Tag Archives: #gold

Rise and Shine

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

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

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

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

Source: trading economics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Good luck

Adf

Sometime Soon Become Miffed

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomcis.com

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

Good luck and good weekend

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A Different Scapegoat

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: finance.yahoo.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

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Bonds are a Flop

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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No Longer the Same

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Not All in Sync

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The story that’s tripping off lips
Is whether the buildup in ships
And aircraft we’ve seen
Is likely to mean
A war with Iran’s in the scripts
 
But markets are not all in sync
As equities clearly don’t think
That war would be trouble
While bond traders’ double
Their bets war will drive stocks to drink

Economic data is clearly not a key driver of market movement these days, arguably because we continue to get mixed outcomes, with some things looking good (Initial Claims, Philly Fed) while others are less positive (Trade Balance, Leading Indicators), although granted, it is not clear to me what the Leading Indicators purpose is anymore.  My point, though, is that we have not seen unambiguous strength or weakness across the data set for several months.  This allows every pundit to frame the economic situation through their own personal lens, whether bullish or bearish.  A perfect example is the dichotomy between the strength of US corporate balance sheets, as per Torsten Slok and seen below, 

and the rise in corporate bankruptcies as per this X post from The Kobeissi Letter (a great follow on X) which shows the following chart.

So, which is it? Are things good or bad?  My understanding is that strong balance sheets and a high number of bankruptcies are not typically correlated, but I could be wrong.  

Given the lack of direction, markets have turned their focus to other things, with most headlines currently garnered by the ongoing buildup of US military power in the Middle East as President Trump tries to pressure Iran into ceding its nuclear and missile programs.  (Of course, the announcement that all information on UAP’s (fka UFO’s) has many excited, and of course, the Epstein files continue to garner attention, as does the SAVE Act, but none of those are even remotely related to financial markets.)

But even here, we are seeing very different responses by the financial markets.  For instance, equity markets continue to perform pretty well, even though Tokyo and Australia sank a bit last night.  Look at the monthly and YTD returns in Europe, Japan and Australia below:

                                           Daily   Weekly   Monthly   YTD

Source: tradingeconomics.com

It strikes me that if war was a major concern, investors wouldn’t be stocking up on risk assets.  Rather, havens would be in more demand, which we are also seeing with gold (+0.4%) and silver (+3.3%) rising overnight as despite extreme volatility in the precious metals space, there is clearly underlying demand for these havens.

Bond yields over the past month have declined, indicating that despite ongoing deficit spending, investors are seeking their perceived safety whether in Treasuries, Bunds or JGBs as per the below chart of all three.

Source: tradingeconomics.com

Finally, the dollar, despite frequent calls for its death, has been edging higher in a classic risk-off response as no matter how much some may hate the dollar philosophically, when bad things happen, its massive legal and liquidity advantages outweigh virtually everything else.  Once again, the DXY has moved back to the middle of its trading range, just below 98.00 this morning, and to my eyes, shows no signs of an imminent collapse.  Rather, if hostilities do break out in Iran, I expect the greenback to rally to at least the top of this trading range at 100, and depending on the situation, it could easily go higher.

Source: tradingeconomics.com

All this is to point out that nobody knows nothing.  Narrative writers continue to try to keep up with the action, and it is increasingly difficult to do so as things change on the ground so rapidly.  Let me be clear when I say I have zero inside information regarding any of this, I am merely an observer.  However, my observations are that there will be some type of military action in Iran as to build up this much fire power in a concentrated area and not use it would be remarkable and I can see no way in which the Ayatollah can accept the terms being offered as it would end his leadership if he does.  I guess we will find out soon enough as President Trump has put a 10-day timeline on things.

Arguably, the only market I didn’t mention here was oil (-0.5%) which is consolidating after a 20% rise in the past two months.  Remember, if military activity is directed at oil production or transport, we could see a sharp spike here and that will not help equities or economic data, although both gold and the dollar are likely to benefit.

Source: tradingeconomics.com

I don’t think there is anything else to discuss market wise so let’s turn to the data.  This morning brings a bunch of important stuff as follows:

Personal Income0.3%
Personal Spending0.4%
PCE0.3% (2.8% Y/Y)
-ex food & energy0.3% (2.9% Y/Y)
Q4 GDP3.0%
Flash Manufacturing PMI52.6
Flash Services PMI53.0
Michigan Sentiment57.3
New Home Sales730K

Source: tradingecomomics.com

We also hear from two more Fed speakers, but at this point, they are all singing from the same hymnal explaining policy is in a good place and unless there are major changes in the data, there is no reason to change.

Arguably, the PCE data is the key for markets here as if it continues to run hotter than target, hopes for further rate cuts will continue to dissipate.  In fact, the next cut is now priced in for July with a second for October.  

Source: cmegroup.com

Remember, too, at that point it will be Kevin Warsh’s Fed, not Jay Powell’s, and Warsh has a very different idea about the way things need to be done.  Interestingly, as this 4th Turning proceeds and old institutions come under increasing pressure, their efforts to fight back and maintain the status quo is no longer behind the scenes as evidenced by this Bloomberg article this morning.

As I have written before, President Trump is the avatar of the 4th Turning and the institutions that are going to change are desperate to maintain the status quo.  This is, truly, the big fight that will continue through the end of the decade in my view.  Every institution that has been overseeing the global situation, whether politically, financially or militarily, is coming under pressure as income and wealth inequality have driven an ever wider disparity of outcomes.  As much power as the rich have, there are a lot more people who are not rich.  Ask Louis XVI how much being rich helped him.

On a lighter note, I watched the gold medal skating performance of Alysa Liu and it was truly magical.  A much better thought for the weekend!

Good luck and good weekend

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Yesterday’s Trauma

Posted on by

The story is yesterday’s trauma
As risk assets traded with drama
For stocks, it was news
AI could abuse
More sectors, that triggered the bomb-a
 
For gold and the metals, however,
It seemed an alternative lever
A bear raid, perhaps
Or filling chart gaps
No matter, twas quite the endeavor
 
Which leads to today’s CPI
Where narratives that with AI
Deflation is coming
As all jobs but plumbing
We’ll no longer need to apply

Let’s start with this morning’s CPI data as in some ways, I feel like that is a key part of the overall market discussion regarding yesterday’s dramatic declines.  Expectations are for both Core and Headline prints of 0.3% M/M and 2.5% Y/Y.  If we feed those numbers into the current narrative, the implication might be that the Fed is continuing to see a slowdown here and it would open the door to further rate cuts.  Remember, despite the comments of two Fed speakers earlier this week, Logan and Hammack, the most recent information we have is that the neutral rate is believed to be 3.0%, a full 75bps lower than the current Fed funds rate.  Interestingly, if we look at the Fed funds futures market, it shows that even after yesterday’s abysmal Existing Home Sales data (-8.4%), the probability of 3 cuts doesn’t hit 50% until the end of 2027!

Source: cmegroup.com

Remember, too, that the payroll report was strong on Wednesday, but that major annual revisions took much of the shine off that.  And of course, we cannot forget that since everything is political these days, certain FOMC members who dislike the President may be against rate cuts simply because the President wants them.  The point here is that the appearance of pretty solid economic activity combined with gradually decreasing inflation could argue for rate cuts but could also argue to leave things as they are since they seem to be working.  And let’s face it, the Fed doesn’t really know anyway, nor do any of us.

Which takes us to the broader narrative about what is driving stock market activity and why we saw such dramatic declines in the US yesterday, and pretty much everywhere else overnight.  It appears the proximate cause is the idea that recent AI announcements have indicated that there are entire service industries that may be destroyed because AI will serve as an effective replacement for their customers.  We have seen it for law firms, accountants and consultants and now logistics and software companies are under the gun.

Adding to the narrative is Elon Musk, who continuously claims that AI and robots will replace virtually all human labor and create enormous wealth for us all while driving prices ever lower.  The flip side of that claim is that throughout history, every major technological advance, while initially destroying jobs in the areas it was used, resulted in more, and better paying, jobs to help advance the overall economic situation.  Of course, historically, these changes took at least a generation, if not several to play out, while things appear to be happening a bit faster this time.

I have not done a deep dive on AI so take this for what it’s worth.  I use Grok as it is convenient for me given I have X open on my computer all the time.  I use it for quick research as it responds to my poorly worded questions with the information I seek and, happily, cites its sources.  But I am looking for data questions (e.g. the GDP of China or the size of European holdings of Treasuries) and I have never even considered using it to write my poetry.  Is it ready to make intuitive leaps in thought?  Maybe, but that seems a stretch.  As with all computers, its advantage over the human brain is its ability to ‘brute force’ a solution by making so many calculations in such a short time that no human can match.  However, my take is breakthroughs have come from intuitive leaps from one topic to another, not from simply doing more math on the same topic.  And it is not clear to me that AI programs, as they currently exist, are intuitive.

Of course, for our purposes, it doesn’t really matter right now if AI is that capable or not, it only matters if investors and traders believe that to be the case and invest accordingly.  That was yesterday’s story, as well as well as the story at the beginning of last week, at least based on the way the NASDAQ traded as per the below chart.

Source: tradingeconomics.com

We had six different significant drawdowns within a given hour since the end of January, and virtually all were described as a consequence of some industry sector being decimated by AI.  The thing is, valuations are pretty high in the tech sector (the area most likely to be hit) and it may simply be that investors have decided to sell the rich stuff and buy cheap stuff instead, like defensives and materials companies.  Just a thought.  But be prepared for a lot more of this narrative about AI eating some other company’s/industry’s lunch as we go forward.

Ok, let’s look at the overnight now.  First, remember, China is going on holiday all next week, and we will see much less activity from Asia accordingly.  But last night, Asia basically followed the US lower with Japan (-1.2%), HK (-1.7%), China (-1.25%) and Australia (-1.4%) headlining.  India (-1.25%) and Singapore (-1.6%) also suffered and you are hard pressed to find any markets that rose there.  As this was very tech focused, it should be no surprise.  (PS India is also suffering on AI as much of the business that had been outsourced to India could well be replaced by AI.)

In Europe, too, red is today’s color, and not simply because they lean more communist every day.  While tech is not a major part of the markets there, watching Italy (-1.5%), Spain (-1.0%), Norway (-1.1%) and Greece (-2.1%) all slide sharply tells the story, I think.  As it happens, France (-0.35%) and Germany (-0.1%) are the continental leaders and the UK (+0.1%) is the only market of note showing gains at all.  As to US futures, ahead of the data at this hour (7:30) they are softer by -0.2% across the board.

In the bond market, yesterday saw Treasury yields slip -4bps after the Housing data and this morning, they have recouped just 1bp.  European sovereign yields are all lower by between -1bp and -2bps as data releases continue to show a ‘muddle-through’ economy rather than one either growing strongly or falling sharply.  We did hear from ECB member Kazaks, telling us that the euro’s strength over the past year could have a negative impact on the economy there, implying the ECB may need to ease further.  Meanwhile, JGB yields (-2bps) continue to demonstrate virtually no concern about PM Takaichi’s plans for unfunded fiscal expansion.

Metals markets were the other noteworthy place yesterday with some very dramatic declines happening simultaneously in both gold and silver just after 11:00am.  (see below) My friend JJ who writes Market Vibes, explained last evening that the timing was impeccable as London had closed and the US is the least liquid metals market around, so if a large speculator was seeking to drive prices lower, that was when to do it.  And somebody did!  

Source: tradingeconomics.com

But that was then, and this is now.  As you can see from the chart, the market is already rebounding with gold (+1.0%) and silver (+3.2%) simply demonstrating that they remain incredibly volatile.  In truth, this was the best take I saw on the subject yesterday.

Turning to oil, President Trump indicated that talks with Iran may go on for weeks, so it is unlikely that things will combust there for a while.  At the same time, the IEA continues to try to convince everyone that peak oil is here and there is a huge glut, but net, Texas Tea slipped -2.8% yesterday and is lower by another -0.35% this morning.

Finally, the dollar…well nothing has changed.  the DXY (+0.1%) is clinging to 97 with no impetus to move in either direction.  JPY (-0.4%) may be softer this morning but is far enough away from 160, the perceived intervention level, that nobody cares.  AUD (-0.6%) slipped on the weak commodities pricing, although remains near its highest levels in three years as the RBA turned hawkish last week.  We are also seeing weakness in the EMG bloc (KRW -0.4%, ZAR -0.5%, CLP -0.6%) with yesterday’s tech and metals sell-offs the proximate drivers.  The narrative remains that the dollar is set to collapse, but I still don’t see it.  Maybe I’m just blind.  I cannot get past the economic growth outperformance and inward investment plans, as well as the need for dollars to continue the global USD debt flywheel as the key demand points.

And that’s really it.  Volatility is with us and likely to stay for a while.  This is a global regime change with respect to economic statecraft rather than the previous rules-based order, and frankly, nobody really knows how it’s going to ultimately play out.  This is why gold remains in demand, because history has shown it has maintained its value on a purchasing power basis for millennia, whatever the terms of the relevant currency may be.  But in the fiat world, I’m waiting for someone to make a better argument for something other than the dollar over time.

Good luck and good weekend

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Up and Down

Posted on by

The only things that really matter
Are stock prices frequently shatter
Their previous high
And rise to the sky
Like too much yeast got in the batter
 
And though prices move up and down
While traders both grin and they frown
The long term has shown
The ‘conomy’s grown
Though lately, tis gold’s worn the crown

As I wrote last week, markets have a difficult time maintaining excessively high levels of volatility for any extended period of time as traders simply get tired and effectively check out.  Now, we have had some impressive volatility lately, whether in stocks, silver or natural gas, to name three and as can be seen in the chart below.

Source: tradingeconomics.com

But a closer look at the chart tells an interesting story, despite a huge amount of movement in the past month, the net movement for the S&P 500, Silver, Natural Gas and the 10-year Treasury, has been essentially zero.  If you dig through this chart, the only net movement has been the dollar’s roughly 2% decline.

That is an interesting tale, I think.  Perhaps Macbeth said it best though, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”  What exactly is the significance of the remarkable volatility we have seen over the past month across numerous markets?

If we review the past month’s activities, the most notable market event was the announcement of Kevin Warsh as the next Fed chair, and the initial assumption that he is much more hawkish than market participants had previously anticipated.  It remains to be seen if that is the case, especially since we are still months away from any confirmation hearings and his eventual swearing in, but that was certainly the initial narrative.  It was blamed for a sharp decline in equities as well as precious metals, although both are essentially unchanged over the past 30 days. 

At least NatGas made sense given the significant cold and winter storms that hit much of the US and northern Europe, but those, too, have passed, and prices are back to where they were prior to the more extreme weather.

Maybe the most interesting thing is that bond yields are basically unchanged despite the Warsh announcement.  It would not have been surprising to see a significant move there given Warsh’s ostensible hawkishness, but that was not the case.

My point is that markets move for many reasons.  Occasionally, there is a clear catalyst (Japan’s Nikkei responding positively to PM Takaichi’s landslide victory comes to mind), but more often than not, the narrative writers seek to explain price action after the fact while covering up their previous forecasting mistakes.  I, too, am guilty of this at times, which is the reason I try to step back and take a broader, longer-term view of market movement to get underlying causes.  As I no longer sit on a trading desk, I am not privy to the day-to-day tick activity, and frankly, even then, unless it was happening at my bank, I would still be in the dark.

To conclude, the strongest trends, which remain the precious metals, continue, although prices are back closer to the long-term trend than the parabolic heights seen 10 days ago as you can see in the below chart.  In fact, I don’t think we have had any changes in the underlying story, but the extreme market volatility is likely to be done for a while going forward.

Source: tradingeconomics.com

Which takes us to overnight market behavior.  While Tokyo (+2.3%) is still ripping higher on the Takaichi election news, only Taiwan (+2.1%) and the Philippines (+2.0%) are keeping pace with the rest of the region much less impressed, (China +0.1%, HK +0.6%, Australia 0.0%).  To my point, nothing has changed.  In Europe, too, price activity is fairly muted (France +0.4%, Germany +0.1%, Spain +0.2%, UK -0.2%) as there has been no news of note either economically or politically.  The most interesting data point was Norwegian inflation which came in much hotter than expected at 3.6% and has traders thinking the Norgesbank may be set to tighten again.  This has helped NOK (+0.6%) which is the leading gainer in the FX markets this morning.  As to US futures, at this hour (7:20), they are very modestly higher, just 0.15% or so across the board.

In the bond market, yields are backing off everywhere, with Treasury yields lower by -3bps, and European sovereigns lower by -1bp to -2bps across the board.  The exception, of course, is Norway (+8bps).  Perhaps, more interestingly JGB yields (-5bps) are slipping despite (because of?) Takaichi’s landslide victory.  Recall, heading into the election, expectations were for aggressive fiscal expansion and borrowing to pay for it.  However, Katayama-san, the FinMin has been explicit that they were going to be borrowing at the short end of the market, 1yr to 5yrs, so perhaps it is no surprise that the 10yr yield is slipping.  With that in mind, though 5yr JGB yields also fell last night, down -3bps, although shorter dated paper was unchanged.  I have not read of any analysts complaining that Japan is turning into an emerging market because they are funding themselves with short-dated paper, although when the US does it, apparently it is the end of the world.

Turning to commodities, oil (0.0%) continues to get tossed around on the Iran story, with no certainty as to whether a deal will be done or the US will attack.  Apparently, Israeli PM Netanyahu is meeting with President Trump tomorrow to register his opinions on the subject.  The interesting thing in this market is that the ‘peak oil demand’ narrative, which has been pushed by the climate set as occurring in the next year or two, has been pushed back to 2050 by the IEA as they take reality into account.  That may encourage more drilling, but that’s just my guess and as I’m an FX guy, what do I really know?

As to the precious metals, after a couple of days rebounding, this morning, the sector is modestly softer (Au -0.3%, Ag -1.6%, Pt -1.2%) although as per the chart above, the trend remains higher across all these metals.

Finally, the dollar, which has fallen the past two days, has stabilized and is mostly higher (save for NOK mentioned above) with most currencies softer by about -0.15 or -0.2%.  The other exception of note here is JPY (+0.5%) as there has been a lot of jawboning by the MOF there to prevent a rash of weakness.  However, it is difficult for me to look at the JPY chart below and discern a major reversal is coming.  I believe that the MOF wants to keep that 160 level as a dollar ceiling without spending any money if they can, but the problem with jawboning is that it loses its efficacy fairly quickly.  However, if they drive yields higher on shorter dated paper, perhaps that will attract more inflows, although given how low they currently are (2yr 1.29%, 5yr 1.69%) I think they have a long way to go before they become attractive to international investors.

Source: tradingeconomics.com

On the data front, NFIB Small Business Optimism fell to 99.3, a bit disappointing, and now we await the following: Retail Sales (exp 0.4%, 0.3% -ex autos) and the Employment Cost Index (0.8%).  We also hear from two more Fed speakers, Logan and Hammack, but I don’t see the Fed, other than Warsh, being that critical right now.  

And that’s really it for today.  My take is we are unlikely to see dramatic movement in any market so hedgers should take advantage of the reduced price volatility.  But otherwise, sometimes, there is just not that much to do.

Good luck

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Changing Fast

Posted on by

At this point most traders are thrilled
It’s Friday, ‘cause throughout that guild
Exhaustion is rife
From bulls’ and bears’ strife
O’er whether their dreams be fulfilled
 
As well, all the narrative writers
Are stuck pulling college all-nighters
With facts changing fast
Their latest forecasts
Do naught but encourage backbiters

It has certainly been an interesting week in financial markets, at least most of them, with significant moves throughout the commodity, equity and cryptocurrency spaces.  We even saw a jump in bond prices yesterday after a really lousy JOLTS Jobs number (6.54M compared to 7.2M expected) and a higher-than-expected Initial Claims number of 231K.  Suddenly, questions about the labor market are front of mind, and prospects for a March Fed Funds cut rose to 23% for a time, although have slipped back to 17% as of this morning.  But one need only look at a few charts (all from tradingeconomics.com) showing the daily movement in some popular trading vehicles to understand why traders are thankful the week is ending.  For instance, 

Silver (+4.75%), which had a 34% range last Friday and has fallen 39% since its high 8 days ago:

Gold (+2.1%), which showed the same pattern, albeit not quite as dramatically:

Natural Gas (+3.4%), which rose $2.65 and reversed $2.00 on a $3.00 base over the past two weeks:

And Bitcoin (+5.8%), which has fallen nearly 50% since its highs in early October and 22% in the past week:

Now, it must be remembered that Bitcoin has a long history of massive drawdowns, with a 50% drawdown in spring of 2021 and a 75% drawdown from November 2021 through October 2022. We shouldn’t be surprised as Bitcoin is essentially a pure risk asset, so is completely narrative driven.  And as the narrative writers try to keep up with the facts on the ground, they are trying to figure out how to sell the story that Bitcoin, which was ostensibly designed to be an alternative to the fiat currency system, has become so tightly linked to the fiat financial system.

In the end, though, the commodity markets are beholden to the marginal demand/supply of the last molecule available.  I have not seen anything change with respect to demand for power to drive the economy, the demand for silver to build out electronics or the demand for gold by central banks.  To me, while prices for these commodities can whipsaw aggressively as the global regime changes, ultimately, I remain confident demand will continue to be the story.  (Bitcoin is an entirely different beast and one I will not discuss in depth other than to highlight its volatility along with the rest of these markets.)

Anyway, you can understand why traders are exhausted.  In fact, my forecast for next week is that we are highly unlikely to see the same size movements, although choppiness will still be the rule.

You may have noticed I missed oil (-0.4%) which has also seen some volatility as per the below chart, but not quite at the same level as the others.  Part of that is the oil market is much larger and more liquid and part of that is that the whole Iran/US discussions question has provided fodder for both bulls and bears in short intervals resulting in no net movement over the past week.

From what I can piece together, the situation in Iran is coming to a head regarding the regime there.  The talks today are ongoing, but there is other information that appears to indicate preparations are being made for a transitional government, and the State Department just warned all US citizens to leave Iran.  Something is up which will certainly drive more oil volatility.

If we look at bonds, Treasury yields fell -8bps yesterday and have rebounded by 2bps this morning.  That was the largest single day move we’ve seen since October, and basically took the market right back to that 4.20% level that had been home for weeks.

There continues to be a lot of confusing data and information regarding the economy as yesterday’s weak jobs data conflict with the broader idea that the hyperscalers are spending 2% of GDP on capex this year and forecasts for the budget deficit continue to run around 2%.  It seems like it will be difficult for a recession to come about with that much new spending in the economy, but as we have seen over the past decades, the beneficiaries of that spending are not necessarily the population cohort that is currently upset.  I guess the question is, is economic growth real if the population doesn’t feel it?  That will certainly be the political question come November.

As to European yields, they all followed Treasuries lower, especially after the BOE 5-4 vote to leave rates on hold offered a much more dovish signal than anticipated, and the ECB harped on the strength of the euro and how that could bring down their inflation forecasts, hinting at lower rates going forward.

In the equity markets, yesterday saw a tough day in the US as the tech/AI story continues to get beaten up right now, and that was more than enough to offset strength in things like defensives and staples.  But this morning, US futures are higher by about 0.5% as I type (8:00).  In Asia, Japan (+0.8%) bucked the US trend on the back of excitement about the upcoming election where Takaichi-san is expected to gain a mandate.  However, China (-0.6%), HK (-1.2%), Korea (-1.4%) and Australia (-2.0%) all had the same fate as the US.  Given the weight of technology companies in Asian indices, I suspect we are going to see more volatility here as different narratives come about on AI and investment and the social/political impacts.  As to Europe, modest gains are the story with the DAX (+0.5%) and IBEX (+0.9%) leading the way higher with the former benefitting from yesterday’s surge in Factory orders as well as a better-than-expected trade balance today.  As to Spain, it has been trending higher and nothing has come out to change that view for now.

Finally, the dollar is giving back some of yesterday’s gains but remains within that longer term trading range.  Using the dollar index (DXY) as our proxy, you can see just how little things have changed.  All the talk last week of the breakdown in the dollar has been forgotten for now, although I continue to read about China building a digital currency backed by gold.  I discussed that earlier this week and why I continue to believe that is unrealistic at this time.

But the weird thing about the DXY is it doesn’t seem to reflect what is happening in individual currencies.  For instance, AUD (+0.85%), GBP (+0.45%) and NOK (+0.9%) are all much stronger although the euro (+0.15%) and JPY (0.0%) not so much.  In the EMG bloc, MXN (+0.8%), ZAR (+1.1%), HUF (+0.8%) and KRW (+0.3%) are all having a very good session despite no specific news that would seem to drive that.  Historically, I never paid attention to the DXY because nobody who actually trades FX pays it any mind.  However, as a trading vehicle, it has gained many adherents which is why I mention it.  So, as we look across the currency universe, the dollar is having a tough day.

On the data front, we only see Michigan Sentiment (exp 55.0) and Consumer Credit ($8.0B).  We also hear from Governor Jefferson, but nobody seems to be listening to any Fed speakers right now, Secretary Bessent is a far more important voice for the markets.

We have seen massive moves across many markets lately, with excessive moves correcting, but I remain stubbornly of the view that while things got ahead of themselves, the underlying trends are still in place, at least in commodities.  As to the dollar, it’s not dead yet, but its future will depend on the administration’s ability to achieve their goals regarding the economic adjustments and inward investment.  

Good luck and good weekend

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Dissension

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It seems that there’s still quite some tension
As metals and stocks show dissension
Though Friday both puked
Of late, metals juked
Much higher, to stocks contravention
 
So, what can we learn from this split?
That tech stocks all now trade like sh*t
While silver and gold
Are what folks will hold
And bonds? No one just gives a whit

It seems the government shutdown has ended, just as quickly as it began and the only people impacted are traders who were looking forward to the NFP data on Friday.  Given the shutdown was only for a few days, and that apparently, all the data was already collected, it was the compilation that was being delayed, I presume we will get the numbers next week.  Of course, this is a government bureaucracy, so it may take a bit longer.  Nonetheless, this morning we see the ADP Employment number (exp 48K) and analysts will have to work from that, plus the reports like the ISM hiring data, to give their views of the economy.  It really all does seem like theater, I must admit.

Anyway, away from that, the only other news of note that is impacting markets has been an increase in tensions in Iran after the US shot down an Iranian drone heading toward the US aircraft carrier, Abraham Lincoln.  However, it appears that talks are still scheduled for Friday, so oil (+0.2% today, +1.4% since yesterday morning) is creeping back higher, although remains well below the levels seen last week when concerns over a US attack there were mounting.

Source: tradingeconomics.com

Which takes us to markets and what appear to be the key internal drivers.  Starting today with stocks, the narrative revolves around concern that AI is going to destroy software companies and SaaS models since their user base will no longer need those companies.  As well, there are the lingering concerns about the AI investment bubble and the circular dealing between Nvidia and its customers being an indication of the end of the era.  This is akin to what happened during the tech bubble in 2000-01 and has been highlighted by numerous analysts for several months, although is gaining more traction of late.  Finally, the Business Development Companies (BDC’s) and PE firms are under increasing pressure as their portfolio of loans and positions, many of which are being hurt by AI, are starting to hemorrhage cash.  This trifecta has been weighing on the NASDAQ, preventing any significant strength, although other sectors, notably energy and materials, have been doing pretty well.

The funny thing is, while the NASDAQ (-1.4%) fell yesterday amid widespread US equity weakness, if I look at the chart (below from tradingeconomics.com) it doesn’t seem that negative, rather it seems to be consolidating ahead of another leg higher.  But then, I am no technician, so don’t pay attention to me.

However, the narrative is strong here that the world is about to end because Nvidia hasn’t made a new high in the past three months.  I am no tech stock expert, but my take from the cheap seats is that future equity market outcomes are going to continue to be reliant on the success of the Trump administration’s plans regarding reshoring and changing the nature of trade.  It is likely to be bumpy, especially if the Fed does not cut rates to support equity markets, especially since that has been the MO for the past 40 years.  But I remain positive overall.

Looking around the rest of the world, last night saw a mixed picture, although definitely more green than red.  While Tokyo (-0.8%) slid along with Malaysia and the Philippines, the rest of the region had a nice session led by Korea (+1.6%), China (+0.8%) and Australia (+0.8%).  It appears the tech fears were less concerning there, either that or PE and BDC companies aren’t yet so prevalent.  In Europe, meanwhile, despite mixed PMI Services data, there are more gainers than laggards led by the UK (+1.0%), which does have miners, benefitting from the rebound in metals prices.  But France (+0.9%) and Spain (+0.15%) are also higher although Germany (-0.2%) is lagging after a modest miss in the PMI data. As to US futures, at this hour (7:15), they are pointing higher by about 0.25%.

Back to metals, which continue to be THE story these days, gold (+2.0%) has reclaimed the $5000/oz level and while it is lower in the past week, remains nearly 17% higher YTD.  Silver (+6.0%) is also rebounding nicely along with platinum (+3.8%) as more and more discussions have ascribed last Friday’s rout to month end delivery and position issues amongst a few very large players who were able to prevent some major damage to their own balance sheets.  However, as I have maintained all along, the fundamentals are unchanged; there is a shortage of silver for industrial use and has been for several years.  As to gold, there is no indication that central banks have stopped buying.  These continue to be long-term plays and will likely drag the entire metals sector along for the ride.

What about bonds, you may ask?  Well actually, nobody is asking about bonds!  They remain mired in a tight range with dueling narratives about the long-term view.  On the one hand, there are those who continue to look at the US debt load, and the expectation of fiscal deficits as far as the eye (or the CBO) can see, and expect supply issues to dominate, forcing the government to seek inflation to create the soft default necessary to pay back the debt.  They will point to the long-term trend, which saw yields decline for 40 years and then reverse back in 2020 (see chart below from finance.yahoo.com) as evidence that yields are going to trend higher for the next decades.

On the other side, you have those who believe the future is deflationary, with AI driving massive increases in productivity and driving down prices, while focusing on Truflation’s recent readings of 1.0% and claiming that is the way.  Personally, I have more sympathy for the former view than the latter, as it is increasingly difficult for me to understand the view that AI will be able to achieve all its currently stated desires without sufficient energy and materials, whose increasing prices are going to limit any downside in inflation.  As well, while a Warsh Fed chairmanship may strive to change the current central bank model of QE whenever needed, there is zero evidence any other central banks are going to follow suit.  

In the meantime, the tension between those two views has kept yields in a very tight range for a while, and we need an exogenous catalyst to break that range.  Peace in Ukraine?  War in Iran?  I’m not sure.

Finally, the dollar is a touch firmer this morning, notably against the yen (-0.6%), which continues to give back its gains from two Friday’s ago when the Fed ‘checked rates’ in the NY session as seen in the chart below.

Source: tradingeconomics.com

However, the point was made this morning, and it is a good one, that while Japanese 10-year yields are at 2.24%, 10-year yields, 10-years forward are about 4.10%, which would be a devastating yield for the Japanese government given its debt/GDP ratio remains above 230%.  It is difficult to get excited about owning the yen with that backdrop, especially given the demographic implosion of population that is ongoing there.  As to the rest of the currency market, Zzzzz.  Aside from the narrative of the dollar is dead, which gets recycled by somebody every day, it is very hard to look at recent price action and think something remarkable is going to happen.  We will need major monetary and fiscal policy changes, which while they may arrive, are going to take quite some time to get here.

And that’s really it this morning.  Aside from ADP, we get the ISM Services (exp 53.5) and we get the Quarterly Treasury refunding announcement, which will garner a great deal of attention only if Secretary Bessent explains he is going to issue more bonds and less bills, which seems unlikely.  Monday’s ISM data was quite strong.  Strength today could well portend that the US economy has a bright future ahead, in the near term, and that should support stocks and the dollar, while commodities will benefit from the increased demand.  Bonds?  Well, we’ll see which side of that argument is correct.  And what happens if the deficits are smaller than expected?  That is the question nobody is asking because the ‘smart’ folks don’t believe it is possible.  Remember, the dollar is still king.

Good luck

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