Tag Archives: #gold

Quite Spicey

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Though Friday things looked pretty dicey
With tech stocks then seen as quite pricey
New word that the bombing
Has ended was calming
And stock markets opened quite spicey

Of course, it can be no surprise
That oil’s now well off its highs
The dollar is slipping
Though yields are just dripping
As bond traders still agonize

President Trump changed his mind about continuing the recent bombing campaign against Iran over the weekend amid questions about alleged US munitions supplies.  But whatever the reason, this was music to the risk markets with oil (opening -6.4%) falling sharply while equity futures (NASDAQ opening +1.25%) rebound from last week’s declines.  Once again, headline risk remains the biggest risk there is in markets.  Note the huge gap lower in the oil market early Sunday evening in the chart below from tradingeconomics.com

At this point, it is a fool’s errand to try to estimate where oil prices are heading going forward as the next headline is likely to be the key driver, and that is a complete unknown.

So, let’s turn our attention to some more fundamental questions that have been brewing in the background and are pretty complex.  I want to start with a remarkable Substack piece I read this weekend which had a completely different perspective on the AI investment thesis than anything that I have seen anywhere else.  And it is quite a persuasive piece.  While I have linked it above, it is quite a long read, so the highlights are as follows:

  • The AI boom is not a tech boom; it is a credit driven real estate cycle
  • This is virtually identical to the run-up to the subprime housing crisis and GFC
  • The key to understand is the second derivative of growth, acceleration.
  • GroundBreaker’s (the author) thesis is that the second derivative on AI valuation has already rolled over and the future for AI stocks is pretty bleak, at least in the medium term.

Below are two charts from his Substack to help describe the issue:

This is a basic description of the movements of the underlying (blue line), its velocity (growth rate, yellow line) and its acceleration (the change in its growth rate, red line).  As you can seem growth can still be increasing, but at a slower rate, and that’s the problem he highlights.  

Below is a chart of OpenAI’s valuation metrics (remember it’s private so the values are episodic, not continuous, but the point is if the change in the rate of growth of the valuation metric starts declining, that is the break where things become a problem, i.e. they may not be able to finance their projected growth going forward.  

And as you can see, it is already heading lower.  This does not speak well to the future for OpenAI, and I would argue, the entire space, as many have made the case this is all Ponzi finance, meaning the funding cannot be repaid on cashflows, only on increasing valuations.  

Now consider the subprime crisis where the problems started when the rate of housing price increases rolled over and all those 2-year teaser rates could no longer be financed at higher valuations.  That’s when they all went bust!  Here’s the thing; the 2nd derivative rolled over in late 2006, the first hiccups didn’t happen until mid-2007 with SocGen closing some funds, Lehman didn’t go bust until September 2008 and the equity market didn’t bottom until March 2009.  It can take a long time for this to play out, but beware the cycle, it could well repeat in AI linked investments.

So, there’s that to consider.

The other thing that I’ve been pondering is gold and its meaning within the financial markets.  Unlike the AI discussion above, I want to discuss two very real sides to this story.  On the one hand, the ongoing destruction of the value of fiat currencies by all major central banks’ policies is real.  Money continues to get printed and inflation continues to rise debasing those fiat currencies.  Adding to the problem is the massive government debt issuance which, if history holds, will be sopped up by those very same central banks, adding to the debasement.  The search for a neutral reserve asset to replace US treasuries is real, but the transition will take a very long time, in my view.  However, all this speaks to increased demand for the barbarous relic, and when that is priced in declining fiat currencies, a higher price.  I think it’s a very strong argument and has been made by many, including this poet.  After all, gold is often thought of as the ultimate inflation hedge.

So, what is the flipside?  As I have written frequently regarding oil prices, we cannot ignore the market pricing and what it is telling us.  Understand that I have been a gold bull for a long time and strongly believe in the long-term debasement concern.  But as a long-time trader and market participant, it is very difficult for me to look at the below, long-term chart of gold and not think that there is a much further decline on the cards.  Parabolic moves, historically, do not resolve by trading sideways for extended periods of time, they fall back… a lot!

While we have recently seen several parabolic moves in market prices, notably the NASDAQ and KOSPI, I want to highlight the last time the NASDAQ had a parabolic move, during the tech bubble in 1999-2000.  The chart below is a logarithmic chart of the QQQ ETF.  As you can see back in 2000 – 2002, it fell a very long way after the bubble burst, some 88%, a much larger move than during the GFC!  

There is one other trading market, that while many may dismiss its meaning, I would contend is very representative of the way markets behave across all asset classes, Bitcoin.  The below chart shows it from its beginning, and you can see a number of essentially parabolic moves higher, each resolving with a decline of at least 50% and at times more than 70%.

Source: coinmarketcap.com

My point is that gold shows all the signs of having peaked for a while, and it has ‘only’ fallen some 25% from its highs.  From a trading history perspective, there is nothing that would seem to prevent a move down to $2800/oz or so, a 50% retracement from the high.  

So, which is it?  As I remain long gold in the personal portfolio, I have been a beneficiary of the long climb higher and would love to see it continue.  And there is much to be said for the debasement theory.  But both sides of this argument can be correct with the time frame the key differentiator. We could see a further short-term decline before a renewed upward move of significant magnitude.  Much will depend on how global macroeconomics and economic statecraft plays out over the coming months/years.  And this is why trading is hard!  One last thing describing just how much things have changed regarding gold and sentiment around it, this headline in Bloomberg this morning is remarkable, Gold Climbs as Pause in Mideast Fighting Curbs Inflation Risk.  

Ok, sorry for my rants, but a brief tour of markets show things are exactly as you would expect based on the reduction of tensions in Iran. Equity markets are higher around the world as per the below tradingeconomics.com screen shot, and don’t be fooled by Brazil, it hasn’t opened yet and there are no futures, so that was Friday’s performance.

As to bond yields, they too, are lower across the board as per the below Bloomberg.com screenshot.  Canada, Mexico and Brazil markets are not yet opened, hence the lack of movement.

Oil has fallen further than when I started writing last evening with WTI (-8.2%) and Brent (-9.7%) both sharply lower.  Regarding Brent, apparently there has been a resumption of flows through Kazakhstan which is helping even more there.  Metals are higher (Au +1.1%, Ag +2.2%, Cu +0.9%), which is keeping with the latest theme.  And finally, the dollar is broadly softer, as also would be expected given the movement in other markets.  The two key exceptions here are NOK (-0.7%) which is clearly a reaction to the movement in oil prices and KRW (-0.8%) which actually started the session much stronger but has reversed.  While I read a rationale about concerns over a Fed rate hike, given the movement in oil and yields, that doesn’t seem right.  Rather, after a more than 6% appreciation over the course of the past 3 weeks, it seems more like a reflexive bounce in the dollar.

Source: tradingeconmomics.com

On the data front today, this morning brings Durable Goods (exp 2.5%, 0.8% ex-Transport) but that is all.  I will go deeper tomorrow, and remember, the FOMC meets this week with the current pricing 33% for a hike, even after the decline in oil prices today.  I remain in the no move camp but will discuss tomorrow.

And that’s more than enough.

Good luck

Adf

Out in the Cold

Posted on by 
So, suddenly, silver and gold
Are both getting bought and not sold
But oil’s still rising
So, what are folks prizing?
Perhaps risk’s now out in the cold

At least, here at home that’s the case
As AI stocks sell off apace
And what of the buck?
It’s basically stuck
While bonds are just standing in place

Arguably, the biggest change in market relations in the past two sessions is that the metals markets have rallied alongside the price of oil.  Since basically the beginning of this conflict, this has been one of the conundrums in markets.  Gold, which has a long history as a safe haven, started selling off (granted from a parabolic move) shortly before the US attacked Iran.  In fact, many ascribed the sell off to the naming of Kevin Warsh as Fed Chair given the view he was the most hawkish of the potential candidates.  But once the fighting started, gold continued to decline, falling some 27% from its initial burst higher at the beginning to its recent low, below $4000/oz.

Source: tradingeconomics.com

Of course, the oil story is quite different as there were far more twists and turns in the price action as the military activity ebbed and flowed and as comments about ceasefires and peace talks were made and denied on a regular basis.  

Source: tradingeconomics.com

But certainly, the impression from the recent price action was that when oil rallied, gold sold off and vice versa.  The ostensible rationale was that higher oil prices would drive inflation higher and interest rates would follow thus reducing the attractiveness of holding gold.  And perhaps that was true, at least to some extent.  However, that was never a satisfying explanation to me.  And, throughout the conflict I have maintained that the medium and long-term views for the metals was quite positive.

However, something seemed to have happened yesterday, and I see no indication of exactly what that was, but we saw oil, gold and silver all rally nicely on the day.  The oil story is clear as the latest issue is the Houthis now blocking Saudi ships from traversing the Bab-al-Mandeb at the southern tip of the Red Sea and reducing flows.  But the metals story remains a mystery.  Granted, this has only been ongoing for a bit more than twenty-four hours, but the magnitude of the metals moves (Au +3.0%, Ag +5.7%) in the past two sessions is pretty substantial for markets that had been doing very little but sliding for months.

Source: tradingeconomics.com

I don’t believe this has been short covering, as in reality, both markets had lost speculative interest given the lack of volatility over the past months, and so short sellers were not involved.  There were far too many other, juicier targets for them.  As to the dollar, which has long had a negative correlation to the precious metals, as it has traded in a 1% range for the past month, as per the below chart, it is hard to ascribe much causality there.

Source: tradingeconomics.com

However, I sense that we are beginning to see some changes to the relationships that have held for the past several months, so we need to be alert for other seeming anomalies.

Turning to the other markets, and continuing with FX, while generically today, it is doing very little as per the below screenshot,

Source: tradingeconomics.com

It is worth discussing the yen, which yesterday traded below (dollar above) the 163 level for the first time since 1986.  Not surprisingly, we heard from FinMin Katayama as follows: “The situation involving the US and Iran has taken a sudden turn for the worse — a deterioration that the world did not foresee — creating a very difficult environment. Our policy remains completely unchanged: We will take appropriate and bold action at any time, should the need arise.”  However, as I have maintained, given the incredibly slow pace of the decline of the currency and given that speed of decline and the volatility in markets has always been an important part of the MOF’s decision matrix regarding intervention, it seems we are not near that step.  One need only compare the JPY to KRW, a currency with low historic volatility, to see that the yen has not been very active.  In fact, the biggest movements have been caused by the MOF in their intervention and comments.

Source: tradingeconomics.com

There has been an increase in market discussion regarding whether the BOJ is going to hike rates again at the end of this month, which is not the market forecast, nor would it be considered the norm given they hiked rates last month.  Most analysts expect the pace of rate hikes to be every six months as they gradually tighten policy.  Of course, they could change that, but again, the yen’s weakness has many fundamental drivers with rates being only one of the issues.  Personally, I don’t see a hike next week, but I guess anything is possible.

Which leaves us with bonds where yields around the world are creeping higher on a regular basis, Treasuries +1bp, European sovereigns +3bps today, and equities.  Yesterday was a solid day in the stock market in the US with tech stocks leading the way higher.  And while Europe is following suit this morning (UK +1.2%, France +0.8%, Spain +1.0%, Germany +0.3%), last night’s Asian markets were less buoyant.  Tokyo (-0.2%), China (-0.5%) and HK (-1.0%) led the charge lower although there were some bright spots, notably Singapore (+1.2%), Taiwan (+1.3%) and Korea (+0.7%).  I guess overall it was a mixed session.  As to US futures this morning, as I type at 8:05 they are pointing lower led by NASDAQ futures (-1.5%).  

Net, some of the relationships with which we had become familiar seem to be breaking up a bit.  I think no matter how you slice the equity market, it is trading at rich levels, so a correction of some sort seems realistic.  I presume that if the tech earnings next week disappoint, we will see a pretty big downdraft.  As to oil, while there is still plenty around, the war drums are beating louder and that is not helping things.  But bonds and the dollar are sitting this move out, at least for now.

There is no data released today and the Fed is in its quiet period, so we remain beholden to headlines from Iran, the White House and other earnings outcomes.  I have a sense of uneasiness about the day, but nothing to put my finger on.

Good luck

Adf

Iran’s Bases, to Stress

Posted on by 
For nine days and nights the US
Has sought, Iran’s bases, to stress
So, ships through the Strait
Will now have to wait
Until Trump has made more progress

The upshot is prices for crude
Have risen a fifth and are skewed
Right now, to go higher
As three key suppliers
All find their production subdued

Oil (-0.7%) started the overnight session more than 2% higher after nine consecutive days of US military strikes on Iranian ports and missile sites amid more threatening rhetoric on both sides.  It certainly seemed like things were rapidly deteriorating.  Iran struck targets in Jordan as well as Kuwait, Qatar and Bahrain as the conflict escalates.  As such, we cannot be surprised that there has been a steady rise in the price of oil during this period.  Since the increase in fighting, WTI prices have risen about 20%. However, a quick look at the chart below shows that things reversed overnight.  

Source: tradingeconomics.com

The proximate cause for this reversal was commentary from Secretary Rubio that Iran has signaled an interest in resuming negotiations.  Additionally, there is another story about other Gulf intermediaries, although unnamed, who are trying to bring proposals toward the same end.  Now, the one thing I know is that both sides in this conflict (and any conflict really) put out reams of propaganda, especially about the conflict.  With that in mind, we have no way of knowing whether negotiations are going to restart or not.  However, it appears market participants are willing to believe that is the case.  

What does this mean for markets?  If we have learned nothing else throughout this conflict, it is that many old relationships are no longer operating the way they had in the past.  Consider gold for a moment.  Prior to this conflict it was considered the ultimate safe haven, the thing you wanted to own if things got really bad and there was an escalating war.  And yet, here we are with gold having fallen some 25% since the US first bombed Iran as you can see below.

Source: tradingeconomics.com

Now, two things about this are that first, that followed a remarkable rally for the previous twelve months, so a correction wasn’t crazy and second, it seems that one of the key drivers in the price decline was selling of gold by sovereigns that needed the money including Russia and Turkey.  After all, that is why those reserves exist, for a rainy day, and it was certainly raining hard.  Nonetheless, that narrative theme, owning gold in case of war, has not played out at all as expected.  

Or we can look at the equity markets, especially tech stocks.  It is hard to look at the chart of the NASDAQ below and conclude that the Iran conflict was anything but beneficial for them.  This, too, runs counter to the general narrative prior to the war that risk assets would suffer during a war.

Source: tradingeconomics.com

Now, if we widen our lens a bit to include other nations’ equity markets, Korea in this case, the story is not so sanguine.  As you can see from the below chart of the KOSPI, it has fallen 29% since it peaked about one month ago.

Source: Bloomberg.com

But is that war related?  Or is that the air coming out of what appears to have been a massive bubble in semiconductor stocks.  Recall, about 40% of the value of the KOSPI is made up of just two companies, SK Hynix and Samsung, and both have mooned because they build semiconductors that are in huge demand due to the AI race around the world.  

Now, one of the few truisms in markets is that every shortage is followed by a glut as the high prices from the shortage lead to massive overinvestment in whatever is lacking.  So, consider this comment from someone I believe is quite reliable.

There will be a comeuppance in tech sector shares, I believe, although I would not dare to guess when.  Semiconductors are historically a cyclical industry, and I don’t think anything has changed about that, except perhaps the amplitude of this cycle.  But there will be a downwave and likely one that wipes out many of the gains seen.

And how has the escalation/de-escalation played out elsewhere?  Well, Chinese shares rallied (+1.5%, HK +2.3%) although that was because the Chinese plunge protection team was in the market buying shares, and they told us so.  Tokyo was closed for Marine Day and otherwise, Friday’s weak US performance was followed by general declines, although far less than Korea’s -4.5%.  As to Europe, there is very little ongoing this morning with virtually no data, no commentary and limited market movement.  Arguably, the only story of note was the official resignation of Kier Starmer as PM and the installation of Andy Burnham, although that has resulted in the FTSE 100 selling off -0.5%, the laggard in Europe.  And given his history, including a lack of experience and stated preferences for far-left policies, I think there could be more to come there.  As to US futures, at this hour (7:30) they are slightly higher across the board, +0.3% or so.

Treasury yields have edged higher by 2bps, and European sovereign yields are higher by 1bp across the board with only UK gilts (+3bps) doing worse.  But it remains difficult to look at 10-year yields and get overly excited about anything.  I grant that there has been some choppiness, but in the big scheme of things, a 20bp range on a 4.5% handle over the course of the past month is not all that shocking, especially given the backdrop of a war and extremely volatile oil prices.

Source: tradingeconomics.com

With oil retreating, the three major metals, gold (+0.4%), silver (+2.4%) and copper (+1.2%) are all firmer this morning.  That relationship has been quite consistent, I will admit.

Finally, the dollar remains uninteresting overall with the DXY little changed although there have been two stories of note.  First, KRW (+0.6%) has rallied more than 5% over the past several weeks as the BOK works to change its status from a restricted currency to one that is freely convertible.  They have just announced plans for that to become the reality starting in January 2027 and I expect that it will help the won going forward.

Source: tradingeconomics.com

While the downside of convertibility is a potential increase in volatility, one need only look at the chart above to see it was already reasonably volatile.  But the positive is that KRW can become a viable asset for international utilization, opening up investment to a much wider community and that is inherently strengthening.

The other story is INR (0.0%) which while little changed this morning, saw another bout of central bank intervention on Friday as you can see on the chart below (the long green spike downward on the second candle from the right).

Source: tradingeconomics.com

Alas, the 1.4% gain was very short-lived and merely wasted some more of the RBI’s reserves.  The rupee is likely to remain under pressure until the Iran conflict ends as higher oil prices are a severe impediment to the Indian economy.  I cannot help but think that we are going to test 100.00 at some point before the end of 2026, although I also imagine we will see some more substantial changes from India going forward to help mitigate the impact.  But other currencies are doing little overall.

On the data front, it is an extremely quiet week with the ECB meeting (no change expected) arguably the highlight on Thursday.

TodayLeading Indicators-0.1%
ThursdayECB Rate Decision2.25% (unchanged)
 Chicago Fed Index0.14
 Initial Claims212K
 Continuing Claims1809K
FridayNew Home Sales610K
 Flash PMI Manufacturing54.5
 Flash PMI Services51.5

Source: tradingeconomics.com

As we are in the quiet period, there will be no Fedspeak until, at least, the FOMC meeting next week.  So, the war remains the story to watch, and who knows how that will go this week.

Good luck

Adf

Risk-Taking Cracks

Posted on by 
The president told us elections
Were filled with some lethal infections
He’s unclassified
More docs to help guide
The courts to start making corrections

Meanwhile in Iran more attacks
Has led to some risk-taking cracks
Thus, oil is higher
While semis look dire
Have we seen the market climax?

A few words on the president’s speech last night as it was widely touted.  In it, he explained he declassified a trove of documents offering proof that there have been many election irregularities over the past six years, naming China as a major player in the process.  These documents are available online for all to see and ostensibly refute (I have not read them, nor am I likely to do so) that our elections have been secure in the US.  In fact, the same government analysts that have declared there to have been no issues are the ones who these documents purport to show were interfering.  My only observation, especially on this topic, is that no matter the proof available, minds have long been made up, and this will not change opinions, at least until arrests are made and trials are held.

Which takes us to more relevant market issues.  Arguably, the poster child for semiconductor stocks is the Korean KOSPI (-6.4%), where just two companies, both major players, Samsung and SK Hynix, represent some 40% of the index value.  As you can see from the below chart, it has been tough sledding for the past month, with that market closing lower by nearly 28% from its highs on June 22nd.

Source: barchart.com

And while that may be extreme, if we look across major markets in Asia, there was some rough times last night almost everywhere.  Tokyo (-4.0%), HK (-1.8%), China (-3.6%) and Taiwan (-6.5%) all had serious dislocations downward.  And, of course, the thread running through them all is the tech exposure.  There has been much discussion of a rotation out of tech and AI stocks into other areas, with financials and energy amongst the beneficiaries, and certainly, last night’s price action supports that thesis.  Interestingly, India (+1.25%) completely bucked that trend, but then, India is perceived to be a major loser from the AI story, so if that is unwinding, I guess it’s no surprise that India benefits.  Elsewhere in the region, things were far less volatile.

As to Europe, despite a glaring dearth of technology companies, equity markets there are also under pressure this morning (DAX -0.9%, CAC -0.9%, IBEX -0.5%, FTSE 100 -0.1%) although that is more likely to be a response to the fact that oil prices have picked back up as the US resumes more aggressive military activities against Iran.  As to US futures, at this hour (6:45), they are all lower led by the NASDAQ (-1.8%) although both the SPX and DJIA are down by -0.7%.

Which takes us to oil.  The black, sticky stuff is higher by 2.0% this morning, although, as you can see from the chart below, it is still hovering right around $80/bbl, the level I described as its new home earlier in the week.  

Source: tradingeconomics.com

The key question here remains just how much of an interruption in economic activity has been caused by the Iran conflict.  Not dissimilar to the election question at the top, it seems the two sides of this argument are dug in and will countenance no discussion that they are misreading the situation.  There are still analysts who discuss tank bottoms and the idea that now that so many reserve inventories have been released, we are quickly approaching a situation where their much mooted $200/bbl is right around the corner.  And yet, despite the tick higher overnight, the market continues to price a relative lack of concern over future supplies.  As always, I go with prices as the best arbiter, but that’s just me.  The massive production increases from the US and Canada, as well as Brazil and Guyana, increases from Venezuela and the workarounds by the Gulf nations to get their oil to market continue to demonstrate that supply is available.  

One wild card that is very difficult to completely understand is China, where things are always opaque, and where their imports have fallen sharply, thus reducing demand.  Was that demand “destroyed” in the sense that it will never return?  Seems unlikely.  Rather, my best guess, and it is just a guess, is that China tapped into their own SPR and has been using that, rather than importing.  Whatever the situation, there appears to be no shortage of oil available.  

One other thing weighing on the price has been Ukraine’s success in attacking Russian refining capacity.  If the Russians cannot refine their oil, they need to sell it as crude rather than products, and that is adding to the inventories available for sale.  It is also part of the explanation as to why products prices and the crack spread remain so high, more oil, less refining.

Looking at precious metals, gold (+0.4%) closed below $4000/oz yesterday for the first time since last November as per the below chart.

Source: tradingeconomics.com

Silver (-0.4%) also remains under pressure and this morning copper (-1.9%) is suffering alongside the precious space.  But perhaps a few words on what gold really represents are in order.

As J.P. Morgan said in 1912, before the Federal Reserve was created, “Gold is money, everything else is credit.” Certainly, the second part of the statement is correct as your bank deposits rely on your bank standing behind them, making you a creditor of your bank.  Federal Reserve Notes are paper obligations of the US government, so again, represent purchasing power, but as we have learned, a decreasing amount of it every day.  Meanwhile, gold has a 5000-year history of being accepted as a thing of inherent value.  Now, the widely accepted definition of money these days is it must have three characteristics; it serves as a medium of exchange, a store of value and a unit of account.  Gold historically has served as the first two, although rarely as a unit of account.  Rather, gold holdings were always converted into whatever the unit of account was at the time.

Which takes us to the present, why does gold continue to represent a part of the financial markets, and over the past several years, an increasingly important part.  I would contend this is all of a piece with the broader changes in the global community, notably the end of the Pax Americana, where the US no longer chooses to (or can) guarantee the peace of the post WWII and Cold War worlds.  Instead, we have seen a constant increase in debt by every nation as governments around the world seek to placate their own citizens and are unable to pay for all the goodies they offer, thus borrow the difference.  

However, the freezing of Russian reserve assets by the West in the wake of the invasion of Ukraine has altered many views about what is safe and represents value, and what is paper and doesn’t represent value and central bankers, charged with maintaining a nation’s wealth, have gone back to gold as the one thing they know will retain value given it is nobody’s liability.  The chart below shows activity in May, which is similar to what has been happening virtually every month, that central banks are relatively price insensitive, buying the stuff as a strategic asset.  And the sellers, were selling because they needed the money!

One last chart to make the point about gold and purchasing power.  The below chart from the FRED database demonstrates just how much purchasing power the dollar has lost since the Fed came into existence; i.e. just how much inflation has destroyed the real value of the dollar.  For reference, that opening level is 1021 compared to today’s 29.9, a 97.1% devaluation in 113 years of the Fed.  It can be argued that the Fed has failed catastrophically in their effort to maintain the value of the dollar.

Ok, quickly elsewhere bond yields have edged lower, with Treasuries (-3bps) leading the way and European sovereigns either unchanged or having slipped by -1bp.  JGBs overnight also slid -2bps, but overall, while there is a lot of discussion about yields, they are not moving very far.

Finally, the dollar is a bit firmer this morning with the pound (-0.3%), Aussie (-0.4%) and euro (-0.1%) all slipping although NOK (+0.2%) is benefitting from oil’s move.  In the EMG bloc, though, there is more trouble with KRW (-0.5%), ZAR (-0.6%) and MXN (-0.3%) representative of more anxiety there.  Ultimately, I still have a hard time getting too bearish the dollar in the current world.

On the data front this morning brings Housing Starts (exp 1.31M) and Building Permits (1.40M) as well as IP (0.2%) and Capacity utilization (76.2%).  Finally, at 10:00 we see Michigan Sentiment (51.0).  There are no Fed speakers scheduled, and they are entering their quiet period, so we won’t hear from them until the meeting on the 29th.  (Perhaps we won’t hear from them anymore after that too!). 

Summing up, Iran and oil are still key drivers, equity market rotation is happening, although given how far it has moved, we may be near the end of that process, and yields have no direction.  Regarding yields, we may have reached the point where the issue is not inflation concerns, per se, but rather the sheer volume of debt that is going to be issued going forward, and the fact that private investors want more yield to be persuaded to buy it.  As to the dollar?  Like I said, I just don’t see the bear case over any longer-term horizon.

Good luck and good weekend

Adf

‘Pocalypse Dreams

Posted on by 
Though many have preached the buck’s dead
The greenback keeps moving ahead
And right now, it seems
Their ‘pocalypse dreams
Are still all confined to their head(s)

But narrative writers ignore
Whatever they said from before
Right now, it’s the buck
That’s causing bad luck
As rate hike bets all start to soar

In a fairly rare set of circumstances, the dollar has drawn the spotlight in markets for the past few sessions.  While it always matters to some extent, it is rarely seen as the cause of many other market movements, just a coincident one.  But right now, I read more about how the strong dollar is driving equity weakness and commodity weakness as more and more bets get placed on the Fed hiking rates aggressively to address inflation by the end of the year.

Using the DXY as proxy, the first chart is the one everybody wants you to focus on, showing the last year and how we have had a clear break above the trading range top of 100.50 and now people are creating targets for just how high it can go.

Source: tradingeconomics.com

And it certainly can go higher, as a quick step back to get some more perspective shows where the dollar has been during the past 5 years. It seems to me I could create a narrative that the dollar has been massively undervalued over the past 18 months, and this move is simply returning it closer to its longer-term fair value.  In fact, just eyeballing, it seems quite reasonable to think the 5yr average of the DXY is somewhere around 103-104 (subsequently confirmed with Grok), still a few percent higher than current levels.  Reversion to the mean anyone?

Source: tradingeconomics.com

All of this, though, begs the question, are rate hikes really on the near-term horizon?  I remain firmly in the camp that is not the case.  Fortunately, someone on my side is super smart, Bob Elliott, former hedge fund manager at Bridgewater.

On the rate hike front, the below CME probability table has barely changed from yesterday as the narrative is strong that rate hikes are coming.  

I cannot really understand why this is suddenly the belief set given the fact that the key driver of recent higher inflation data has been the price of oil, and that price continues to fall, down a further -2.0% this morning.  I understand that gasoline prices have not fallen quite as dramatically, but nothing about the chemistry has changed and I remain highly confident that those prices will be falling as well, catching down to oil.

Source: tradingeconomics.com

So, I remain confused as to why everybody seems to believe the Fed, which despite a new Chair remains the same institution that observed inflation run higher for years during Covid and calling it transitory, has become the reincarnation of the Bundesbank.  In fact, the only rationale I see is that other than Waller, Warsh and Bowman, who were all appointed by Trump, everybody else in that room has TDS and is terrified that things will work out such that by the time the election rolls around, the economy is ticking over nicely with inflation a historical issue.  And frankly, I think most of them do share that affliction.

But other than Powell, and Cook to some extent, none of them have really felt the force of the critiques that come with upsetting President Trump, and frankly he didn’t care about Cook per se, she was just a convenient target to get ousted so he could put his man in there.  And in fairness, Cook is a massive dove, and should agree with Trump on this policy, but I’m sure she doesn’t because…Trump.  I am confident none of them signed up for being in that spotlight.

Apparently, BOA is calling for 3 rate hikes this year in the final four meetings.  I think that’s nuts, but futures are pricing a 2/3 chance of a hike at the end of July, which I also think is nuts.

The recent hiccup in stocks, and the steadier downturn in commodities has been blamed on dollar strength which is being driven by expectations of rate hikes coming soon.  While I like the dollar in the long-term, that is because I believe investment flows into the US will drive it, not financial arbitrage flows.  As things evolve, I expect the market to understand the Fed will not be hiking rates and narratives will need to find a new bogeyman.

Ok, let’s tour markets quickly.  Yesterday’s equity market selloff in the US, following the tech selloff in Asia closed well off the lows and futures this morning are pointing slightly higher.  Asia was mixed overnight with Korea (+3.3%) rebounding sharply although there was weakness in Japan (-0.9%), Taiwan (-2.25%), Indonesia (-3.6%) and the Philippines (-2.2%).  But on the flip side, China (+0.5%), HK (+0.3%) and India (+1.0%) all followed Korea while other regional exchanges had much more limited movement.  It appears that people are trying to figure out what to do for now.

In Europe, Germany (-1.0%) is the laggard after Germany cancelled its plans for a new warship and Rheinmetall, the company set to win biggest there, got crushed.  But elsewhere +/-0.3% or less is the norm with little new information as traders await the next shoe to drop.

In the bond market, interest is low as 10-year Treasury yields continue to track around the 4.5% level and movement has been 1bp or so lower across all of Europe.  Nothing to see here for now.  Just wait until views start to change on rate hikes though!

Metals markets continue to get hammered with gold (-1.7%), silver (-2.9%) and copper (-1.6%) all still falling as the opening narrative about higher rates and a stronger dollar play out.  The thing is, I think the fundamentals remain positive for metals markets as there continues to be central bank demand for gold as well as industrial interest in silver and copper and long-term shortages of supply.  But right now, none of that matters.

Finally, looking beyond the DXY, it is no surprise the euro (-0.35%) and pound (-0.35%) are lower given the DXY’s continued rise, but the yen (-0.1% and at a new low (dollar high) for the move) continues to slide and there is weakness pretty much across the board in both the G10 and EMG blocs.  KRW (-1.0%) is today’s laggard while INR (+0.2%) is the lone currency holding its own.  This continues to be a dollar focused story so when the rates story changes, so will the dollar.

On the data front, we see New Home Sales (exp 640K) and then EIA Oil inventories with yet another large draw expected.  And that’s it for today.  As long as this rate hike narrative remains primary, look for weaker risk appetite and a strong dollar.  But I think it is a short-term phenomenon.

Good luck

Adf

To Sink or To Climb

Posted on by 
While talks about peace seem to be
In limbo, from what I can see
The threats from each side
Are not bona fide
But rather, the talks’ apogee

So, markets are biding their time
Not sure if to sink or to climb
Thus, things that have rallied
Have all dilly-dallied
While laggards change their paradigm

The dichotomy between the increased intensity of the recent threats from both the US and IRGC and the lack of market response to those threats is quite interesting.  After President Trump responded to a question thusly, “I hope we don’t have to do the war, but we may have to give them another big hit,” the IRGC responded in kind, “If the aggression against Iran is repeated, the regional war that was promised will this time go beyond the borders of the region, and you will be dealt crushing blows in places you do not expect, and you will fall into the abyss of defeat and destruction.”

Once again, I am neither in the situation room nor in Vahidi’s cave, so can only observe from a distance, however, my take is elevated threats on both sides indicate a play to the home crowd showing how tough both sides are being in the negotiations as those talks find a conclusion.  Now, it is possible that Vahidi is truly apocalyptic and doesn’t care, but again, it is very difficult to believe that someone would strive to reach the pinnacle of power in a nation just to destroy it.  

But it is more than my amateur psychology that leads me to this belief, it is the fact that the oil market continues to behave as though things are going to be corrected fairly soon.  Once again, I understand markets can be wrong and misprice things, but there just does not appear to be an actual dearth of oil around the world right now.  Certainly, there are some places suffering more than others, but it is not universal.  And if I look at the chart of WTI below, $100/bbl keeps coming back as a “home” of sorts and has since the conflict began.  Thus, my view has become that by July 4th, as an appropriate date for President Trump, Hormuz will have reopened and there will be a deal on the nuclear material.  In the meantime, alternative routes for oil delivery out of the gulf are being developed post haste.  None of this has changed my view that oil’s price is driven by politics, not geology.

Source: tradingeconomics.com

Turning to the FX market, I thought I might take a trip down memory lane regarding the dollar.  You may recall at the beginning of 2025 when the dollar slid about 10% and there were breathless takes about the end of the dollar and how this was unprecedented in such a short period of time.  You can see the move as the farther right trend line in the chart below.

Source: tradingeconomics.com

The other trendline is steeper (i.e. the dollar fell more rapidly) and that happened just two years prior.  Now, the beginning of 2025 was right at President Trump’s inauguration and one of the main narratives at the time was that he would like to see the dollar weaken to enhance the competitiveness of US manufacturers, but pundits, to highlight the unusual nature of the move, clung to the idea that it was the sharpest decline in the dollar at the beginning of the year since sometime in the 1980’s.  Of course, we know, the calendar doesn’t really matter to a market that trades 24/5.  But I raise the issue as despite the ongoing narrative about the dollar’s still impending collapse, the below chart of both INR and IDR shows that, in fact, these are currencies that are having significant problems and have been selling off steadily despite explicit actions by both nations’ central banks to stop the slide.

Source: tradingeconomics.com

Last night, Bank Indonesia surprised markets and raised rates by 50bps to 5.25% to help mitigate the rupiah’s decline while the RBI entered the market and directly intervened after the rupee fell (dollar rose) below 97.00, a record low.  Both currencies have fallen by about 10% this year vs. the dollar.  Again, the dollar is not going anywhere.

Ok, let’s tour the other markets.  Looking at the dollar more broadly, it is little changed to modestly softer after a solid rally over the past two days on the back of rising yields.  In the G10, most everything is within +/-0.2% or less, hardly worth mentioning and USDJPY is around 159, not quite in the danger zone.  In the EMG bloc, aside from INR (+0.4%) responding to the intervention, ZAR (+0.6%) is getting a reprieve on softer oil prices and then otherwise, things here have also barely moved.

As per the first chart, oil (-2.1%) is slipping again showing no impending fears of disaster.  This, in turn, has helped the metals markets (Au +0.2%, Ag +2.8%, Cu +0.7%) all of which have been under pressure while both oil and yields rose.  For now, I suspect this relationship will remain intact, but as I continue to look for oil to ultimately slide back more substantially, the metals should rebound at that time.

In the bond market, yields are lower across the board this morning, backing off the highs seen yesterday.  I think the below Bloomberg screenshot tells the story well.

It is key to know that neither Brazilian nor Mexican markets are open as I type at 7:30.

Finally, turning to the equity markets, as it appears most people are holding their breath for this afternoon’s Nvidia earnings report, the current situation shows that Asian markets overnight followed the US markets lower with Tokyo (-1.2%), HK (-0.6%), Korea (-0.9%) and Australia (-1.3%) leading the way although other regional exchanges were also generally lower.  Arguably, the one exception of note was India (+0.2%) which seemed to benefit from the FX intervention.

In Europe, though, it’s happy days as you can see below from the Bloomberg screenshot.

Only the UK is not keeping pace and that is despite lower-than-expected inflation readings this morning, which I would have thought would be seen as beneficial.  As to US futures, at this hour they are all higher by about 0.4%, I guess in anticipation of those Nvidia earnings.

On the data front, the only thing today is the EIA oil inventory data where another large draw, about 5 million barrels, is expected.  This is, of course, due to the selling of oil from the SPR and the fact that the US is exporting a record 5 million bpd lately elsewhere in the world of refined products.  As well, the FOMC Minutes are released at 2:00 this afternoon, but given that was Powell’s last meeting and Mr Warsh is due to be sworn in on Friday, and the fact that the market is already aware that the discussion was about potential hikes and what to do about rising inflation, I don’t think they will teach us very much.  This morning there are also two more Fed speakers but right now, they are speaking into a void.

My belief continues to be that the conflict will end sooner rather than later, that oil prices will slide accordingly along with Treasury yields and the dollar, while stocks and precious metals will rally.  I haven’t seen anything to change that view as of now, but I keep on looking.

Good luck

Adf

Futures Are Juiced

Posted on by 
At first, it was open then not
As small boats attacked and were shot
But now, all eyes turn
To what we will learn
From Payrolls and if things are hot

While yesterday saw risk reduced
This morning stock futures are juiced
So, as we await
More news from the Strait
We’re hoping Jobs give things a boost

The top story was the minor skirmish in the Strait of Hormuz when three US destroyers transited the Strait and escorted one or two ships trapped in the Persian Gulf out.  Iranian small boats attacked and were sunk, but missiles were fired and it seems they hit a Chinese tanker.  I’m guessing President Xi is none too pleased with that outcome.  In the end though, while oil (-0.2%) traded higher through most of yesterday, as you can see in the chart below, it subsequently faded back from its highest levels of the day and remains well below $100/bbl as I type.

Source: tradingeconomics.com

In the end, the major market themes and correlations continue to play out with oil the primary driver and other markets responding either in sync (the dollar and bond yields) or in opposition (stocks and precious metals).  I imagine we are going to see this continue to play out until such time as an agreement is definitively reached to end all the hostilities there, whether that is by signing an accord or the complete destruction of the IRGC leadership.

Which means, we need to turn elsewhere for our news and happily, we have the payroll report to observe this morning.  Leading into this report, we saw the ADP number on Wednesday print at a better-than-expected 109K, while Initial and Continuing Claims yesterday both printed at lower than forecast numbers, indicating that the labor market is in pretty good shape.  With that in mind, here are this morning’s expectations:

Nonfarm Payrolls62K
Private payrolls75K
Manufacturing Payrolls5K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.2
Participation Rate61.7%
Michigan Sentiment49.5

Source: tradingeconomics.com

Of course, it is key to remember that revisions to this report have been consistently lower over the past several years as per the below chart.  Of course, headlines are everything in today’s world, and while there are many economists and analysts who try to explain the revisions matter and offer a much dimmer view of the labor market, as we all know, the correction to a misleading story published on page 24 never impacts the narrative.

In fact, based on this, and what is apparently a fatally flawed birth/death model at the BLS, and based on the stronger performance in the ADP data as well as the continued low readings from Initial Claims, I anticipate a better than expected number and would not be surprised to see something on the order of 100K.  There is one other thing worth noting that I believe is a major positive, and that is that government payrolls continue to shrink, something that can only help the overall fiscal position in the US.

We can only hope that the recent trend, as seen below, continues.  As I have written in the past, given the remarkable lack of productivity in the government, if these people become baristas at Starbucks, it would add more to economic prosperity for the nation than their current role.

Source: tradingeconomics.com

And with that as preamble, let’s visit the overnight market results in the wake of the little skirmish and President Trump’s comments that the cease fire was still in effect.

Yesterday’s US weakness has been followed around the world, pretty much, with declines in Asia (Japan -0.2%, HK -0.9%, China -0.6%) and the regional exchanges there as well (India -0.7%, Taiwan -0.8%, Australia -1.5%, Indonesia -2.9%) with only Korea (+0.1%) managing to hold its ground during the session.  There is much discussion regarding the upcoming Summit between Presidents Trump and Xi, and the other stories of note are yet another Chinese plan to support domestic consumption.  (It strikes me that these plans are akin to European sanctions on Russia, full of fanfare and producing zero results).

Speaking of Europe, equity markets are weaker there as well with the DAX (-0.7%) leading the way lower after IP was released at a much worse than expected -0.7% in March along with a smaller than forecast trade surplus.  A quick look at the last 3 years of German IP and you can see that Energiewende, their insane energy policy, is effectively deindustrializing the nation, once the heartbeat of Europe.

Source: tradingeconomics.com

As to the rest of the continent, red is today’s color with France (0.7%), Spain (-0.3%) and the UK (-0.1%) all under water.  However, US futures are higher by about 0.5% across the board ahead of NFP.

In the bond market, Treasury yields (-1bp) are reversing part of yesterday’s climb, but are still higher than yesterday morning.  Most of Europe is little changed although UK gilts (-5bps) have performed best after (despite?) local elections where the ruling Labour Party lost half the seats they were defending with the MAGA-like (MUKGA? MEGA?) Reform Party of Nigel Farage and the Green party the big beneficiaries.  Pressure is increasing on PM Starmer to step aside as his favorability plummets, but like most politicians, he is clinging to power with a death grip.  I’m not really sure I understand the mechanics of why gilts would rally, although perhaps as Reform’s power increases, investors believe there will be more fiscal rectitude.

Precious metals, which rallied yesterday again, are continuing higher this morning (Au +0.8%, Ag +2.8%) with Silver back above $80/oz.  I have not mentioned copper (+1.7%) lately, but it is worth noting that the red metal has been powering higher and is approaching the spike high seen in late January, which is the all-time high in the market there.  While there are clearly market internals regarding positioning that are helping the move here, it does portend a positive outlook for the economy given its importance in virtually all manufacturing these days.

Source: tradingeconomics.com

Finally, the dollar is under pressure again this morning with the DXY (-0.1%) back below 98.00, but just barely.  Again, the collapsing dollar narrative makes no sense to me and if I look at the DXY over the last year, 96.50 – 100.00 does a pretty good job of containing the entire range as per below.  If the dollar gets down to that lower level and breaks it convincingly, we can discuss the merits of a short-term vs. long-term view on the dollar’s future.  

Source: tradingeconomics.com

And it is important to note that the long-term future, at least compared to other fiat currencies, remains positive in my view.  Looking at specific movers, both the euro and pound are higher by 0.35% while the yen (+0.1%) remains caught between its negative fundamentals and fears of another round of BOJ intervention.  NOK (+1.3%) is kind of surprising given the lack of impetus in the oil market, but it is no surprise to see ZAR (+0.6%) and CE4 currencies benefit alongside the euro.  LATAM currencies are also doing well although CLP (0.0%) is somewhat surprising given copper’s strong move higher.

And that’s really it today.  We see payrolls in a bit and that should drive the discussion unless there is some other breakthrough in Iran and the ongoing conflict.

Good luck and good weekend

Adf

That’s Nuts

Posted on by 
Seems Jay is a narcissist too
Refusing to leave when he’s through
He claims he won’t try
To stop the new guy
But sticking around is the clue

Meanwhile, in his last vote as Chair
The poll, for his views, didn’t care
As one wanted cuts
And three said that’s nuts
Seems politics is in the air

Starting with the FOMC meeting, as universally expected, they left policy on hold with the Fed funds rate target 3.50% to 3.75%.  However, in an extension of the last meeting’s three dissents, this time there were four, so the vote was 8-4 to leave rates on hold.  However, that seems a bit disingenuous to my eyes, as while Governor Miran wants a 25bp rate cut, as he has said all along, the other three ‘dissents’, regional presidents Hammack, Kashkari and Logan, “did not support inclusion of an easing bias in the statement at this time.”

However, after having read the statement numerous times, I challenge anyone to highlight where they expressed an easing bias.  Here is the exact wording:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

But that is the narrative.  Of course, the fact that there were four dissents led to much tongue wagging by the narrative set with some claiming that Powell had lost the room, while others claimed that this is a warning to Warsh that he will not be able to get his way.  

During Warsh’s nomination hearing, one of the things he discussed in terms of the institutional changes necessary, was that there needed to be less communication by FOMC members as it didn’t do anything to help the process.  I heartily agree with this approach, and perhaps this was all the regional presidents, who are looking ahead and seeing that they will not be able to move markets anymore, certainly a heady feeling I’m sure, trying to stake their turf.

Meanwhile, Chair Powell, the arch traditionalist as we have been told, will be breaking with tradition and remaining on the board in his governor’s role after his chairmanship has ended, although he claims this is to ensure the institution remains protected from politics. (🤣🤣🤣🤣🤣🤣🤣🤣🤣). Whatever.  I am willing to wager that Mr Powell is a consistent dissent as long as he is on the board.

In the end, no policy changes were expected nor forthcoming.  As of the close of yesterday’s session, the Fed funds futures market looks like this:

Source: cmegroup.com

Basically, market participants do not believe the Fed is going to do anything for nearly the next two years.  I hope they are right!

Remember Monday?
Ueda explained…nothing
That’s what the yen heard

Early this morning
Katayama, with a smile,
Hinted at bold action

Monday’s BOJ meeting resulted in no policy changes, as was widely expected, but Ueda-san perfectly illustrated the futility of central bank chiefs trying to guide markets with their words instead of deeds.  Basically, he fumbled around exhibiting no commitment to anything.  And, one look at the chart below shows that traders continued to sell the yen in the wake of the BOJ meeting on the 28th.  However, traders are nothing if not attentive to signals and while it took her a little while, Japanese FinMin Katayama livened things up a bit after Tokyo markets closed as follows [emphasis added]:“We are nearing the point where bold action on exchange rates will be necessary,” and more entertainingly, “I just want to remind everyone: whether you’re traveling or taking a break, don’t put down your smartphone.”

Source: tradingeconomics.com

One of the problems for them is that we are coming to Golden Week, with the first of the holidays already past yesterday.  But Friday through next Wednesday are all Japanese holidays with no markets open.  On the one hand, lack of liquidity can suit the BOJ as any intervention may have a much larger than normal impact.  On the other, holiday activity is very rare.  The term ‘bold action’ is, I believe, step 6 in the 7 steps to intervention and as you can see from the above chart, traders are listening.  The problem Katayama and Ueda have is that the fundamentals remain negative for the yen.  Is it really speculative to respond to weakening Japanese economic data that is worsened by the current energy situation vs. surprisingly strong US economic data where the energy situation is a benefit for the US?

If history is any guide, the dollar is likely to trade below that 160 level for a little while as traders may not want to test things during the Golden Week lack of liquidity, but ultimately, I suspect that dollar can push higher and the BOJ will be in.  Their problem, though, is fundamental, and until the fundamentals change, the yen will be under pressure.

Speaking of fundamentals, let’s take a quick look at GDP figures and ask ourselves about the prospects for currencies in the future.  The below chart from tradingeconomics.com shows annual GDP for the US (grey bars), Germany (blue bars), France (red bars) and Italy (black bars).  See if you can tell the difference!  The US number for Q1 is to be released this morning and expected at 2.3%.

Yesterday’s US data surprised on the high side with strong Durable Goods and Housing data.  This follows stronger than expected Retail Sales data as well, which is the opposite of the situation in Europe.  In fact, a look at the Citi Surprise Index below shows just how surprisingly bad things are in Europe relative to the US.

Again, please explain to me the case for the euro’s strength.

Ok, on to markets.  Bonds were the big tell yesterday as yields in the US rose sharply, up 8bps at their peak, although have since retraced -3bps to 4.40%.

Source: tradgineconomics.com

While that is not the highest yield we have seen since the war began, it is near the upper bound, but I suspect that has more to do with the fact that the US economy, as demonstrated above, is anything but weak right now.  Maybe the dollar should be considered a petrocurrency going forward!  European sovereign yields tracked Treasury yields and this morning, they too are lower by between -2bps and -4bps.  One noteworthy aspect is that ahead of the BOE meeting this morning, 10-year Gilt yields are above 5.0% for the first time since 2008, higher even than during the Liz Truss inspired liability management crisis.

Of course, the other thing weighing on bonds is the oil price (+0.1%) which while it is little changed this morning has climbed steadily and is higher by nearly 12% in the past week.  The entire discussion here is about the naval blockade and whether it will be able to force Iran to capitulate soon.  Certainly, President Trump is doing all he can to apply increased pressure on the Iranians with more secondary sanctions on all the banks that have surreptitiously handled Iranian money in the past.  WTI remains below the spike highs from the first night of the war, but it has been climbing steadily of late.  There is no doubt that there has been material damage done to the oil infrastructure in the Middle East and it will take time to repair once the fighting is done.  As the blockade continues, it appears some of that destruction is being priced in.  However, with the UAE out of OPEC and Venezuela likely to leave as well, there will be a race to see who can pump oil fastest.  I remain convinced that there is a firmer cap than floor over time.

Perhaps the biggest surprise today is that gold (+2.0%) and silver (+3.2%) have rebounded sharply despite oil’s continued rally.  That inverse correlation had been quite strong, although I continue to have a difficult time understanding its underlying cause.  Nonetheless, commodities across the board are in demand today.

In the equity markets, yesterday’s US performance was lackluster ahead of the big earnings releases, two of which were quite strong (GOOG and AMZN) while two were less optimistic (MSFT and META).  Asian markets were broadly negative as rising oil prices continue to weigh on the region with the Nikkei (-1.1%) and Hang Seng (-1.1%) leading the way lower amid mostly poor outcomes throughout the region.  Only Singapore (+1.1%) and New Zealand (+1.0%) managed to buck the trend, after better-than-expected PMI data.   Meanwhile, in Europe the picture is mixed with France (-0.5%) and Spain (-0.3%) softer while Germany (+0.3%) and the UK (+1.0%) are in better shape.  The BOE just announced no policy change but seemed to sound more hawkish as they are going to try to use monetary policy to prevent higher oil prices.  Historically, that has been a catastrophic central bank error, but I will not be surprised if they go down that road.  As to US futures, at this hour (7:15), they are pointing higher across the board by between 0.3% and 0.6%.

Finally, the dollar is softer this morning, with the yen (now +2.0%) leading the way, although that is hardly a dollar story and decidedly limited to the yen.  But, vs. the G10, the greenback is universally softer (EUR +0.3%, GBP +0.35%, AUD +0.6%, CHF +0.7%).  Frankly, this doesn’t make sense to me, but markets will do that to you.  Versus the EMG bloc, the dollar is also softer across the board with KRW (+1.0%) the leader as it follows the yen higher, and the rest of the block showing gains of between 0.25% and 0.5%.  I still stand by my view that the dollar benefits over time, but apparently not today.

And while I fear I have gone on too long already today, there is a lot of data coming out as follows: Personal Income (exp 0.3%), Personal Spending (0.9%), Q1 GDP (2.3%), PCE (0.7%, 3.5% Y/Y) and Core PCE (0.3%, 3.2% Y/Y), Initial Claims (215K), Continuing Claims (1820K) and then later this morning, Chicago PMI (53.0) and Leading Indicators (-0.1%).  With the Fed ostensibly showing a hawkish bias, all eyes will be on the Core PCE data.  But really, my take is the combination of position liquidation in the yen and the twists and turns in the war are going to be today’s drivers.  While you cannot catch a falling knife, I do see this dollar downtick as quite temporary.

Good luck

Adf

What They Most Fear

Posted on by 
For many, it seems very clear
That war is not what they most fear
But rather, for them
They need to condemn
Each Trumpian outcome and sneer

So last night, ere clocks all struck eight
The president said he would wait
Another two weeks
As peace that he seeks
Seemed closer than it had to date

As I’m just a poet in a room in New Jersey, I don’t have any intel on the situation in Iran, but boy oh boy, the number of takes out there is remarkable.  On one side are the naysayers claiming Trump chickened out again, that Iran won this war and the US is forever seen as a loser.  On the other side is Trump played it brilliantly, raising the stakes to a level where even the IRGC leadership decided that the destruction of their nation wasn’t worth the battle.

My observation is that whatever the actual rationale, the world is better off with the fighting stopped.  With that in mind, it is hard to look at the results of the war, where Iran saw both its Navy and Air Force obliterated, its senior leadership decimated and a large proportion of its missile launchers destroyed and feel like they won.  I think this would be called a Pyrrhic Victory.

But from our perspective here, the questions of note are how did markets respond?  You will not be surprised that much of the trauma that markets have felt over the past month has already been reversed.  Let’s start with oil, as that has been the keystone for all markets.  As per the below chart, it has plunged -16% overnight, back well below $100/bbl.

Source: tradingeconomics.com

While this is a picture of WTI, Brent (-14%) also tumbled as did the markets in gasoline (-10.0%) and all other products.  NatGas (-5.3%) fell to its lowest level since October 2024, as per the below chart.

Source: tradingeconomics.com

In Europe, TTF Gas (-14.7%) also tumbled but it remains far above its prewar levels as per the below.

Source: tradingeconomics.com

All told, as would be expected, energy prices have fallen sharply.  Of course, questions have rightly been raised as to whether this will remain the case because, remember, the cease fire is slated for only 2 weeks.  What happens if there is no agreement and the US resumes their attacks?  As well, the status of the Strait of Hormuz remains somewhat cloudy with mixed information about safe passage.  It appears that many ships in there may be able to exit, but will any go back in with the risk of getting stuck again?  My point is this may not be over, but for now, everybody is giddy.

In the metals markets, the rally has been similarly impressive with both gold (+1.6%) and silver (+5.4%) continuing their rebound from the March 23rd spike lows as per the chart below of gold.

Source: tradingeconomics.com

In fact, gold has retraced 16% from that low print and silver 26%.  But here, too, it will all depend on how the Iran situation evolves going forward.  Arguably, if the fighting starts again and oil rises, precious metals will head lower while if a long-lasting peace is secured, I would look for metals to head higher again.

In the equity markets, the all-clear has been sounded, as you would have expected.  The screenshot below from tradingeconomcs.com of futures markets shows that the only perceived loser from this deal is Russia.  Otherwise, every market is substantially higher (Toronto’s TSX is closed in the overnight session) or was so last night in Asia.

The thing we are likely to hear about a lot today is that the S&P 500 has traded back above its 50-day moving average, as per the below chart.  For the technicians, this will be seen as a key outcome and expect to hear much more about a test, and potential break, of the all-time highs of 7000 made back in January.

Source: tradingeconmomics.com

Moving on to bonds, Treasury yields are the big disappointment here, having only declined -5bps heading into the NY open, but as the Bloomberg screenshot shows, European sovereign yields have virtually collapsed, as have yields throughout Asia, although remain higher than a month ago.

It appears that all the fears about rising inflation have been virtually extinguished overnight!

Finally, the dollar has also reversed its recent gains, falling sharply across the board.  Using the DXY (-1.1%) as a proxy, it does seem to measure the average movement, but there have been some real outliers.  For example, ZAR (+2.3%) has benefitted from the combination of much higher precious metals prices and much lower energy prices as South Africa is a net energy importer.  SEK (+2.2%) has also exploded higher, although that looks more like a reversal of yesterday’s sharp decline, than any other news.  But, broadly speaking, currency gains on the order of 1% or more are the norm this morning.  However, as we have seen across almost all markets, this movement merely returns us to the middle of the previous trading range, it is not a signal for the dollar’s collapse.  Just look at the chart below of the DXY.

Source: tradingeconomics.com

So, across all markets, we have witnessed a major reversal of the war induced trauma.  It is not completely unwound nor are we confident it will exist in two weeks if no deal is reached.  But that’s the scoop for now.

While it certainly won’t have an impact today, it is worth looking at the Fed funds futures market to see how it has behaved.  While expectations for the meeting on April 29th remain for no change, as you can see from the aggregate probability table created by the CME, cuts are back in the thought process, although not until the end of this year.

On the data front, we receive EIA oil inventory data this morning and then the FOMC Minutes are released at 2:00 this afternoon, but I cannot imagine anyone paying close attention to those given the changing situation in the Middle East and its impact on markets, especially oil and the prospects for future inflation.

To recap, we all ought to be happy that the Iran war has stopped for now with prospects for a longer peace.  You can love Trump or you can hate Trump, but if he succeeds in eliminating the terror networks that Iran has long sponsored, that is a gigantic net benefit for the entire world.  Nobody has any idea how things will ultimately resolve, but certainly, as we wake up this morning, prospects for the future look better than they did twenty-four hours ago.  Of course, my advice had been to play it close to the vest because of unexpected outcomes like this.  Nobody has any edge trading markets like this, not even the algos.  Perhaps the one thing that will change is trading volumes will start to pick up and increase overall liquidity, and that would be a net positive.

Good luck

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Feeling the Blues

Posted on by 
Last night we saw two things of note
The first was exciting, not rote
The Artemis II
Launched higher and flew
Just like Jackie Gleason would quote

The other was Trump’s broad address
Regarding the Middle East mess
He said that the war
Was closing the door
So, Mullahs have no nuke access

For markets, though, this latter news
Was clearly at odds with their views
So, rallies we’ve seen
Have all been wiped clean
And bulls are now feeling the blues

I will start with the highlight of the evening, the successful Artemis II space launch, where NASA’s latest mission to send four astronauts to orbit the moon and come home began.  As a child of the Sixties, I well remember being at Camp Mah-Kee-Nac, in Lenox Mass, with the entire camp gathered around a small black and white TV to watch Neil Armstrong step on the moon.  A remarkable time and achievement that portends a great future.

The other story, though, was less optimistic, at least for markets in the short term.  The President’s address did not signal an end was near, at least not to the market’s collective ear.  Instead, Mr Trump made a series of statements and claims, many of which we have heard before, but here they were all gathered in one place.

  • *TRUMP: IRAN’S NAVY IS GONE, AIR FORCE IN RUINS
  • *TRUMP: MOST OF IRAN’S LEADERS ARE DEAD
  • *TRUMP: IRAN’S ABILITY TO LAUNCH MISSILES AND DRONES CURTAILED
  • *TRUMP: DON’T NEED OIL FROM MIDDLE EAST
  • *TRUMP: WILL NEVER LET IRAN HAVE NUCLEAR WEAPON
  • *TRUMP: CORE STRATEGIC OBJECTIVES IN IRAN NEARING COMPLETION
  • *TRUMP: THESE STRATEGIC OBJECTIVES NEARING COMPLETION
  • *TRUMP: MUST COMPLETE MISSION IN IRAN
  • *TRUMP: WE WILL FINISH THE JOB VERY FAST
  • *TRUMP: GETTING VERY CLOSE TO FINISHING JOB IN IRAN
  • *TRUMP: WE ARE ON TRACK TO COMPLETE ALL MILITARY OBJECTIVES
  • *TRUMP: WE WILL NOT LET MID EAST ALLIES GET HURT OR FAIL
  • *TRUMP: WILL HIT IRAN EXTREMELY HARD OVER NEXT 2-3 WEEKS
  • *TRUMP: WILL BRING IRAN BACK TO STONE AGE WHERE THEY BELONG
  • *TRUMP: NEW LEADERS IN IRAN LESS RADICAL, MORE REASONABLE
  • *TRUMP: IF THERE IS NO DEAL, WILL HIT IRAN’S ELECTRIC PLANTS
  • *TRUMP: WE HAVE NOT HIT THEIR OIL EVEN THOUGH EASIEST TARGET
  • *TRUMP: WILL HIT IRAN WITH MISSILES IF WE SEE THEM MAKE A MOVE
  • *TRUMP: WE HAVE ALL THE CARDS THEY HAVE NONE
  • *TRUMP: ON THE CUSP OF ENDING IRAN’S THREAT TO AMERICA

He also explained that the rising gasoline prices were a result of Iranian attacks on tankers but that the US was well supplied and would weather any storm in the short run with no problems.  However, this is not what markets were looking for, that is very clear.  So, the past two days of rainbows and unicorns are a distant memory this morning.  A look at the chart of the S&P 500 below shows the end of last week’s concerns grew into optimism right up until 9:00pm EDT last night when Mr Trump took to the podium.

Source: tradingeconomics.com

While futures are only lower by -1.0% at this hour (6:30), the response in both Asia and Europe was quite negative overall.  For instance, in Asia, Tokyo (-2.4%) led the way lower although weakness was virtually universal (China -1.0%, HK -0.7%, Australia -1.1%, Taiwan -1.8%) while the biggest loser was Korea (-4.5%) which has been in the process of unwinding what appears to have been a massive bubble there as per the below chart.

Source: google.com

European bourses are also lower across the board with the UK (-0.1%) the clear winner (least bad?), while the continental exchanges (Germany -1.85%, Spain -1.3%, Italy -1.2% and France -0.9%) are all faring poorly this morning.  It is very clear that the idea the war would be ending soon has been pushed back.  I have to say, that given the ongoing buildup in military assets in the Gulf region by the US, that always struck me as an odd belief.  I guess we will need to wait a few more days/weeks to see.

In the bond market, too, price action from the beginning of the week has reversed.  Treasury yields have rebounded 5bps this morning, although remain well below the recent peak of late last week, and you can see how Europe and Asia behaved in the Bloomberg screen shot below.

I expect that we will continue to unwind the price action from the early part of this week as the situation appears far closer to the market beliefs of last Friday than yesterday.

Turning to commodities, oil (+7.8%) has rebounded sharply as you can see in the below chart, actually trading now at its highest level since the initial spike move the evening the attacks began.

Source: tradingeconomics.com

Brent crude rose a similar amount and interestingly, the spread between Brent and WTI has collapsed to just $0.52, it’s narrowest level since May 2022.  That leads me to believe the market is pricing in a great deal more interest in US exports as oil supply will be curtailed for a while going forward.  In keeping with the unwinding theme, precious metals were sold off aggressively with gold (-3.4%) and silver (-5.5%) retracing much of their recent gains.  Both are still well above the spike lows seen two weeks ago, but I imagine that there is further to decline based on the current vibe.

Finally, the dollar has rebounded sharply against all comers this morning with the DXY (+0.6%) back above the 100 level as the euro (-0.7%) probes 1.15 again and the yen (-0.5%) trades back toward 160.00.  Nothing in the G10 has been spared, although CAD (-0.4%) and NOK (-0.4%) are the best performers as clearly oil’s rise is helping them both.  In the EMG bloc, it should be no surprise that ZAR (-1.1%) is the laggard given the move in gold and platinum (-3.4%).  But even CNY (-0.4%) has seen substantial selling while INR (-0.5%) and KRW (-0.2%) also continue to slide.  The CE4 are all weaker by -0.7% and CLP (-0.9%) is feeling the weight of copper’s decline.  The only outlier really, today, is Brazil (0.0%) which is unchanged as remember, they are a major oil producer and far away from the current problems.

On the data front, this morning brings Initial (exp 212K) and Continuing (1840K) Claims as well as the Trade Balance (-$59.2B), none of which seem likely to matter to markets.  Yesterday saw generally stronger than expected data with ISM Manufacturing ticking up to 52.7 while Retail Sales surprised a tick higher as well at 0.6%, 0.5% ex autos.  ADP Employment was also modestly better than expected.  As such, it continues to be difficult to call for a significantly weaker US economy, at least based on the data we continue to see.  However, the Atlanta Fed’s GDPNow reading was revised to 1.9% for Q1 yesterday, down a tick from the previous estimate.  Still, that is not a collapse.

Pulling it all together, the war in Iran is going to continue for at least 2-3 more weeks and there is no clarity on whether the US is going to attempt to take Kharg Island.  It still seems to be part of the discussion, but as I wrote yesterday, strategic ambiguity is a key part of President Trump’s method.  In the meantime, my take is we are much more likely to behave like the end of last week going forward, than the beginning of this week.  That means risk will be reduced and the dollar will benefit.

Good luck

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