Tag Archives: #gold

In Tears

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As I wrote yesterday, “at least” did a lot of work in the Treasury announcement as it opened the door for significantly larger purchases of longer dated bonds, enough to truly have a market impact.  Most of the initial analysis on the announcement focused on the extra $2 billion to be purchased in each operation.  But what if, instead of $2 billion, they purchase $50 billion each time?  Suddenly, that is a significant reduction in long bonds outstanding, and the program will have a much greater price impact.  Which leads to this Bloomberg headline and story, Bessent Says He’s Ready to Expand Treasury Buybacks.  I believe it would be a mistake to dismiss the Treasury’s ability to achieve their goals as, after all, they do make the rules.

The upshot is that after a one-day rally in bonds, yields retraced those early declines (see chart below) and stocks fell sharply yesterday, clearly not the desired outcome.  

Source: tradingeconomics.com

Much hay has been made regarding the total US debt surpassing $40 trillion the other day, although I see that as merely a reaction to a big round number, not dissimilar to a trading situation in, for example USDJPY, where the market is focused on 160.00 and a break is seen as significant from a trading perspective, but less so from a policy perspective.  I am not seeking to downplay the problems that exist in the US regarding fiscal policy.  I am, after all, a hard money guy (it’s why I am working on USDi, the only inflation tracking cryptocurrency) and a proponent of a much smaller government with much reduced spending.  And that is what is necessary to address the problems at the root.  But that takes Congress and, alas, seems highly unlikely anytime soon.  Personally, I will not bet against Bessent, but that seems to be a popular idea right now.  It is certainly a popular thesis on X.

This saga is only beginning, and I expect that it will be a key topic of conversation for a while, at least until we see a substantial move in yields from the current level.  It is interesting to note, however, the difference in attitude from Chairman Warsh, who explained the market was doing the Fed’s job for them by pushing up yields thus tightening policy, and Secretary Bessent who continues to say that yields don’t represent fundamentals.  Of course, both sides are talking their respective books, so say what they need to say.  Part of me thinks they have dinner together and laugh over how they are confusing markets.

Let’s start our market descriptions with gold (+1.7%) this morning as it is extending its rally of the past two weeks.  A look at the chart below shows the trend line lower from the peak in late January (the date Kevin Warsh was named Fed Chair) was broken on August 6th and has been driving higher since, up 8% since that day and more than 15% since the low print on June 30th.

Source: tradingeconomics.com

Silver (+2.3%) and copper (+2.1%) are also rallying here as there is a growing skepticism about financial assets and it appears investors are looking for things that are not reliant on government promises to retain value.  While I rarely discuss Bitcoin, that has rallied nearly 25% this week on largely the same story, although it has also benefitted from additional Treasury regulations being promulgated as part of the GENIUS Act and hopes for the CLARITY Act to pass soon as well.  Interestingly, BTC bottomed on June 30th as well.

Source: tradingeconomics.com

As to oil prices (+0.35%) they are creeping higher this morning as the ongoing Iran situation remains unresolved with no end in sight.  A key piece of news, that hasn’t gotten that much attention, is that the UAE has completely shut off all trade with Iran after two of its ships were attacked in the Gulf.  This matters hugely for Iran as the UAE was a significant trade conduit in things like machinery and equipment, as well as food and other necessities.  This will help the US sanctions regime significantly.  In fact, yesterday, Iranian Minister Ghalibaf, in a meeting in Baghdad explained that if the economy suffers further, that will be a major problem for the military and the nation.  Maybe this is going to end sooner than later after all.

If we turn to the bond market, while Wednesday saw a sharp decline in yields, yesterday saw that reverse, as per the chart at the top of the note and this morning, yields are unchanged from yesterday’s close.  That is true in the US and across every European market.  It feels like investors are waiting for the next piece of information.  The exception here is JGBs (+4bps) where yields rose after inflation data was released at 1.9% (1.8% core) as expected, but trending higher again as government efforts to mitigate the impact of higher energy prices are starting to falter.  As you can see in the chart below, though, the inflation regime in Japan has changed dramatically from the previous decades.

Source: tradingeconomics.com

In the stock markets, yesterday’s US performance was pretty crummy (a technical term), with declines on the order of -1% across all major indices.  But that did not follow through so much in Asia (China +0.6%, HK +1.2%, Korea +0.9%, Taiwan +0.65%) although the Nikkei (-0.3%) did lag.  Nor did it have an impact in Europe, although other than Spain (+0.7%), the other major markets are higher by about 0.1% only.  And US futures this morning are in the green, +0.5% across the board, at this hour (7:30).  A key part of yesterday’s US declines was a disappointing earnings report for Walmart, where although they beat earnings, their forecasts going forward were softer.

Finally, the dollar is under further pressure this morning, falling against almost every major counterpart with some substantial declines.  For instance, commodity currencies (AUD, NZD, NOK, ZAR) are all firmer by about +0.7% this morning following their local commodity strengths higher, although CLP (-0.1%) is an outlier here.  But we are also seeing strength in the EUR (+0.25%), GBP (+0.2%), JPY (+0.3%) and CAD (+0.35%) from the G10 bloc and similar gains from EMG currencies (MXN +0.3%, PLN (+0.4%), HUF (+0.6%) and the biggest gainer, KRW (+0.7%) which continues to benefit from capital inflows as well as repatriation by SK Hynix after the US IPO.  If we use the DXY (-0.25%) as our proxy the recent downtrend also started at the end of June as per the below chart.

Source: tradingeconomics.com

Two things here.  First, despite this decline, the dollar remains right in the middle of its longer-term range and until we break below 96.50 on the DXY, I do not believe the day-to-day movement indicates much.  Second, though, and more importantly, the FX markets are typically the release valve for pressures in a given economy, as no government can control capital flows, the exchange rate and monetary policy simultaneously, as pointed out by Robert Mundell in 1960 and 1963 (the so-called impossible trinity).  In this case, if the US continues to struggle with the debt situation, or else decides to head down the YCC road for real (meaning the Fed caps yields and buys whatever bonds necessary to do so), the dollar will suffer dramatically and likely boost inflation.  But we are a long way from that situation I believe, and it will take time to get there, if that is the direction.

On the data front, I would be remiss if I didn’t mention the Philly Fed’s blowout number of 47.4 yesterday with the manufacturing sector the biggest beneficiary.  This morning all we see is Flash PMI data (exp 53.9 Mfg, 54.0 Services) although with both the Philly and Empire State readings so strong, I wouldn’t be surprised to see a much stronger read here as well.

And that’s it for the week.  Certainly, it was more exciting than anticipated given the Treasury/Bessent announcement, but until we see just how many bonds they buy in a few weeks, we really don’t know how things will play out.  In the meantime, earnings have continued to be strong generally, and I see no reason for risk assets to decline for now.  The dollar, however, is starting to look a little shaky, and if we see a bit more of a fall, I might get concerned.

Good luck and good weekend

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Just a Ruse

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Said Scottie, since Congress keeps spending
And frankly, it seems never-ending
We’re going to buy
More bonds as we try
To stop yields from keeping ascending

The market response to this news
Was instant, as it did infuse
A bid to all risk
With movement quite brisk
Though skeptics claim it’s just a ruse

Boy, I leave you alone for one day and look what happens!

At 8:33 yesterday morning, the following announcement hit the US Treasury website [emphasis added]:

Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9

WASHINGTON, D.C. —The U.S. Department of the Treasury is increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector).  The current maximum size of $2 billion per operation will be at least $4 billion per operation. 

This change is effective September 9, 2026 and will be in effect for the remainder of this refunding quarter (through November 4, 2026).  Treasury will provide more information about future buyback sizes at the next Quarterly Refunding, scheduled for November 4, 2026. 

This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.

An updated tentative Treasury buyback schedule will be released at a later date.

First, here is a picture of the market reaction in the DXY and gold, the two things that responded most aggressively.  (I inverted the scale for the DXY, so it fell on the news.)

Source: tradingeconomics.com

And here is the bond market response with that gap occurring between 8:30 and 8:35.

Source: tradingeconomics.com

Obviously, this was a big deal, right?  Well, that’s a good question and one worth discussing.  As a baseline, the size of the current program that they are doubling is a maximum of $2 billion per operation, which means that the new limit is at least $4 billion per operation.  Now, while an extra $2 billion of demand is nothing to sneeze at, we must consider how much of that debt is currently outstanding.  According to Claude, which took the data from the Treasury website, there is about $3.7 trillion of debt that currently has between 10 and 30 years left to maturity, held by private investors.  When adding the intragovernmental holdings and the Fed, that number appears to be about $5.4 trillion.  

There are seven more of these operations planned before the November deadline, so they will be purchasing an additional $14 billion of notional value, probably paying about $8 billion in cash given it all has much lower coupons so trades at a steep discount to par (and funding it by issuing T-bills).  And if we do the math, that means they will have absorbed (assuming the smaller outstanding of privately held debt) 0.38% of the notional.  

The caveat here is the ‘at least’.  Arguably they could buy any amount and stay within the confines of the announcement and that would certainly have a much larger impact.  But everything I have read is focused on the extra $2 billion.

With that in mind, and while I’m just an FX poet, my long experience in markets tells me that removing 38 basis points worth of some security or asset from a market is unlikely to have a major long-term impact on the supply/demand balance given there is real elasticity here.

So, while yesterday’s moves were certainly impressive (gold +4.3%! as an example) I might contend that the movement was based on the narrative rather than the actual market impact.  But the one thing we have learned of late is that the narrative matters.

Many in the market have immediately claimed that this is an act of desperation as Secretary Bessent seeks to drive longer end yields lower.  Others have claimed that this is the beginning of Yield Curve Control (YCC), although the fact they are issuing more T-bills to buy the bonds makes it a lot more like Operation Twist, when the Fed did the same thing, sold the front of the curve to buy the back, thus maintaining the same size balance sheet but removing duration from the market.  If this were YCC, they would need to print more money to buy those bonds, and the Treasury cannot do that, only the Fed can and they are not part of the process.

Here’s what I know, Scott Bessent is a very smart guy, and somebody who understands markets better than any Treasury Secretary since Bob Rubin and maybe better, certainly better than you or I.  I also know he has been dealt a very bad hand; 2,3,5,7,8, off-suit in poker terms, so doesn’t have many good options.  And I know that he has zero control over spending amounts which falls to Congress and the President, with him merely implementing the spending, not deciding how much to spend.  I don’t know if this will be effective beyond yesterday’s market movement, but if he is able to get the narrative moving in the right direction, (i.e. there is a reduction in duration available to the market so prices there should rise and yields concomitantly fall), it may offer some more breathing room.  The fact that he is using the tools available to manage the government’s balance sheet is a huge positive.  I can only say, good luck Scott.

While there are probably other stories of some import, this was the one that got the most engagement, and I think the one with the potential longest-term impacts on things.  So, let’s see how other markets responded.  It was interesting to me that the equity markets did not wholly embrace this action, although there was an initial rally, much of it faded by the end of the session with very modest gains at the end of the day.  Asian markets, however, fared very well with Tokyo (+1.4%), China (+0.1%), HK (+0.8%) and Korea (+5.9%!) all rallying and taking almost the entire region higher.  I think it is worth showing a chart of Korea’s KOSPI to demonstrate the increase in volatility we have seen on a regular basis there since the Iran war began.  Just look at the expansion of the daily ranges, especially since May, compared to the size of those bars for the prior six months.  This is another indication that the way things were is no longer the way they are.

Source: finance.yahoo.com

In Europe, though, equity price action is desultory this morning, with modest declines of about -0.4% or so across all major markets with Spain (-0.1%) the outlier.  As to US futures, at this hour (7:15), they are edging lower led by the NASDAQ (-0.5).

In the bond market this morning, yesterday’s euphoria is being tempered with Treasury yields backing up 3bps.  European sovereigns, though, are little changed to +1bp, although they didn’t respond to the Treasury market in any real sense yesterday.  That makes sense since Bessent’s announcement was highly US specific.  As to JGB yields, they did slip -4bps overnight, and there are many who draw a direct link to Treasuries and USDJPY, with official efforts by the US to cap both of those things.

Speaking of the yen (-0.3%), it was one of the largest beneficiaries of the announcement, rallying nearly 1% as you can see in the chart below.  However, this morning it is slipping a bit, and frankly, the post-intervention pattern has not been altered by yesterday’s move.

Source: tradingeconomics.com

In fact, most currencies rallied yesterday on the news but this morning, the picture is more mixed as we see both gainers (GBP +0.2%, EUR +0.15%, NOK +0.15%) and laggards (INR -0.25%, SEK -0.3%, ZAR -0.35%).  In essence, while yesterday’s moves were large and broadly dollar lower, this morning there is more nuance.  As it happens, the DXY (-0.1%) is edging lower today, but remains directly in the middle of that long-erm 96.50 / 100.50 range at 98.71.

Source: tradingeconomics.com

Finally, commodity prices show oil (+3.1%) continuing its recent rebound and back to its highest level in about a month.  But if I look at the chart below, it remains in the middle of its much wider range as well, if anything somewhat closer to the bottom than the top.  At this point, it is impossible to know what is happening in the Gulf war and frankly, I think market participants who don’t trade oil directly, have moved on to other drivers.  

Source: tradingeconomics.com

As to the metals markets, after yesterday’s remarkable rallies, it ought not be that surprising that they are consolidating this morning (Au -0.7%, Ag -0.3%. Cu -1.1%).  There are some analysts who believe that copper is getting set to roll over and decline in price as the narrative about shortages of supply for ever increasing data center and power production demand grow long in the tooth and may already be priced in.

On the data front, yesterday’s Minutes showed that there were non-voters who also would have been inclined to raise interest rates back in July, but we know that we have seen softer data since that meeting, so it is unclear if that is still the case.  As well, EIA oil inventories rose again, >4 million barrels, so tank bottoms are still covered!  This morning we get the weekly Initial (exp 210K) and Continuing (1790K) Claims as well as Philly Fed (25.0) and Leading Indicators (+0.1%).  There are still no Fed speakers, and I continue to believe that Chairman Warsh’s speech next week is the most important thing on the horizon.

Until then, I imagine yesterday’s surprise announcement is the biggest news we will get for a while and that we are likely to see markets return to their somnolence.  But there is a new narrative forming, the US is going to ignore inflation and push rates lower, which if it is followed implies higher commodity and equity prices and a falling dollar.

Good luck

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Investors Are Troth

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The doom mongers are up in arms
As though they raise many alarms
Investors don’t care
And add risk with flair
Ignoring the much-mooted harms

So, war is no longer concerning
And though hyperscalers are burning
Through all of their cash
Amid much backlash
Investors, their shares, are still yearning

And what about data and growth?
Investors care naught about both
Concerns about yen?
Not that trope again!
To stocks most investors are troth

As I read through my X feeds in the morning, as well as the WSJ and Bloomberg, the overriding theme appears to be the end is nigh.  Whether discussing Iran and the oil price and the future of the Strait of Hormuz, AI and the bubble or the potential for massive job losses and the creation of Skynet, the economic data and the incipient recession coming because people cannot afford to continue their consumption habits, or the idea that we are on the precipice of a Treasury bond market collapse because the Japanese yen is weak, the dominant theme is disaster is around the corner.  It is really tiresome, I have to say.

Now, you might say that I simply follow the wrong people, and that may be true, but my feed hasn’t changed, and I never look at the algorithm’s selections for me, I only look at my followings.  So, I cannot tell if people have become that much more bearish on the overall situation, or if they simply write these things because they believe they will get more engagement.  I fear it is the latter, but that simply devalues anything useful they may have to say.  Mostly, it’s frustrating to try to get an unbiased sense of what is happening in the world these days.  After all, while I understand that governments put out propaganda constantly, I thought the idea behind X and Substack was you could avoid that.  I think I am going to go back to reading books!

So, as we await this morning’s payroll report, I’ll try to touch on the key issues I believe matter.  Starting with the yen, which continues to garner attention, or more accurately, the joint intervention garners attention, I first have to laugh at the following Bloomberg headline, “Yen Surrenders Nearly Half Its Gains From US-Japan Intervention”.  This was written by Mia Glass, and I don’t know anything about her except her grasp of arithmetic is tenuous.  Here is the chart of USDJPY and while the yen has been weakening steadily since the intervention last week, half?  Even taking the spike low into account, we are nowhere near a 50% retracement and on a closing basis, it is a ridiculous claim.

Source: tradingeconomics.com

There continues to be much fodder made about Secretary Bessent trying to prevent a meltdown in the Treasury market but Occam’s Razor tells me that it is far more likely that a too-weak yen is bad for Japan because of its inflationary impact and the US because it impedes US exports so joint intervention made sense.  And as I have maintained all along, unless underlying fiscal and monetary policies change, the yen is going to continue to weaken.

Turning to Hormuz, the press continues to write with glee about President Trump’s miscalculation and the US losing the war and whether Iran and Oman are going to come to some agreement on the Strait, but oil prices, while they rallied a bit yesterday, are lower this morning by -0.6% and -9.25% in the past week.  Looking at the chart below, despite all the discussion of inventory depletion, which are real, but obviously not as important to the price as many previously believed, the trend remains downward and we are well below the trend.  Frankly, at $75/bbl, it appears the world works fairly well.

Source: tradingeconomics.com

Look, I would rather pay less for my diesel, and I know you would all like to pay less for your gasoline, but here’s a 20-year history of the RBOB (NYMEX gasoline) contract.  We are hardly in unprecedented territory having spent a lot of time around here from 2011 through 2015 as well as the beginning of the Russia/Ukraine war.

I have no idea how things will end up in Iran, nor does any other commentator.  I know I am happier if Iran does not have a nuclear weapon and ballistic missiles that can reach Europe, let alone the US.  But I would say the market has almost lost interest in the war.

As to the hyperscalers and the AI bubble, in truth, it seems much of the animosity has been turned toward SpaceX as everyone loves to hate Elon almost as much as they love to hate Trump.  But it appears by many metrics that equity markets continue to benefit across the board from strong earnings results, with ~85% of companies (depending on your source) beating estimates which is well above the average of 77%.  So, the economy continues to grow pretty strongly, and companies continue to make money, and investors continue to want to buy shares.  The hyperscalers aren’t leading the pack anymore, but they have not collapsed either.  There are many who continue to explain this cannot go on forever and there will be a reckoning, and they may well be correct, but in this case, being early and being wrong are the same thing.

Ok, enough of that.  Let’s see if anything noteworthy has happened overnight.  The truth is, not especially.  Asian shares were mixed with Chinese shares doing well after solid trade data, but the rest of the region drifted lower.  European shares are firmer across the board after broadly positive data (German IP and Trade, French Trade) although the French Unemployment Rate ticked higher to 8.3%.  And US futures are higher this morning as well ahead of the NFP report.  Despite the doom and gloom, equity markets are doing fine.

Bond markets have barely moved overnight, although we did see Treasury yields back up 5bps yesterday.  That appears to have been on the back of the oil price rise, although as I look at probabilities of central bank rate hikes, there is a growing belief that the Fed, ECB and BOJ are all going to raise rates next month as hiking rates into an energy shock seems to be their MO.

Source: rateprobability.com

We discussed oil but gold (+2.0%) and silver (+4.1%) are the real story in commodities as both are extending their recent rallies from the consolidation lows.  For instance, silver is higher by 11% this week and $9/oz since July 17th.

Source: tradingeconomics.com

Finally, the dollar, despite all the anxiety about the yen, remains quiet overall.  The DXY is below 100, back in its range and showing no inclination to move in either direction.  This morning ZAR (+0.7%) is the king of the hill on the rally in gold while MXN (+0.3%) is a touch higher after Banxico left rates on hold.  But remember, peso rates are still high and economic growth continues apace so investment opportunities abound.  The peso has strengthened more than 17% since the beginning of 2025, shaking off any tariff concerns easily.

Source: tradingeconomics.com

As to the data, here are consensus forecasts:

Nonfarm Payrolls80K
Private Payrolls78K
Manufacturing Payrolls4K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.6%

Source: tradingeconomics.com

We also see Canadian employment data (exp 6.5% Unemployment Rate) and hear from Thomas Barkin, the Richmond Fed president.  But it is a summer Friday and typically, about an hour after the NFP release, traders are gone for the weekend so don’t expect too much today.

The world is not ending, the dollar is not collapsing, the Treasury market is not collapsing, and equity markets are not about to implode.  My take is the big stories from the past months have lost their luster and I suspect after a lull, we are going to start to focus on the politics of the midterm elections in November.  But until then, have a cold one and relax.

Good luck and good weekend

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Does It Matter?

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Much ink has been spilled
Describing intervention
But does it matter?

It is still early days since the joint intervention in USDJPY by the US and Japan, and we know they spent a lot of money, but the question at this point is, has it really changed anything?  It is pretty easy to look at the chart below and see the pattern following previous interventions repeating already.  Major dollar decline followed by very gradual dollar strength.

Source: tradingeconomics.com

But as I said it is early days.  Now, I have made the point that unless more fundamental changes are made in Japan, whether that is reining in spending (which seems highly unlikely) to reduce the budget deficit and ongoing increases in debt issuance, or tightening monetary policy by raising interest rates more aggressively, it strikes me that despite all the headlines, this won’t change the situation that much.  

If we use CME JPY futures positions as a proxy for the carry trade, as you can see in the below chart from cotsignal.com, that while we are not at record short positions in the large spec community, we are awfully close.

In fact, it is difficult to see at this point, although the data to be released tomorrow could well show it, much change in the short JPY positioning amongst the speculative set.  In fact, I would expect that would be the case to some extent.  And yet, as in the first chart, the yen appears to have begun to grind lower again.

Much has been made of the potential ramifications of the fact that the Foreign and International Monetary Authority (FIMA) swap lines were used to fund this intervention rather than Japan simply selling some of its Treasury holdings (remember, it holds some $1.13 trillion), and what it means.  Some analysts are claiming Secretary Bessent is concerned over the reaction in the Treasury market if the Japanese sell their bonds and so was trying to prevent any additional pressure there.  And perhaps that is correct.  We will never really know as Bessent will certainly never admit that.  

But let me offer a different, simpler explanation.  The BOJ didn’t want to take the losses on their bonds which are probably quite large given where US yields have been.  Remember Silicon Valley Bank?  So, if the BOJ used a repo facility, they get the cash and don’t take the loss.  After all, that is not really a new idea.  Yet I haven’t heard a single analyst mention it.  I guess it’s not sexy enough.  Time will tell if things have really changed, but to my eyes, not yet.

Let’s turn now to Friday’s release
Of Payrolls, where there’s an increase
Expected and if
It comes, folks will sniff
A hike ere the summer does cease

On a subject that has not gotten a lot of press so far this week, tomorrow brings the NFP report where a solid growth in NFP is expected (80K) although yesterday’s ADP Employment number disappointed at just 44K.  Remember, since the change in immigration policy and the deportation of several million foreigners, it is becoming dogma that a stable Unemployment Rate can be achieved by simply not losing jobs as opposed to having to keep creating new ones. 

In this light, 80K indicates a still solid labor situation.  Now, the question at hand is how the market will absorb the data.  We continue to see equity market participants focused entirely on the earnings data being released, with macro concerns a distant third place on their worry list.  (I imagine oil is second). But for the fixed income market and the newly created Fed watchers, this is a critical piece of information.  

The few Fed speakers we have heard this week have all discussed how they are now very focused on inflation (where were they in 2022?) and may need to raise rates if it continues to rise although a look at the Fed funds futures market shows that the probability of a rate hike next month has declined to 55% from two-thirds earlier this week.  And while a second hike is still priced in the curve, it has been delayed until next spring from the earlier January expectations.

I find this quite interesting as all the Fed commentary has been hawkish and the data we have seen, notably ISM, continues to show economic strength.  So, too, does the corporate earnings data and forecasts, with strength as far as the eye can see.  I have no explanation for this change, and, in fairness, it is a bit subtle, but the futures market appears to be pricing in a different outcome than the punditry or at least starting to.  We will need to watch this carefully as it may be a harbinger for more substantive changes in the narrative and future price action.

Ok, let’s quickly look at markets.  The outstanding performer yesterday was clearly the precious metals space with gold (+4.1% yesterday, +0.3% this morning) having its largest gain since the late March bounce.  Whether I draw a trend line or look at the 50-day moving average, it seems like a clear break higher after six weeks of consolidation around the $4000/oz level.

Source: tradingeconomics.com

Silver (-0.5%) had a similar move yesterday while copper (+0.9%) is in the process of making yet more new highs this morning although this move has been far steadier.  I’ve seen explanations about how yesterday, the market suddenly realized that inflation was a problem or other such nonsense, but my experience tells me this is more likely a positioning event with new money entering after the markets demonstrated a more certain bottom.  In other words, since it couldn’t go down despite bad news, the only direction left was up.

Oil (+1.0%) is almost an afterthought these days, remarkably.  There is a lot of discussion about an imminent deal between Oman and Iran on the Strait of Hormuz, but my impression is that the market has pretty much moved beyond that story.  EIA inventories rose, inventories at Cushing rose and there is no evidence of shortages anywhere in the West.  

In the equity markets, yesterday’s mixed US session was followed by a generally weaker one in Asia (Japan -0.9%, China -0.2%, HK -1.5%, Korea -4.6%) although there were some gainers as well (India +0.5%, Australia +0.5%, Singapore +1.0%, Thailand +0.7%).  The tech story continues to be the driver and yesterday was a clear demonstration of tech concerns compared to basic materials bullishness.  Europe, though, is firmer this morning led by Spain (+1.1%) and France (+0.6%) after some positive data was released (Spanish IP, French Construction PMI, German Factory Orders) although the DAX (+0.25%) is lagging the group.  As to US futures, at this hour (7:40) while the NASDAQ (-0.4%) is lower, the other two indices are firmer by 0.2%.

In the bond market, yields are edging higher this morning with Treasuries (+2bps) leading the way and most European sovereign yields higher by 1bp.  While yields across the board are at the high end of their recent ranges (see chart below), they do not appear to be breaking out  Although for now, the trend across the board does seem to be modestly higher.

Source: tradingeconmics.com

Finally, the dollar is a bit firmer this morning, but only just.  In fact, there is really no currency movement of note to discuss.  Brazil cut its SELIC rate to 14.0% as expected and the BRL (+0.3%) is a touch firmer, but really, other than that, 0.1% is today’s story and that is not much of a story.

Today’s data releases include Initial (exp 202K) and Continuing (1790K) Claims as well as Nonfarm Productivity (0.6%) and Unit Labor Costs (2.1%) and that’s really it.  There is another speech by St Louis Fed president Alberto Musalem, but we already know he is a hawk, so there will be nothing new there.

While we need to keep our eye on how things play out in the yen, there seem to be fewer stories of interest right now, at least marketwise.  Perhaps we are finally in the summer doldrums.

Good luck

Adf

Why People Screech

Posted on by 
Investors enamored with risk
Are active, some might e’en say brisk
In buying up stocks
In very large blocks
And feeling, right now, very frisk-y

But this simply highlights the breach
Twixt markets and why people screech
The ‘conomy’s ailing
And policy’s failing
To help, so for more, they beseech

If you ever wanted to see the definition of the K-shaped economy, there is no more accurate representation than the fact that equity markets are making all-time highs at the same time Socialists are winning elections.  Now, I don’t know many voters in Michigan, but I’m pretty sure the ones who have an equity portfolio are not voting for the candidate who wants to abolish the Senate, the Supreme court and the Presidency as well as the police and the Department of War.  But here we are, with both the DJIA and the S&P 500 trading to another new all-time high yesterday, although as you can see in the chart below, the NASDAQ is still a few percentage points away from its recent highs and the DSA candidate poised to win the Democratic primary election for US Senator in Michigan.  Strange times indeed.

Source: tradingeconomics.com

While there is no doubt that earnings continue to be quite strong, and that is the proximate cause for the equity market rally, earnings are a function of economic activity, so it is highly unlikely they would be so strong without underlying economic strength.  The upshot is that we continue to ‘reap’ the benefits of the original Portfolio Balance channel defined by then Fed Chair Ben Bernanke as he began the process of inflating the Fed’s balance sheet and all that liquidity spilled into financial markets rather than the real economy.  At this point, we have seen money moving back toward production (I saw that a new steel mill was being built in California, the first new mill there in over 50 years) but it remains the case that more money flows to markets than to production. And that, I would argue, is the crux of the dichotomy that we are currently observing, fabulous wealth being created but an extremely uneven distribution.

Can it, or will it change?  It took a long time to create the problem, and I fear it will take a long time to unwind it, although I believe that politicians on both sides of the aisle recognize the problem.  And this is the classic case where they have very different solutions.  Arguably, the fate of the nation rests on which solutions are implemented, reshoring American industrial capacity, or a state takeover of the means of production and redistribution.  You know which side I’m hoping wins out.

But in the meantime, equity markets here are strong as is economic activity, at least as measured by the government, and that has been sufficient to drive market behavior.  And that, my friends, is why Wall Street is happy.  Well, that and the following headline:

Wall Street bankers’ bonuses set for significant rise

With that in mind, let’s see how markets are behaving.  That US strength was followed almost universally in Asia with every major market rallying except Singapore (-0.55%) and Thailand (-0.5%).  Otherwise, the gains ranged from +3.7% (Tokyo and Korea) down to +0.25% (HK) with more strong gains above 1.0% than below that level.  Tech stocks remain the story and that has been helped along by the latest Hormuz story that indicates a deal is coming soon.  Frankly, writing about Hormuz at this point seems absurd given the numerous claims and counterclaims with very little ability for most of us to discern truth from propaganda.

The interesting thing about a tech-led rally is how completely it ignores European bourses with France, Germany and the UK all unchanged on the day, although Spain has managed a modest gain of 0.4%.  But I think that gain is a function of the better-than-expected PMI Services number from Spain, 58.3, which is its highest reading in more than 3 years while the rest of Europe managed to basically meet expectations at lower levels.  As to US futures, as we await the ISM Services data today (exp 54.5) you will not be surprised that they are higher at this hour (7:45).

Perhaps the bigger story has been bond yields as they have slipped -13bps in the past two sessions and are down -1bp this morning as per the chart below.  European sovereign yields have also backed off a bit although this morning they are basically unchanged while JGB yields (-3bps) continue to trade near their recent multi-decade highs.  So far, the US-Japanese joint yen intervention has not been enough to change that story.

Source: tradingeconomics.com

In the commodity space, it is the metals markets that are the most interesting this morning with gold (+2.7%) and silver (+4.1%) leading the way as hopes for the Hormuz reopening and the end of the Iran conflict percolate.  Either that or people have begun to realize that the demand for metals remains impervious to other stories.  Now, I am not a market technician, but frankly, the fact that the gold price is breaking above its 50-day moving average as per the below chart, and the general price action is telling me that we have put in a bottom and seem poised to break higher.

Source: tradingeconomics.com

Copper (+0.4%) continues to trade near its all-time highs and I suspect a move higher in gold and silver will take it along for the ride.  As to oil (+0.4%), the fact remains it is lower by -10.0% this week, which has been a key driver of sentiment in markets overall.

Finally, the dollar is a bit softer this morning, but not too much.  The euro and pound are both firmer by 0.2% while the yen is little changed along with CHF, CAD and AUD.  NZD (-0.4%) is an outlier after weaker than expected jobs data undermined the idea of another rate hike by the RBNZ.  In the EMG bloc, most currencies are a bit stronger as well, 0.1% to 0.3% or so with KRW (+0.4%) and CLP (+0.8%) the outliers, with the former continuing its recent trend as you can see from the chart below, while the latter is benefitting from the overall strength of copper.

Source: tradingeconomics.com

And that’s really it for the day.  In addition to the ISM data, we do see EIA oil inventories later this morning and we get the Treasury Refunding Announcement at 8:30, although there is no expectation for a massive change in the current issuance schedule.  Late this afternoon, the central bank of Brazil is expected to cut the SELIC rate by 25bps to 14.0%, which is arguably why BRL has been such a strong performer all year, very high real interest rates.

As to the dollar writ large, it is on its heels right now and I don’t think Secretary Bessent minds that very much.  Using the DXY as the proxy, do not be surprised to see it trade to 97 by the end of summer.

Good luck

Adf

Quite Spicey

Posted on by 
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

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‘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

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