cry

In fact, I think it is instructive to help understand just how quickly sentiment can change without any obvious catalyst.  For the life of me, reading through the headlines this morning, there is nothing I have seen that would cause me to believe things are so much better today than at the close yesterday.  But perhaps this is a case of less market activity allowing a bit more volatility in markets.  After all, it is summer and there are many market participants on vacation on any given day.  According to Grok, in the past 5 trading sessions, average volume for NASDAQ shares was about 7.6 billion, but as large as that is, it is well below the YTD average of around 9.0 billion.  In reduced volume markets (no matter how large they are) there can be large, unexplained moves based on individual flows.  I’m grasping at straws here!

Regardless, this is where we stand this morning.  There are headlines dueling between further military action and further efforts at peace talks, with markets clearly preferring the latter rather than the former.  Oil prices (+0.9%) remain within their recent range although are creeping higher this morning.  Is this a prelude to a move back to $100/bbl?  

Source: tradingeconomics.com

The problem with that story is that there continues to be a massive supply of crude oil around.  And Ukraine’s success in attacking Russian refineries has actually brought more crude to market as the Russians can no longer refine their own in the same volumes thus are shipping it to anyone who will buy it. 

Products, though, are a different story as the lack of refining capacity (US refiners are running at about 98% capacity) has led to record high crack spreads.  (The crack spread is the value of the products created from crude; gasoline, jet fuel and diesel largely, compared to the price of a barrel of crude.  The higher that spread the more profitable the business is for refiners, and the more we pay at the pump). Referring back to the chart above, the blue line is gasoline futures in NY, which as you can see are much closer to their early war highs despite the more dramatic decline in oil (green line).

In fact, this chart may be the best metaphor for the current sentiment in the US with the population suffering from rising gasoline prices while the government touts the decline in crude prices.

Net, I am having trouble finding a single coherent narrative that is widely believed.  So, let’s look at how other markets behaved overnight, having already seen equities and oil.  Bond yields rose yesterday with Treasury yields higher by 5bps and a further tick up this morning.  Similar price action was seen in Europe although more of these markets are +2bps this morning, rather than the +1bp in Treasuries.  And JGB yields rose 3bps overnight.  

Speaking of Japan, you may recall the story from about two weeks ago where Japanese FinMin Katayama expressed the idea that Japanese pension funds should consider investing more domestically, bringing home some of their massive $3+ trillion in assets.  The market got quite excited about that and as you can see in the below chart, the yen immediately rallied.  

Source: tradingeconomics.com

Well, that was sooooo two weeks ago!  This morning, the yen is just 5 pips, as I write, from breeching the peak seen before the last intervention scare.  As you can see in the chart, the move is extremely gradual, but in this case, the tortoise is being played by the yen.  I saw more discussion on this pension story this morning but while I think it is highly probable to play out over time, I think the timeline is better measured in years, not weeks, or even months.  As such, the gradual depreciation of the yen seems likely to continue.  Elsewhere, it remains very hard to get excited about the dollar vs. any currency right now.  Sure, NOK (+0.6%) is rallying on the oil rally, and perhaps the real surprise today is ZAR (+0.5%) which despite higher oil has seen higher gold prices help sustain it.  But if we look at the dollar writ large, the ‘breakout’ from its year-long range seen back in mid-June has been a damp squib as per the below chart of the DXY.

Source: tradingeconomics.com

Perhaps the big surprise this morning is the metals (Au +1.2%, Ag +4.2%, Cu +3.1%) are all higher despite the rise in oil prices and yields.  While I remain long term constructive on the metals sector, it is very difficult to understand what is driving today’s price action at this point.

And that’s really it today.  There are no frontline data points to be released so I expect that oil sentiment will continue to lead markets although there will certainly be excitement about equities if they can maintain the rally today.  As to the dollar, nobody seems to care.

Good luck

Adf

Inciting

Posted on by 
It’s true that I may seem passe
But when I heard words people say
I truly expected
The words I detected
To mean what they did yesterday

So, words like cease-fire depict
A time when two sides don’t inflict
The other with fighting
Or, likewise, inciting
An outcome the words contradict

I have always been a plain meaning of the words sort of fellow, using words in their most common form unless there is some extraordinary opportunity for a pun.  And I don’t get many of those.  But these days, government spokespeople sound more like Humpty Dumpty than Walter Cronkite, that’s for sure.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”

Lewis Carroll, Through the Looking Glass

Frankly, Humpty Dumpty had nothing on either the Iranians or the US in this regard.  After all, ostensibly there is a cease-fire underway, and yet two days in a row we have had Iran attack ships in the Strait of Hormuz and the US respond.  I’m sorry, that doesn’t sound much like a cease-fire to me, but then, I’m just a poet.

While Tuesday’s activities had virtually no impact on the oil markets, with crude slipping further, and equities continuing their ride higher, last night, there was a modest bounce although so far, WTI is still trading around $90/bbl, hardly a signal that the end is nigh.  But net, risk aversion is more evident this morning.  I guess one day’s worth of skirmishes were believed to be limited, but now, two days in a row, people have concerns.

And that’s where things stand this morning, uncertainty over whether the cease-fire is going to remain in place and uncertainty as to whether talks are going to continue.  My take is that, like every conflict, whether military or commercial or even governmental, the question is which side is feeling the pain more deeply such that they must alter their strategies.  There was an interesting article in the WSJ describing that exact tradeoff as the blockade is successfully hurting the Iranian economy more than the closure of Hormuz is hurting the US economy.  But given the lack of coherent leadership in Iran, with both IRGC hardliners and elected officials tending to be more pragmatic, it remains unclear who blinks first.

So, let’s see how markets are responding this morning.  Yesterday’s lackluster US equity session, where miniscule gains were seen was followed by a somewhat negative picture in Asia as the second attacks made headlines.  Tokyo (-0.5%) and HK (-1.3%) were under pressure as were Korea (-0.5%), Taiwan (-1.4%) and Australia (-1.4%).  In fact, almost every market in the region was lower except China (+0.1%) which managed a tiny gain.  European bourses are all lower this morning as well, with the UK (-0.8%) leading the way down while Spain (-0.4%), France (-0.3%) and Germany (-0.2%) slip less dramatically.  The little data we saw showed weak Spanish Retail Sales and negative Eurozone Confidence indicators (Consumer (gray bars) -19, Industrial (blue bars) -8).

Source: tradingeconomics.com

But let’s face it, looking at this chart, things have been pretty dire in Europe for a while now.  One wonders how long they can continue their current path of energy insanity and over regulation, although the current crop of leaders is clearly committed!  As to US futures, at this hour (6:30) they, too, are pointing lower led by the NASDAQ (-0.8%) with the other indices just barely down in the session.

In the bond market, the fears of runaway inflation and yields from earlier this month have clearly abated and the 10-year is back around 4.50%.  I am sure Secretary Bessent would like to see it somewhat lower, but this is hardly an apocalyptic level.  One of the things that appears to be underlying the recent rise in yields has been foreign central bank sales since the beginning of the war.  Not surprisingly, as the dollar rallied on its haven status, as well as the need for dollars to pay higher prices for oil, nations around the world needed to dip into their reserves to support their own currencies (recall, we have seen intervention from Japan, India and Indonesia for certain) and they sell Treasuries as part of that process.  Bloomberg had a nice explanation this morning.  But that takes me back to the idea that US yields are not running away, and if the Iran conflict ends soon, we will see yields head lower again.  As to today’s price action, most markets have seen yields edge higher by 1bp or 2bps, not really demonstrating much.

In the commodity space, oil (+2.5%) has rebounded from the lows yesterday, but as you can see in the chart below, remains right in the middle of its wartime trading range.

Source: tradingeconomics.com

However, something that hits much closer to home, I would suggest, is gasoline, and you can see how that has behaved over the past month.  While it has tracked oil higher today, we have seen a dramatic decline in the price there in the past week as you can see below.  I imagine that will begin to filter through to your local gas station pretty soon.

Source: tradingeconomics.com

Turning to the precious metals, they have been absolute dogs of late with both gold (-1.5%) and silver (-1.5%) finding no traction whatsoever.  One of the theories has been higher yields are weighing on them, and there is certainly truth there, but I must admit, there seems to be a glitch in the long-term story, a story I have long believed, regarding their ultimate value.  Now, remember, markets have a habit of finding the most painful outcome for the most participants, and long gold and silver has been a favorite trade for a while, so perhaps we are simply watching the weakest hands get forced out.  But whatever the case, it is certainly uncomfortable if you are long.

Finally, the dollar is modestly firmer again this morning, but looking at the DXY (+0.2%), it remains well within its trading range of 96.50 – 100.00, this morning trading at 99.38.  It is very difficult to get too excited about very much here as all the major currencies in both the G10 and EMG blocs are trading in lockstep this morning with one exception, BRL (+0.3%) which has managed a modest gain although it is hard to find a direct rationale for that movement.  After all, interest rates haven’t moved enough to change the carry characteristics.  My best bet is that this is simply a reflexive move after several days of weakness.

On the data front, it is a busy morning with Personal Income (exp 0.4%), Personal Spending (0.5%), Q2 GDP (2.0%), PCE (0.5%, 3.8% Y/Y), Core PCE (0.3%, 3.3% Y/Y), Initial Claims (211K), Continuing Claims (1780K) all at 8:30 and then New Home Sales (670K) at 10:00.  We also get the EIA oil inventory data today, with more draws expected.  Adding to that we get NY Fed president Williams speaking this morning.  Yesterday, Governor Cook explained that she was very focused on inflation and thought rate hikes may be needed if things don’t change.  However, that has been the basic understanding since the last FOMC meeting.  I don’t believe they will be hiking rates anytime soon, personally, although cuts are unlikely as well.

And that’s what we have today.  The war and oil remain the key drivers, but there will be keen interest in today’s PCE data to see if there need to be further worries about the Fed moving.  It is difficult to look at the current situation and think the dollar is going to decline soon, and frankly, my take is we are not going to see much movement at all with price consolidation the theme for the next several weeks.

Good luck

Adf