Tag Archives: #gold

Dark and Cold

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When gold was the talk of the town
Most governments just played it down
But now that its oil
That’s gone on the boil
The issue is much more profound
 
Twas Nixon who made sure that gold
Fell out of the government fold
But oil’s essential
In truth, existential
Without it, the world’s dark and cold

 

The past several days have seen some substantial moves in the commodity markets, notably the metals markets as I discussed all week.  Precious metals had been on an extraordinary run, with YTD gains in gold (+60%), silver (+80%) and Platinum (+85%) prior to the dramatic declines that began last Friday.  Using gold as our proxy, the chart below shows the nature of the recent price action, something which I believe was driven by liquidity issues as much as anything else.  (As I wrote yesterday, when margin calls come, and in a highly levered market like we currently have, they do come, people sell what they can, not what they want, and they could sell gold.)

Source: tradingeconomics.com

However, missing from that price action, both YTD and in the recent session volatility, was oil, which had been fairly benign, drifting lower on a growing belief that there was a huge glut of the stuff around the market.  But, yesterday afternoon, President Trump announced new sanctions on the Russian oil majors Rosneft and Lukoil to increase pressure on President Putin to come to the table in a serious manner and end the Russia/Ukraine war.  Too, Europe imposed sanctions on the same firms, although clearly it was the US ones that made the difference.

Remember, earlier in the week the Trump administration put out bids to begin refilling the Strategic Petroleum Reserve when the price of WTI fell to ~$55/bbl.  Now, add on the sanctions and we cannot be surprised that oil has rallied sharply, up 5.5% today and more than 9% since Monday as per the below chart from tradingeconomics.com

Aiding the rally here was the EIA data yesterday that showed a net draw of inventories of nearly 4mm barrels vs. an expectation of an inventory build as per the glut narrative.  Now, if I take the story of the US refilling the SPR and add it to the inventory draw, that is probably enough to see a rally ahead of the sanction news.  However, there are several rumors/stories around that there was inside information with some institutions buying oil ahead of the sanctions announcement.  Of course, anytime there is a news story that drives market price action, it is common for there to be complaints of insider trading activity.  And maybe there was some.  But I don’t think you have to stretch your imagination to believe that a combination of short covering and the SPR news got things going without the benefit of inside scoop.

At any rate, financial market attention remains on the commodity space with stocks and bonds garnering a lot less excitement.  While equity markets did fall in the US yesterday, none of the declines were dramatic, with the three major indices slipping between -0.5% and -0.9%.  Compare that movement to what we have seen in commodities and you can see why equities have slipped from the headlines.  But let’s see how things played out overnight.

The Nikkei (-1.35%) had a rocky session, caught between concerns over unfunded fiscal stimulus from the new Takaichi government and the dramatic jump in oil prices on the one hand, and a Trump comment that he will be meeting President Xi next week on the other.  I guess it was the latter story that helped Chinese (+0.3%) and HK (+0.7%) shares.  Elsewhere in the region, Korean and Taiwanese stocks slipped while Indonesia and Thailand saw gains of more than 1% and the rest was little changed.  in Europe, under the guise of bad news is good, UK stocks (+0.6%) have rallied after a weaker than expected CBI Industrial Trends release of -38.  As you can see from the below chart, while this is not the lowest level seen in the past 5 years, it certainly paints a picture of a struggling economy.  Of course, that means the market is increasing its bets the BOE will cut rates next week, hence the lift in the stock market!

Source: tradingeconomics.com

I don’t know about you, but it is hard to look at that chart and feel positive about the UK economy going forward, whether or not the BOE acts!  As to the continent, the DAX (-0.25%) is lagging while the CAC (+0.5%) is rallying with both responding to corporate earnings news rather than macro signals.  US futures are little changed at this hour (7:15).

In the bond market, yields are bouncing off their recent lows with Treasuries adding 4bps, although still just below the 4.00% level.  European sovereign yields have edged higher by 2bps across the board, and we saw JGB yields rise 3bps overnight.  It is difficult to get too excited about this market right now.  All eyes will be on the CPI release tomorrow morning with expectations of a rise of 0.3% M/M, but the general tone of what I continue to read is that the US economy is slowing down which, theoretically, will reduce inflation pressures and encourage bond buying.  Maybe.

We’ve already discussed commodities, although I have to say that the liquidation phase of the metals markets appears to be ending as all three precious metals are higher this morning (Au +0.4%, Ag +1.4%, Pt +2.6%) and copper (+1.8%) is joining in the fun.  It strikes me that copper’s recent performance is at odds with the slowing growth narrative, but then I am just an FX poet, so probably don’t understand.

Finally, the dollar is…still there, but the least interesting part of markets lately.  It is a bit firmer this morning with the yen (-0.5%) the laggard in the G10 space as it appears FX traders are concerned over Takaichi’s plans, even if JGB traders are not.  The outlier in G10 is NOK (+0.4%) which is clearly benefitting from the oil rebound.  In the EMG bloc, KRW (-0.6%) is the worst of the bunch, slipping after the BOK hinted that a rate cut might be in the offing soon.  On the flip side, ZAR (+0.2%) is benefitting from the bounce in metals, but I want to give a shout out here to the rand, which despite the dramatic decline in gold and platinum earlier this week, held in remarkably well and is basically unchanged on the week.

There are actually two data points this morning, the Chicago Fed National Activity Index (exp -.40) and Existing Home Sales (4.1M), as the Fed is not shut down and the existing home data is privately sourced.  Speaking of private data, there is a WSJ story this morning about how ADP has stopped giving the Fed access to anonymized data that they had previously enjoyed.  There are many conspiracy theories as to why this is the case, but I can only report it is the case.

The government has been shut down for more than three weeks, and the story does not have much traction anymore.  I’m no political pundit but it seems to me that this is going to end sooner rather than later, perhaps early next week, as it is very clear President Trump is going to continue his policies and unclear to a growing proportion of the population that the shutdown is helping them.

One final thought.  You know I am involved in a cryptocurrency project called USDi, the only fully backed truly inflation tracking currency that exists.  I strongly believe that we are going to continue to see cryptocurrencies, notably stablecoins expand their usage throughout the economy.  But I couldn’t help but laugh at the following post regarding the jewel heist from the Louvre.  

My mildly informed take is that financial assets are a perfect place for blockchain technology and cryptocurrency products, but maybe the real world is different.

Good luck

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Has, Now, the Bell Tolled?

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The pundits are still talking gold
But what is the reason it sold?
Liquidity drying
Means selling, not buying
Of havens. Has, now, the bell tolled?

 

One of the great things about FinX (FKA FinTwit) is that there are still a remarkable number of very smart folks who post things that help us better understand market gyrations.  The recent parabolic rise and this week’s reversal in the price of the barbarous relic seem unrelated to any concept of fundamentals one might have.  After all, perhaps the only fundamental that impacts gold is the rate of inflation, and since we haven’t seen a reading there in a month, it seems unlikely that had anything to do with this price action.  However, there is a far more likely explanation for the move lower, which has been very impressive in any context.  First, look at the chart below from tradingeconomics.com which shows the daily bars for the past 6 months.  The rise since early September has been nothing short of remarkable.

This begs two questions; first, why did it rise so far so fast, and second, what the heck happened on Friday to turn it around so dramatically?

The first question has several pieces to its answer including ongoing concerns over fiat currencies in general (the debasement trade that became popular), increased central bank buying and a recent change in financial advisors’ collective thought process about the merits of holding gold in an investment portfolio.  In fact, I think it was Bank of America (but I could be wrong) that recently suggested that the 60:40 portfolio should really be 60:20:20 with the final 20% being gold!  Given the human condition of jumping on bandwagons, it is no surprise that this type of ‘analysis’ has become more popular lately.  Whatever the driver, or combination of drivers, the price action was remarkable and clearly overdone.  After all, compare the current price, even after the recent sharp decline, to the 50-day moving average (the blue line on the chart) as an indicator of the extreme aspect of the price action.

But let’s focus on the last few days and the sharp reversal, which takes me back to X.  There is an account there (@_The_Prophet_) who put out an excellent step by step rationale of what led up to yesterday’s dramatic decline and why it is important.  I cannot recommend it highly enough as a short read.

In sum, his point is, and I fully subscribe to this idea, that when things get tough, investors/traders/speculators sell what they can sell, not what they want to sell.  If liquidity is drying up for the funding of speculative assets that are highly leveraged, then when margin and collateral calls come, and they always do, those owners sell whatever they have that they can liquidate.  In this case, given the massive run up in the price of gold, there was a significant amount of value to be drawn down and utilized to satisfy those margin calls.  

History has shown this to be the case time and again.  I would point to the Long-Term Capital Management fiasco back in 1998 where the Nobel Prize winning fund managers quickly found out that liquidity was much more important than ideas and they were forced to sell out their Treasury holdings rather than their leveraged positions because the former had prices and the latter didn’t.  This ultimately led to the liquidation of their fund along with some $5 billion in capital.

There has been much discussion as to the nature of the recent rise in asset prices with many pundits calling it the everything bubble.  Bubbles are created when central banks pump significant liquidity into the system and this is no different.  We know the Fed has allegedly (look at the graph of M2 below to see how much they have been increasing money supply during their tightening) been trying to reduce its balance sheet (i.e. liquidity) but this could well be a sign that phase is over.  Typically, the next step is QE in some form, so beware.  And when that comes, you can be sure that gold will rally sharply once again!

Of course, while the gold move has been the most spectacular, we have seen a lot more market volatility in the past several sessions, so let’s look at how things behaved overnight.  Yesterday’s mixed US session was followed by more laggards than leaders in Asia with Japan essentially unchanged, while HK (-0.9%) and China (-0.3%) both slid a bit.  Recent comments by President Trump that he may not sit down with President Xi next week have investors and traders there nervous.  Elsewhere, Korea (+1.5%) and Thailand (+1.1%) had solid sessions while the rest of the region (Indonesia -1.0%, Malaysia -0.9%, Australia -0.7%) all lagged.

In Europe, the UK (+0.9%) is benefitting this morning from softer than expected inflation readings (3.8% vs 4.0% expected) which has tongues wagging that the BOE will now be cutting rates.  The market priced probability has risen to 60% for a cut this year, up from 40% yesterday, before this morning’s data release.  However, on the continent, only Spain (+0.6%) is showing any life on local earnings performance while the rest of the markets are all lower by varying degrees between -0.1% and -0.5%.  As to US futures, at this hour (7:20) they are unchanged.

Bond markets continue to see yields slide lower with Treasuries (-1bp) now nicely below 4.00% and trading at their lowest level in more than a year (see below)

Source: tradingeconomics.com

European sovereign yields have seen similar movement, edging lower by -1bp except for UK gilts, which have fallen -10bps this morning after that inflation report.  Perhaps more interesting is the fact that despite Takaichi-san becoming PM, with her platform of increased fiscal spending, JGB yields are 2bps lower this morning.

Turning to the rest of the commodity space, oil (+2.1%) is rising on the news that the US has started to refill the SPR.  While the initial bid is only for 1 million barrels, this is seen as the beginning of the process with the administration taking advantage of the recent low prices.  Arguably, given they want to see more drilling as well, it is very possible that $55/bbl is as low as they really want it to go.  As to the metals beyond gold (-2.4% this morning), silver (-1.6%) is still getting dragged along but copper (+0.6%) and platinum (+0.9%) seem to be consolidating after sharp declines in both.  My sense is gold remains the liquidity asset of choice given its far larger market value.  (One other thing to note is that there was much discussion how gold has replaced Treasuries as the most widely held central bank reserve asset.  That was entirely a valuation story, not a purchase story.  In other words, the dramatic rise in the price of gold increased the value of its holdings relative to other assets on central bank balance sheets.)  

Finally, the dollar is doing just fine.  It continues within its recent trading range and basically hasn’t gone anywhere in the past six months.  In fact, of you look at the DXY chart below from Yahoo Finance, it is arguably in the upper quintiles of its long-term price action.  It is very difficult for me to listen to all the reasons that the dollar is going to be replaced by some other reserve currency and take it very seriously.

As to specific currency moves today, the pound (-0.3%) is slipping on the increased belief in a rate cut coming soon and ZAR (-0.5%) is suffering on the ongoing gold price decline but away from those two, +/-0.1% is the story of the day.

EIA Crude Oil inventories are the only data of the day with a modest build expected.  Yesterday, Governor Waller discussed payment systems and cryptocurrencies never straying into monetary policy so we will need to wait for CPI on Friday, the FOMC next Wednesday and whenever the government reopens, which I sense is coming sooner rather than later as the Democrats have been completely unsuccessful in making the case this is President Trump’s fault.  

It appears the cracks in the leverage that has accompanied the recent rally in asset prices are beginning to appear.  If things get worse, and they probably will, look for the Fed to respond and haven assets to be in demand.  Amongst those will be the dollar.

Good luck

Adf

Soon Will Feel Pain

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The future arrived yesterday
As Amazon’s cloud went astray
Along the East Coast
Much business was toast
The question is, who’s forced to pay?
 
Meanwhile, contradictions remain
In markets, which rose once again
Both havens and risk
Have seen, buying, brisk
I fear one side soon will feel pain

 

Arguably, the biggest story yesterday was the outage of Amazon Web Services on the East Coast yesterday morning with the impact dragging through the day.  Apparently a supposedly minor code update had an error of some sort, and that was all it took.  For every business that has been convinced that it is much cheaper and more efficient to move their computing capacity to the ‘cloud’ (and it certainly is on a daily operating basis), this is the risk being taken.  Ease and convenience are wonderful when they are there, but businesses are inherently more fragile because of the movement.  I guess the finance question comes down to how much do businesses save by outsourcing their computing vs. how much does it cost when those systems go down?

I am sure there will be lawsuits galore vs. Amazon for recompense.  I have no idea what the AWS contract looks like, and if they leave themselves an out for situations like this, a sort of force majeure, but you can bet we will hear a lot about it going forward.  Interestingly, Amazon’s stock price rose 1.6% yesterday despite the issue.  Clearly nobody is worried yet.

Speaking of rising stock prices, I continue to observe the ongoing equity rally alongside the ongoing bond market rally and wonder.  As you can see from the chart below, for the past three to four months, the S&P 500 has rallied alongside 10-year bonds (yields falling as the price rose).  For a very long time, those two markets were negatively correlated.  In fact, that was the very genesis of the 60:40 portfolio being a lower risk way to remain invested.  

The thesis was when stocks were rallying (the 60), things were good and while yields might rise, the gain in stocks would outperform the loss in bonds.  Meanwhile, in tough times, when stocks suffered declines, bonds would rally to mitigate some of the losses.  But lately, the two have traded synchronously.

Source: tradingeconomics.com

Perhaps, if we zoom out a little further, though, and look at this behavior over the past five years, we can make an observation.  Here is the same chart since late 2020.

Source: tradingeconomics.com

Now, who can remember anything that changed in 2022 in the economy?  That’s right, inflation re-entered the conversation in a very big way.  It turns out that the 60:40 portfolio, and all its adjuncts, like risk parity and volatility targeting, were all designed when inflation was low and stable.  But it appears that once inflation moves above the 3% level, the correlation that was the underlying basis of all those strategies flips.  I’m sure you all remember how awful 2022 was for most investors with both stocks and bonds showing negative returns.  As inflation continues to rise, and there is no reason to expect it to stop that I can see, be prepared for 2022 redux going forward.  Maybe not quite as dramatic, but similar directionally.

The one thing that can change that would be the reintroduction of QE or YCC or whatever they decide to call it, as that would, by definition, prevent bonds from selling off dramatically.  Of course, that will only stoke the inflationary fires, so there will still be many issues to address.

In the meantime, let’s see how markets behaved overnight, with the truly noticeable movement continuing in the precious metals space.  Markets are funny things, with the ability to move very far very quickly for no apparent reason.  With that in mind, a case can certainly be made that there is a serious amount of intervention in the precious metals markets lately.  While I am not expert in these markets, I am well aware of the stories that there are a number of major banks, JPM among them, that are running large short positions in these metals and have been charged with preventing the prices rising too far.  The concern seems to be the signal that a runaway gold or silver price would be to markets and people in general.  Last Friday was a major option expiration in the SLV contract and it was remarkable to see the price of silver tumble below a number of large open strike prices. Seemingly to prevent calls to deliver.  A look at the chart below, showing how quickly the price declined into the close, and it is easy to understand the genesis of those conspiracy theories.

Source: tradingeconomics.com

Yesterday, the metals all rallied nicely, but this morning, they are all, once again, under severe pressure (Au -2.2%, Ag -4.1%, Cu -1.5%, Pt -4.3%).  Generally, I follow the precious metals as a signal of overall market sentiment, as I believe they are better indicators of fear than bonds.  But I cannot get these movements out of my head as straight up price manipulations and so any signals we are getting are very murky.  This will not last forever, but for now, I expect them to remain quite volatile.  As to oil (+0.8%) it is getting a respite after a really tough run lately, with the price testing its recent lows and a growing chorus of analysts looking at the private data coming out and calling for a US recession.  I don’t know about that, but things are not fantastic, that’s for sure.

But equity markets feel no pain.  After yesterday’s US rally, with all three major indices rising by more than 1%, we saw gains throughout Asia (Nikkei +0.3%, Hang Seng +0.7%, CSI 300 +1.5%) as Takaichi-san was elected PM, as widely expected and investors believe that China is getting set to add fiscal stimulus as an outcome of their Fourth Plenum, with a focus on domestic demand, rather than exporting.  While it is certainly possible that is what they will do, I believe this is the third time, at least, that has been the narrative, and thus far, anything they have done has been ineffectual at best.  Remember, they still have a massively deflating property bubble which is weighing on the domestic economy there.  In the rest of the region, almost all bourses were higher, certainly those of larger nations, with Indonesia (+1.8%) the leader.

In Europe, gains are also widespread, albeit far less impressive with the CAC (+0.4%) the leader and the rest of the major indices higher by between 0.1% and 0.2%.  At this hour, (7:40) US futures are unchanged.

In the bond market, yields around the world continue to edge lower with Treasuries (-1bp) showing the way for all of Europe and for JGBs as well.  it is a bit surprising that JGBs are holding in so well given Takaichi-san’s platform of more unfunded spending.  Perhaps the BOJ is supporting there.

Finally, the dollar is firmer this morning rising against all its G10 counterparts with JPY (-0.8%) the laggard.  It seems the FX market has listened to Takaichi’s plans even if the JGB market hasn’t.  But otherwise, declines of -0.2% to -0.4% are the order of the day in the G10.  In the EMG bloc, ZAR (-0.5%) is feeling the weight of the precious metals rout, while KRW (-0.65%) is under pressure as well with lingering concerns over a trade deal with the US being reached.  Otherwise, though, that -0.2% level is a good proxy for the entire bloc.

The only data today is API oil inventories, and for some reason, despite the Fed’s quiet period, Governor Waller will be speaking today, although he will be making opening remarks at the Payments Innovation Conference in Washington, so will probably not focus on monetary policy.

And that’s really the story.  The government remains shut down with no end to that in sight.  Metals markets are a mess with stories rampant about who is manipulating them, but through it all, stocks go higher, and the dollar remains right in the middle of its recent trading range.  I’m not sure what it will take to change that dynamic and I suspect it will be a gradual situation rather than a single catalyst.  In the end, though, I still like the dollar better than most other currencies.

Good luck

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No Mean Feat

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On Friday, the story was gold
And PMs, which everyone sold
The question now asked
Is, has the peak passed?
Or will it still rise twentyfold?
 
The funny thing, though, is that stocks
While weak coming out of the blocks
Reversed course and rose
Right into the close
T’was like Bessent sold from Ft Knox!
 
(PMs = precious metals)

 

The world felt like it was ending on Friday as the early price action showed all the asset classes that have been rallying dramatically, notably gold and stocks, falling sharply.  But a funny thing happened on the way to the close.  While gold stopped declining, it had no rebound whatsoever, yet the equity market rallied sharply late in the session to close in positive territory.  The below chart (taken Sunday evening) shows that the two assets tracked each other pretty closely right up until lunchtime Thursday and then diverged sharply.

Source: tradingeconomics.com

While there continues to be an overwhelming amount of news stories that may have an impact, I believe Occam’s Razor would indicate the most likely reason that gold sold off so dramatically, slipping more than 2%, is that the rally had gone parabolic and a series of option expirations on Friday forced some real position changes.  My take is this was some profit taking and despite the decline, the bull market trend remains strong and there is no reason to believe this move is over.  After all, there has been nothing to indicate that inflation is going to be contained, nor that fiscal spending will be significantly cut, and Chairman Powell has pretty much promised another rate cut in 10 days.  Look for the correlation, which regained some vibrancy late Friday, to reassert itself going forward.

However, the activity in the other precious metals cannot be ignored, as gold was the least dramatic.  My friend JJ (Alyosha’s Market Vibes) explained that the story was silver driven as an extremely large number of SLV (the Silver ETF) call options were expiring on Friday and there were many machinations by the market makers to prevent too many from being in the money.  Read his piece above for the details, but I would argue none of these machinations change the underlying precious metals thesis.

Takaichi-san
Seems to have found a partner
History’s waiting

From Japan, the word is that Sanae Takaichi and the LDP have convinced the Japan Innovation Party to join in a governing coalition and that, in fact, Ms Takaichi will become the first female Prime Minister in Japan.  This was seen very favorably by Japanese equity markets with the Nikkei gapping higher on its open overnight and rallying 3.4% on the session.  I guess investors are excited by her run it hot plans, and given a governing majority, she should be able to implement those plans.  I suppose that given run it hot is the global consensus of policymakers right now, we shouldn’t be surprised.  FYI, the rally since the April Liberation Day decline has been just over 60%, but I’m sure there is no bubble here.🙄

Source: tradingeconomics.com

In China, this week Xi will meet
With leaders, and though he won’t Tweet
They’ll conjure a plan
For growth, if they can
Success though, will be no mean feat

Finally, Chinese data was released overnight showing that GDP growth fell to 4.8% Y/Y in Q3 as Retail Sales remain relatively sluggish and Fixed Asset Investment (a euphemism for housing) continues to decline, falling -0.5%.  In fairness, housing prices, though they fell -2.2% across 70 major cities, have seen the rate of decline slow, but as you can see from the chart below, those prices have been falling for 3 ½ years.  it is not surprising that the people there feel less wealthy and correspondingly spend less as housing was sold as their retirement nest egg and represents some 25% of the economy.

Source: tradingeconomics.com

The Fourth Plenum is this week, which is the meeting where Xi and the CCP determine the next five-year plan.  There is much hope that they will focus on supporting domestic consumption, but history has shown that is not their strong suit.  Rather, the economic model they know is mercantilism, and I suspect that will still dominate the process going forward.  However, Chinese shares (CSI 300 +0.5%, HK +2.4%) responded positively to hopes that the US-Chinese trade situation will be ameliorated when President’s Xi and Trump meet next week.  Apparently, Secretary Bessent and Premier Li are due to meet this week as a preliminary to that meeting.

So, with all that in mind, let’s see how things so far unmentioned played out overnight. it should be no surprise that given the rallies in both Japan and China, the rest of the region performed well with Korea (+1.75%), India +(0.5%) and Taiwan (+1.4%) indicative of the price action.  Only Singapore (-0.6%) showed any contrariness although there were no obvious reasons for the move.  In Europe, we have also seen some real positive movement with the DAX (+1.3%) and IBEX (+1.5%) performing quite well on  relief that the US-China, and by extension global, trade situation seemed set to improve.  However, in Paris, the CAC (0.0%) has lagged on news that BNP Paribas has been fined >$20 million on its alleged complicity in Sudan atrocities two decades ago dragging the entire French banking sector down with them.  As to US futures, at this hour (7:10) they are pointing higher by about 0.2%.

In the bond market, yields are unchanged in the Treasury market, with the 10-year sitting at 4.01% while European sovereign yields have edged higher by 1bp, except France (+3bps).  Ostensibly, the story is the reduced trade tensions have investors leaving the ‘haven’ of bonds and getting back into equity markets.  Overnight, JGB yields rose 4bps as the news that Takaichi-san seemed set to become PM has bond investors there a bit nervous given her unfunded spending plans.

In the commodity markets, oil (-1.0%) continues to slide and is now testing the post Liberation Day lows seen in April.  Looking at the chart below, it is hard to get too bullish, and I suspect we will see lower prices going forward for the near term.

Source: tradingeconomics.com

As to the metals markets, gold (+0.2%) is choppy, but clearly has found short-term support after Friday’s decline while silver (-0.25%) and Platinum (-1.0%) are both still under modest pressure, although nothing like Friday’s moves.  If Friday’s story was all about the option expiries in SLV, which is quite viable, I don’t expect much more downside and the underlying bullish thesis is likely to reassert itself.

Finally, nobody seems to care about the FX markets these days.  The dollar has edged slightly higher this morning but as we have consistently seen for the past several weeks, daily movement is on the order 0.1% or 0.2%, and the big picture is the dollar is not a focus right now.   If we use the euro as our proxy, you can see that since June, it has basically been unchanged.  The rally from the first part of the year has ended for now, and I continue to suspect that absent a significant dovish turn by the Fed, it is likely over.

Source: tradingeconomics.com

On the data front, with the government still shut down, the only data point we will see is CPI on Friday (exp +0.4%, 3.1% Headline; +0.3%, 3.1% Core).  As well, the Fed is in their quiet period so we won’t have any distractions there.  That means that FX markets will be beholden to risk moves and trade comments, but for now, I don’t see much movement on the horizon.

Good luck

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Old Theses Are Reeling

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The temperature’s rising on trade
As China, rare earths, did blockade
It seems they believe
That they can achieve
A triumph with cards that they’ve played
 
Investors worldwide are now feeling
Concern as old theses are reeling
This new world now shows
It’s capital flows
And trust, which is why gold’s appealing

 

Escalation in the trade war between the US and China is clearly the top story.  There are a growing number of analysts who believe that currently, China may have the upper hand in this battle given the recent history of deindustrialization in the US and the West.  Obviously, rare earth minerals, which are critical to manufacturing everything from magnets to weapons, and semiconductors, are China’s big play.  They believe this is the bottleneck that will force the US and the West to back down and accept their terms.  The Chinese have spent decades developing the supply chain infrastructure for just this situation while the West blithely ignored potential risks of this nature and either sought lower costs or virtue signals.

Before discussing the market take, there is one area where China lacks capacity and will find themselves greatly impaired, ultra-pure silicon that is used to manufacture semiconductors.  The global supply is almost entirely made in Japan, Germany and the US, and without it, Chinese semiconductor manufacturing will encounter significant problems.  So don’t count the West out yet.

Anyway, the interesting question is why have equity markets continued to behave so well in the face of this growing bifurcation in the global economy?  After all, it is clear why gold (+0.75%) continues to rise as central banks around the world continue to buy the barbarous relic for their reserves while individual investors are starting to jump on board if for no other reason than the price has been rising dramatically.  (As an aside, the gold price chart can fairly be called parabolic at this point, and history has shown that parabolic rallies don’t last forever and reverse course dramatically.)

Source: tradingeconomics.com

But equity prices are alleged to represent the discounted value of estimated future cash flows, and those are certainly not parabolic.  Of course, there is something that has been rising rapidly that feeds directly into financial markets, and that is liquidity.  Consider the process by which money is created; it is lent into existence by banks and used to purchase either financial or real assets.  The greater the amount of money that is created, the more upward pressure that exists for asset prices (as well as retail prices).  This is the essence of the idea that inflation is the result of too much money chasing too few goods.

Turning to the IIF for its latest statistics, it shows, as you can see in the chart below, that global liquidity continues to rise, and there is nothing to indicate this rise is going to slow down.  The chart below shows global debt across all sectors (government and private) has reached $337.8 trillion at the end of Q2 2025, which is 324% of global GDP.  If you are wondering why asset prices continue to rise in the face of increased global macroeconomic risks, look no further than this chart.

And if you think about the fact that literally every major nation around the world, whether developed or EMG, is running a public budget deficit, this number is only going to grow further.  It is very difficult to make the case for a reversal unless this liquidity starts to dry up.  And the one thing central bankers around the world have figured out is that they cannot turn off the liquidity flow without causing severe problems.  As to CPI inflation, some portion of this liquidity will continue to seep into prices paid for things other than securities and financial assets.  Ironically, if President Trump succeeds in dramatically reducing the budget and trade deficits, the impact on global financial markets would be quite severely negative.  This is the best reason to assume it will never happen…by choice.

In the meantime, this is the world in which we live, and financial markets are subject to these flows so let’s see how they behaved overnight.  After yesterday’s modest gains in the US markets, Tokyo (+1.3%) continued its recent rally despite a growing concern that Takaichi-san will not become the first female PM in Japan as all the opposition parties seem to be coming together simply to prevent that outcome, rather than because they share a grand vision.  HK (-0.1%) and China (+0.25%) had lackluster sessions as the trade war will not help either of their economies either, while the rest of the region had a strong session across Korea (+2.5%), India (+1.0%), Taiwan (+1.4%), Australia (+0.9%) and Indonesia (+0.9%).  One would almost think things are great there!

As to Europe, France (+0.75%) is the leader today as PM LeCornu survived a no-confidence vote by agreeing not to raise the retirement age from 62 to 64 despite this being seen as President Macron’s crowning achievement.  (I cannot help but look at public finances around the world and see that something is going to break down, and probably pretty soon.  Promises to continue spending while economic activity stagnates are destined to collapse.  Of course, the $64 trillion question is, when?).  As to the rest of Europe, equity markets are little changed, +/- 0.15% or less.  At this hour (7:40) US futures are pointing nicely higher though, about 0.5% across the board.

In the bond market, the place where the growth in liquidity should be felt most acutely, there is no obvious concern by investors at this stage.  Yields across the board in the US and Europe are essentially unchanged in the session and there was no movement overnight in JGBs.  It feels as though the entire situation is becoming more precarious for investors, but thus far, no real cracks are visible.  However, you can be sure that if they start to develop, we will see the next wave of QE to support these markets.

Away from gold, this morning silver (+0.1%) and copper (-0.1%) are little changed although platinum (+0.7%) is working to keep up with both of the better-known precious metals and doing a pretty good job of it.  Oil (+0.9%) is bouncing off recent lows but remains below $60/bbl and seems to have lost the interest of most pundits and traders, at least for now.  

Finally, the dollar continues to edge lower, with most G10 currencies a touch higher (GBP +0.2%, SEK +0.2%, NOK +0.3%, EUR +0.05%) although the yen (-0.15%) and CHF (-0.2%) are both slipping slightly.  But the reality is there has been no noteworthy movement here.  Even in the EMG bloc, movement is 0.2% or less virtually across the board this morning.  The dollar is an afterthought today.

On the data front, Philly Fed (exp 10.0) is the only data release with some positive thoughts after yesterday’s Empire State Manufacturing Index rose a much better than expected 10.7.  We also hear from a whole bunch more Fed speakers (Barkin, Barr, Miran, Waller, Bowman) as the IMF / World Bank meetings continue.  Yesterday, to nobody’s surprise, Mr Miran said that rates needed to be lower to address growing uncertainties in the economy.  I suspect he will repeat himself this morning.  But the market is already pricing two cuts for this year, and absent concrete data that the economy is falling off a cliff, it is hard to make the case for any more (if that much) given inflation’s stickiness.

The world is a messy place.  Debt and leverage are the key drivers in markets and will continue to be until they are deemed too large.  However, it is in nobody’s interest to make that determination, not investors nor governments.  This could go on for a while.

Good luck

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Will Not Be Quelled

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Both sides in the trade war appear
To want nothing more than to steer
The narrative toward
A place where each scored
Political points, crystal clear
 
But markets, which yesterday felt
The problems would soon, away, melt
Are nervous today
And cannot allay
Their fear losses will not be quelled

 

It is becoming more difficult to discuss markets writ large as we have seen some historic relationships fall apart over the past 6 months.  For instance, the idea that both gold (and all precious metals) and the dollar would rise simultaneously is hard for old-timers like me to understand.  In ordinary times, the two had a very different relationship as gold was, essentially, just another currency.  If you look at the two charts below from tradingeconomics.com, you can see a longer-term chart that demonstrates, at best, independent behavior, and while the magnitudes of the movements are somewhat different, you can see that as the dollar peaked in late 2022, gold was bottoming and there is a general inverse correlation.

However, over the past month, that story is completely different as evidenced by this chart (which is based on percentage moves):

The other day I mentioned the debasement trade, the idea that investors were scooping up gold and bitcoin because they didn’t want to hold dollars.  However, it is harder to make that case about dollars, although fiat in general may be a different story.

I highlight this because I use the term ‘markets’ all the time as a generic concept, but lately, I need more specificity, I think.  So, Friday, when there appeared to be a sudden escalation in the trade war between China and the US, equity markets fell sharply, precious metals rallied, and bonds rallied while the dollar edged lower.  Yesterday, with the bond market closed, and a concerted effort by both sides to claim nothing had changed and that Presidents Trump and Xi would still be meeting at the ASEAN conference in two weeks, equity markets rebounded sharply, precious metals continued to rally, and the dollar rebounded.  Bringing us up to date now, equity markets are back under pressure (it appears that the trade situation is still an issue), precious metals are still rallying alongside the dollar, and as the bond market reopens, it, too, is rallying with yields slipping -3bps to 4.00%.

Some of this doesn’t make much sense, but I will try to address things, at least broadly speaking.  The constant across these moves has been precious metals rallying and I believe there are two stories working together here.  There is a fundamental story where central banks and, increasingly, individual investors are buying gold as they are seeking safe havens in an increasingly uncertain world.  Silver and platinum both benefit from this, as well as ongoing industrial demand, especially from the technology sphere.  But there is also a serious short squeeze unfolding in both the gold and silver markets as there is a mismatch between inventories held on exchanges and demand for physical metal.  

In the leadup to Liberation Day, you may remember the story of a huge inflow of gold and silver to the COMEX in the US ahead of feared tariffs on precious metals imports, although those tariffs never materialized.  However, all that metal sits in COMEX vaults today and is likely hedged with short futures contracts.  Meanwhile, London has a shortage of available metal and owners of LME contracts are seeking delivery, thus pushing the shorts to buy back at ever higher prices.  My friend JJ (Market Vibes on Substack) made the point there is a big difference between a bubble and a short squeeze, and a squeeze can go on much longer depending on the size of the short relative to the market’s overall size.  I think that’s what we are currently witnessing in both gold and silver.

As to the debasement trade idea, there are two things that call this theory into question, the dollar’s continued rebound and the bond market’s rally driving yields lower.  Arguably, the key concern in debasement is a dramatic increase in inflation, something I also fear.  But if that is the fear, how is it that bond yields, which are entirely reliant on pricing future inflation, are declining.  And that is what they have been doing since the beginning of the year, with 10-year yields falling ~80bps, and in truth, having gone nowhere since late 2022.

Source: tradingeconomics.com

Meanwhile, the dollar, which did decline in the first half of the year, looks very much like it is forming a base here.  It is certainly not in a serious decline as evidenced by the chart below.

Source: tradingeconomics.com

What about equity markets?  Well, they have much that goes on away from macroeconomic issues, such as company earnings and more sector specific events, although the macro can have an impact.  We all know the AI story has been THE driver of the equity rally this year, really the past 2+ years, pushing everything else aside.  However, the trade tiff between China and the US, and growing around the world (the Netherlands just expropriated a Chinese owned chip company!) is highly focused on the AI story, and if trade is severely impacted, especially in chips and technology, that does not bode well for the drivers of the equity rally.  Whether that results in a rotation into other companies or a wholesale liquidation is far less clear.  

This morning, for instance, all European bourses are lower (DAX -1.6%, CAC -1.3%, FTSE 100 -0.6%, IBEX -0.6%) and overnight we saw significant weakness on Japan’s reopening (-2.6%) as well as China (-1.2%) and HK (-1.7%).  Too, US futures are lower across the board at this hour (7:15) by -1.0% or so.  The indication is that a rotation is not the story, rather a reduction of risk.  Of course, we could easily see more comments from both China and the White House (who are meeting at the IMF meetings in Washington right now) that things have de-escalated and turn the whole ship back around.  It should be no surprise that the VIX is rallying.

As to bonds, European sovereign yields have fallen by between -3bps and -4bps across the continent while UK gilts (-7bps) have fallen further after employment data there showed the Unemployment Rate ticked up to 4.8% unexpectedly while there were job losses as well.  In fact, looking at the chart below of Payroll Changes over the past three years, the trend seems pretty clear!

Source: tradingeconomics.com

Those UK employment figures also weighed on the pound (-0.45%) which is declining in line with most of the G10 bloc (NOK -1.1%, AUD -0.9%, NZD -0.5%) although the yen (+0.25%) is bucking the trend, perhaps because of its haven status.  NOK is suffering from oil’s (-2.2%) sharp decline after the IEA, once again, said there would be a supply surplus, although their forecasts have been wrong, and consistently overestimating supply and underestimating demand, for the past decade.  

As to the EMG bloc, despite the rally in precious metals, both ZAR (-0.9%) and MXN (-0.8%) are under pressure as is KRW (-0.6%) after the story that China is imposing restrictions on Korean ship builders in the US that are helping America try to reverse the decimation of our shipbuilding industry.  

Trying to recap all that is happening, fear is pervasive across investors of all stripes.  The hunt for havens continues and absent a more lasting trade truce between the US and China, something I think will be very difficult to achieve, volatility is likely to be the dominant feature in all markets.  In the end, though, there is no evidence that the dollar is being ‘dumped’ in any manner and while gold and precious metals may continue to rally, given 2 Fed rate cuts are already priced in for the rest of the year, we will need something completely outside the box to see the dollar fall in any meaningful manner, I believe.  For hedgers, markets like these are why you remain hedged!

Good luck

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Rare Earths No More

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Said Xi, we’ll sell rare earths no more
Said Trump, well that means we’re at war
The stock market puked
As traders got spooked
And Trump imposed tariffs galore
 
The question is just why would Xi
Get feisty when things seemed to be
Improved for both sides
With fewer divides
Did Mideast peace kill his esprit?

 

Let’s talk about markets for a moment.  Sometimes they go down and go down fast when you’re not expecting it.  That is their very nature, so it is important to understand that Friday’s price action, while dramatic relative to what we have seen over the past 6 months, is not that uncommon at all over time.  It appears the proximate cause of the market decline was the word from China that they would stop selling and exporting rare earth minerals. 

It can be no surprise that President Trump immediately responded by threatening an additional 100% tariffs on all Chinese exports and new controls on software, all to be implemented on November 1st.  There is a lot of tit-for-tat in the dueling messages from China and the Trump administration and it is hard to tell what is real and what isn’t.  However, equity markets clearly weren’t prepared for a break in the previous expectations that the US and China were closing in on a more lasting trade stance.

But weekends are a long time for markets as so much can happen while they are closed.  This weekend was a perfect example.  After the carnage on Friday, we cannot be that surprised that both sides of this new tiff modified their responses.

First we saw this on Truth Social:

Then China backed off clarified that what they are really doing is require licensing for all rare earth minerals and products that contain them in exports.  China claims that applications that meet regulations will be approved although the regulations have not yet been defined. Ostensibly this is for national security reasons, and it is unclear exactly who will receive licenses, but this is clearly not the same as ending exports.  

And just like that, many of the fears that were fomented on Friday have been alleviated as evidenced by this morning’s equity market moves in the futures markets.

Source: tradingeconomics.com

But why did Xi make this move in the first place?  I have no idea, nor does anyone but Xi, although here are two completely different thought processes, one very conspiratorial and one rooted in the broader escalation of geopolitical affairs.

As to the first, (Beware, you will need your tinfoil hat here!) consider if the Israel-Gaza peace settlement, (with the hostages returned as of the time I am writing this morning at 5:30) does not serve China’s interest.  First, the one Middle East nation that will be on the outside is their ally, Iran.  Second, the ongoing problems there were always a distraction for the US, something that clearly suits Xi and China.  After all, if the US is focused there, they will have more difficulty paying attention to things Xi cares about like Taiwan and the South China Sea.  If the peace in Israel-Gaza holds, and the Abraham Accords extend to the bulk of the rest of the region, Xi loses a major distraction that cost him virtually nothing.  Plus, this opens the door for tightening sanctions on Iran even further, which could negatively impact China’s oil flows.  

The second is much more esoteric and I read about it this weekend from Dr Pippa Malmgren, someone who has a deep insight into global politics from her time as a presidential advisor as well as from her father, Harold Malmgren, who advised four presidents.  In her most recent Substack post she explained the importance of Helium-3 (3He), a rare isotope of helium that has major energy and military implications and where the largest deposit of the stuff known to man is on the moon.  Her claim is this is the foundation of the recent acceleration in the space race between the US and China and without rare earth minerals, the US ability to achieve its goals and obtain this element would be greatly hampered opening the door for China to get ahead.

Are either of these correct?  It is not clear, but I would contend each contains some logic.  In the end, though, as evidenced by the quick retreat on both sides, I suspect that the trade situation between the US and China will move forward in a positive manner, although there could well be a few more hiccups along the way.  And those hiccups could easily see equity markets decline such that there is a real correction of 15% to 20%.  Just not today.

So, what is happening today?  Let’s look.  First, I would be remiss if I didn’t highlight the following Bloomberg headline: ‘Buy the Dip’ Call Grows Louder as China Selloff Seen Contained, as it perfectly encapsulates the ongoing mindset in equity markets.  At least in US equities.  Asia had a much rougher session despite the backtracking with HK (-1.5%) and China (-0.5%) under pressure and weakness virtually universal in the time zone (Korea -0.7%, India -0.2%, Taiwan -1.4%, Australia -0.8%). Tokyo was closed.  It appears there are either still concerns over the trade situation, or perhaps the fact that globally, markets have had long rallies has led to some profit taking amid rising uncertainties.  

European bourses, though are all in the green, with the continent seeing gains of 0.5% or so across the board although the UK is lagging with a miniscule 0.05% gain at this hour (6:30).  As to US futures, as seen above, gains range from 1.0% (DJIA) to 2.0% (NASDAQ).

Meanwhile, bond yields also saw a dramatic move on Friday, tumbling -8bps and back to their lowest level seen in a month as per the below chart from tradingeconomics.com

This morning, those yields are unchanged.  European sovereign yields, which followed Treasury yields lower on Friday are also little changed at this hour, down another -1bp as concerns begin to arise that economic growth is going to be impaired by the escalation in trade tension between the US and China.  

I would argue that commodities are the one area where the back and forth is raising the most concern.  At least that is true in metals markets, with gold, which rallied 1% Friday amid the equity carnage, higher by another 1.6% this morning, to more new highs and we are seeing silver (+1.6%), copper (+4.2%) and Platinum (+3.6%) all in sync.  To me, this is the clearest indicator that there is an underlying fear pervading markets.  Oil (+1.8%) has rebounded from Friday’s rout as the easing of trade tensions appears to have calmed the market somewhat, although WTI remains just below $60/bbl at this point.  

Finally, the dollar is firmer again this morning as, although it softened slightly Friday, it has since regained most of those losses and is back on its recent uptrend as you can see below.

Source: tradingeconomics.com

While Tokyo was closed overnight, we did see further JPY weakness as the yen retraced most of its Friday gains like the rest of the market.  The biggest G10 mover was CHF (-0.9%) followed by AUD (-0.7%) and JPY (-0.7%) with other currencies less impacted and NOK (+0.2%) benefitting from the oil rally.  However, the EMG bloc has seen a much wider dispersion with MXN (+0.5%), ZAR (+1.1%) and CLP (+0.8%) all rallying sharply on the metals rally while PLN (-0.5%) and CZK (-0.4%) lag as they follow the euro lower.

And that’s enough for today.  With the government still on hiatus, no official statistics will be released although we do get a little bit of stuff as follows:

TuesdayNFIB Small Business Index100.5
WednesdayEmpire State Manufacturing-1.8
 Fed’s Beige Book 
ThursdayPhilly Fed Manufacturing9.1

Source: tradingeconomics.com

But, with the lack of data, it appears Chairman Powell has instructed his minions to flood the airwaves with a virtual cacophony of speeches this week, I count 18 on the calendar including the big man himself on Tuesday afternoon.  It seems difficult to believe that their opinions on the economy will have changed very much given the lack of new data.  The market is still pricing a 98% chance of a cut at the end of this month and another 91% chance of a cut in December.  With the increased trade tension, there is much more discussion regarding a slower economic course ahead, which would play into further rate cuts.  However, while that would clearly help precious metals as it ends any ideas of an inflation fight, it is not clear it will weaken the dollar very much as everybody else will almost certainly follow along.

Good luck

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The Chaos Extant

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Though yesterday equities fell
The trend that most pundits foretell
Is higher and higher
As AI’s on fire
And it would be crazy to sell
 
And, too, precious metals keep soaring
A sign of investors abhorring
The chaos extant
Which serves as a taunt
To those who prefer markets boring

 

My friend JJ (Alyosha at Market Vibes on Substack) made a very interesting point about recent markets, which I have felt, but not effectively articulated until he pointed it out; the correlation of pretty much all markets is approaching one, but they are rallying.  Historically, every market has its own drivers and tends to trade somewhat independently of other markets, at least across asset classes.  While it is certainly common to see equity indices rise and fall together, we have all become used to bond markets moving in the opposite direction while commodity and FX markets tend to follow completely different drummers.  After all, while there are certainly big unifying themes, each of these markets, and the components that make them up, all have idiosyncratic drivers of price.

Again, historically, the only time this changes is when there is a crisis, at which point the correlation between markets tends to one (or minus one) as panic selling of risk assets and buying of perceived havens becomes the ONLY trade of interest.

However, what we have observed over the past several weeks is that virtually all risk assets are rising simultaneously, with equities, gold and bitcoin all on a tear as you can see below.

Source: tradingeconomics.com

In other words, their correlations are approaching one.  The odd thing about this is that equity markets tend to reflect expectations for the future of economic activity along the following line of reasoning; strong economic growth leads to strong earnings leads to higher equity prices.  At least that has been the history.  Meanwhile, gold, and more recently bitcoin, have served as the antithesis of that trade, increasing concern over weaker economic outcomes which results in increased demand for haven assets that can buck that trend.  

Of course, historically there has been another asset class seen as protection, bonds, but those are in a tough spot right now as the ongoing massive increases in issuance by countries all over the world has investors somewhat concerned about their safety.  This has been especially true in Japan, where JGB yields last night traded to their highest level since 2008 at 1.70%.

Source: marketwatch.com

But my observation is that investors elsewhere are uncertain how to proceed as yields, though higher than seen several years ago, are not increasing dramatically despite the narrative of fiat debasement, increased inflation and major fiscal problems building around the world.

Source: tradingeconomics.com

The explanation that makes the most sense to me is the concept that governments around the world are going to ‘run it hot’ as they seek faster economic growth at the expense of all else and will only pay lip service to trying to fight inflation.  The result is fiscal spending will continue to prime the pump, whether on purely domestic issues or things like defense, debt issuance will tend toward shorter dates as there is a much greater appetite for T-bills than bonds given the inflation concerns, and so stock markets will benefit, but perceived inflation hedges like gold and bitcoin, will also benefit.  (At this point, I will insert a plug: If you want to protect against inflation, at least against CPI’s rise, while maintaining liquidity, USDi, the only inflation tracking cryptocurrency is a very good idea for some portion of your portfolio.  Check out http://www.USDicoin.com).

The concern about this entire story is that when things change, and they always do at some point, all these assets that are rising in sync will fall in sync, and remember, falling markets tend to move a lot faster than rising ones.  I’m not saying this is imminent, just that the setup feels concerning, at least to my eyes and my gut.

Meanwhile, let’s look at how markets behaved overnight.  Yesterday saw US equity markets slip a bit, although they closed well off their early morning lows and futures this morning are pointing higher by a small amount, 0.2%.  Asian markets saw Japan (-0.5%) and HK (-0.5%) both slide as well, following the US while China remained closed for the holiday but will reopen this evening.  Elsewhere in the region, for those markets that were open (Australia, India, Taiwan were the majors) modest weakness was also the story.  

Europe, though, is a bit of a conundrum as it is having a very positive session (UK +0.9%, Germany +0.7%, France +0.8%, Spain +0.6%) despite the fact that data there continues to disappoint (German IP -4.3%) which as you can see from the below chart continues a three year run of pretty horrible outcomes.

Source: tradingeconomics.com

As well, France has no government, and the UK government is seeing its support erode dramatically.  But looking at the ECB, there is no expectation priced into the market for further rate cuts, so I am baffled as to why European equity markets are performing well.  

Perhaps it is because the dollar is strengthening, which is the recent trend with the euro slipping another -0.25% overnight and trading back to its lowest level in a month.  Too, the pound (-0.2%), CHF (-0.2%) and JPY (-0.6%) have all suffered pushing the DXY up toward 99.00.  Does a strong dollar help foreign markets?  I always thought the story was it hurt them as funding USD debt became more difficult for foreign companies.  Something doesn’t make sense here.  As to EMG markets, they are also seeing their currencies slip, mostly in a similar fashion to the euro, down about -0.2%, although KRW (-0.6%) is the laggard as they have been unsuccessful in getting any tariff relief from President Trump.

Finally, commodity prices continue their remarkable rally, at least metals prices are on a remarkable rally with gold (+1.3% or $50/oz) and silver (+2.5%, now at $49/oz) driving the bus and taking copper (+0.7%) and platinum (+1.8%) along for the ride.  While gold has rallied more than 53% so far this year, it has not been a US investor focus until recently.  I think it has further to run, a lot further.  As to oil (+1.5%), it continues to bounce from last week’s lows but remains well within its recent trading range.  Ukrainian attacks have been successful in reducing Russian output and OPEC+ only raised production by 137K barrels at their last meeting, less than had been rumored.  However, as I observe this market, it needs a large external catalyst to breech the range in my view, and if war doesn’t do the job, I’m not sure what will.

And that’s really it for the day.  Government data remains on hiatus and even though Fed speakers are polluting the airwaves, nobody is listening.  The government has been shut down for a week, and I think that most people just don’t care.  In fact, if the result was less government expenditure for less government service, I think many would make the tradeoff.  The upshot is, the larger trend of equity and commodity rallies remain in place, and the dollar continues to look a lot better than most other fiat currencies.

Good luck

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Never Sold

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The news of the day is that gold
Is actively bought, never sold
The Four Thousand level
Led some folks to revel
And drew many more to the fold
 
But weirdly, the dollar keeps rising
Which based on the past is surprising
The problems in France
And Sanae’s stance
Have been, for the buck, energizing

 

A month ago, many Wall Street analysts came out with forecasts that gold could trade as high as $4000/oz by mid 2026 as they reluctantly jumped on the bandwagon.  But, by many accounts, although my charts don’t show it, the barbarous relic’s futures contract traded a bit more than 120 lots at $4000.10 last night, nine months earlier than those forecasts.

Source: Bloomberg.com

Right now (6:20), the cash market is trading at $3957 (-0.1%) but there is absolutely no indication that the top is in.  Rather, I have been reading about the new GenZ BOLD investment strategy, which is buying a combination of Bitcoin and gold.  Mohammed El-Arian nicknamed this the debasement trade, which is a fair assessment and a number of banks have been jumping on this theme.

Perhaps more interesting than this story, which after all is simply rehashing the fact that gold is seen as a long-term hedge against inflation, is the fact that the dollar is trading higher alongside gold, which is typically not the case.  In fact, for the bulk of my career, gold was effectively just another currency to trade against the dollar, and when the dollar was weak, foreign currencies and gold would rise and vice versa.  But look at these next two charts from tradingeconomics.com, the first a longer term view of the relationship between gold and DXY and the second a much shorter-term view.

The one-year history:

Compared to the one-month history:

I believe it is fair to say that while there is a clear concern about, and flight from, fiat currencies, hence the strength of precious metals as well as bitcoin, in the fiat universe, the dollar remains the best of a bad lot.  Yesterday I described the problems in France and how the second largest nation in the Eurozone was leaderless while trying to cope with a significant spending problem amid broad-based political turmoil.  We have discussed the problems in Germany in the past, and early this morning, the fruits of their insane energy policies were shown by another decline in Factory Orders, this time -0.8%, far less than the 1.7% gain anticipated by economists.  I don’t know about you, but it is difficult for me to look at the below chart of the last three years of Germany’s Factory Orders and see a positive future.  Twenty-two of the thirty-six months were negative, arguably the driving force behind the fact that Germany’s economy has seen zero growth in that period.

Source: tradingeconomics.com

Meanwhile, the yen continues to weaken, pushing toward 151 now and quite frankly, showing limited reason to rebound anytime soon.  Takaichi-san appears to be on board with the “run it hot” thesis, looking for both monetary and fiscal stimulus to help Japan grow itself out of its problems.  The JGB market has sussed out there will be plenty more unfunded spending coming down the pike if she has her way as evidenced by the ongoing rise in the long end of the curve there.  While the 30-year bond did touch slight new highs yesterday, the 40-year is still a few basis points below its worst level (highest yield) seen back in mid-May as you can see in the chart below.  Regardless, the chart of JGB yields looks decidedly like the chart of gold!

Source: tradingeconomics.com

In a nutshell, there is no indication the fiscal/financial problems around the world have been addressed in any meaningful manner and the upshot is that more and more investors are seeking safety in assets that are not the responsibility of governments, but either private companies or have inherent intrinsic value.  This is the story we are going to see play out for a while yet in my view.

Ok, so, let’s look at how markets overall behaved in the overnight session.  China remains on holiday, but it will be interesting to see how things open there on Thursday morning local time.  Japan, was unchanged overnight, holding onto its extraordinary post-election gains.  As to the other bourses there, holidays abound with both Hong Kong and Korea closed last night and the rest of the region net doing very little.  Clearly the holiday spirit has infected all of Asia!  In Europe, though, we are seeing very modest gains across the board despite the weak German data.  The DAX (+0.2%) has managed a gain and we are seeing slightly better performance in France (+0.4%) and Spain (+0.4%) with the UK (+0.1%) lagging slightly.  On the one hand, these are pretty benign moves so probably don’t mean much, but it is surprising there are rallies here given the ongoing lousy data coming from Europe.  As to US futures, at this hour (7:20), they are all pointing higher by just 0.1%.

In the bond market, yields are continuing to edge higher with Treasuries (+2bps) leading the way and European sovereigns following along with yield there higher by between 2bps and 3bps.  There continues to be a disconnect between what appear to be government policies of “run it hot” and bond investors, at least at the 10-year maturity.  Either that or there is some surreptitious yield curve control ongoing to prevent some potentially really bad optics.

In the commodity markets, oil (+0.1%) is still firmly ensconced in its recent range with no signs of a breakout.  I read a remarkably interesting article from Doomberg (if you do not already get this, it is incredibly worthwhile) this morning describing the methods that the Mexican drug cartels have been heavily involved in the oil business in Mexico, siphoning billions of dollars from Pemex and funding themselves, and more importantly, how the US was now addressing this situation.  This is all of a piece with the administration’s view that the Americas are its key allies and its playground, and it will not tolerate the lawlessness that has heretofore been rampant.  It also implies that if successful, much more oil will be coming to market from Mexico, and you know what that means for prices.  As to the metals markets, they are taking a breather this morning with gold (-0.1%) and sliver (-0.3%) consolidating after yesterday’s rally.  We discussed gold above, but silver is about $1.50 from the big round number of $50/oz, something that I am confident will trade sooner rather than later.

Finally, the dollar is rallying again with the euro (-0.5%) and pound (-0.6%) both under pressure and dragging the rest of the G10 with them.  If the DXY is your favorite proxy, as you can see from the chart below, this is the 4th time since the failed breakout in late July that the index is testing 98.50 from below.  It seems there is some underlying demand, and I would not be surprised to see another test of 100 in the coming days.

Source: tradingeconomics.com

It should be no surprise that the CE4 currencies are all under pressure this morning and we have also seen weakness in MXN (-0.3%) and ZAR (-0.3%) although given the holidays in Asia, it is hard to make a claim there other than that INR (-0.1%) continues to steadily weaken and make new historic lows on a regular basis.

With the government shutdown continuing, there is still no official data although there is a story that President Trump is willing to have more talks with the Democrats.  We shall see.  I think the biggest problem for the Democrats in this situation is that according to many polls, nobody really cares about the shutdown, with only 6% registering any concern.  It is a Washington problem, not a national problem.  Of course, FOMC members will continue to speak regardless of the shutdown and today we hear from four more.  Interestingly, nothing any of them said yesterday was worthy of a headline in either the WSJ or Bloomberg which tells me that there is nothing coming from the Fed that matters.

Running it hot means that we will continue to see asset prices rise, bond prices suffer, and the dollar likely maintain its current level if not rally a bit.  We need a policy change somewhere to change that, and I don’t see any nation willing to make the changes necessary.  I have no idea how long this can continue, but as Keynes said, markets can remain irrational longer than you can remain solvent.  Be careful betting against this.

Good luck

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The Winds of Change

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Takaichi-san
Her pronouns so very clear
Brings the winds of change

 

Japan has a new Prime Minister, Sanae Takaichi, the first woman to hold the position.  She was deemed by most of the press as the most right-wing of the candidates, which fits with a growing worldwide narrative regarding nationalism, antagonism toward immigration and concerns over China and its plans in the region.  However, in the waning days of the campaign, she moderated a number of her stances as she does not have a majority in either house of the Diet, and will need to persuade other, less rigid members to vote with her in order to pass legislation.

However, the initial market response has been remarkable.  The Nikkei opened in Tokyo +5.5% and held most of those gains, closing higher by 4.75%.  USDJPY gapped 1.3% on the Tokyo opening and is currently higher by 2.0% and back above 150.  Perhaps the most interesting thing is that despite dollar strength, the precious metals have roared higher with both gold and silver gaining 1.4% as gold touches yet another new all-time high and silver pushes ever closer to $50/oz. Meanwhile, JGB yields are little changed as I imagine it will take a few days, at least, for investors to get a better sense of just how effective she will be at governing in a minority role.

Below is the chart for USDJPY, demonstrating just how big the gap was.  This appears to be another chink in the ‘end of the dollar’s dominance’ armor.  Just sayin’!

Source: tradingeconomics.com

In Europe, the powers that be
Have found citizens disagree
With most of their actions
Thus, building up factions
That want nothing but to be free
 
The most recent story is France
Where Macron’s PM blew his chance
He’s now stepped aside
But Macron’s denied
He’ll willingly exit the dance

However, the dollar’s gains today are not merely against the yen, but also, we have seen the euro (-0.7%) slide sharply with the proximate cause here being the sudden resignation of French PM LeCornu.  And the reason it seems like it was only yesterday that France got a new PM after a no-confidence vote in September, is because it basically was only yesterday.  PM LeCornu lasted just one month in the role as President Macron didn’t want to change the cabinet there, thus making LeCornu’s job impossible.  While the next presidential election is not scheduled until April 2027, and Macron is grasping to his role as tightly as possible, it appears, at least from the cheap seats over here in the US, that the vote will happen far sooner than that.  He appears to have lost whatever credibility he had when first elected, and France has now had 4 PM’s in the past twelve months, hardly the sign of a stable and successful presidency.

Like the bulk of the current European leadership, Macron has decided that nearly half the country should not have their voices heard by banning Madame LePen’s RN from government.  And while President Biden was never successful imprisoning President Trump, in France, they managed to convict LePen on some charge and ban her from running.  But that has not dissuaded her followers one iota.  We see the same behavior in Germany with AfD, and the Merz government’s attempts to ban them as a party, and similar behavior throughout Europe as the unelected Brussels contingent in the European Commission struggles to do all they can to retain power.

In fact, if you look at the most recent polls I can find for France, from Politico, you can see that RN, LePen’s party, is leading the polls while ENS, Macron’s centrist party has just 15% support.  The far left NFP is in second place and the center-right LRLC is at 12%.  It is difficult for me to believe that Macron can hold on until 2027, at least 18 months away, and if he does, what type of damage will he do to France?

The point of the story is that whatever you may think of Donald Trump, he has the reins of government and is doing the things he promised on the border and immigration, reducing government and reducing regulations.  In Europe, the entrenched bureaucracy is fighting tooth and nail to prevent that from happening with the result that economic activity is suffering and prospects for future growth are stunted.  And all that was before the US change in trade policy.  With that in mind, absent a massive Fed turnaround to dovishness, which doesn’t seem likely in the near term, the euro has more minuses than pluses I think and should struggle going forward.

Ok, two political stories are the driver today, and neither one has to do with Trump!  Meanwhile, let’s look at how everything else has behaved overnight.  Friday saw a mixed session in the US, and all I read and heard over the weekend was that the denouement was coming, perhaps sooner than we think.  The recurring analogy is Hemingway’s description of going into bankruptcy, gradually, then suddenly, and the punditry is trying to make the case that the ‘suddenly’ part is upon us.  I’m not convinced, and would argue that, at least in the US, things can go on longer than they should.  This is not to say the US doesn’t have serious fiscal issues, just that we have better tools to address them than anyone else.

Elsewhere in Asia, China is still on holiday while HK (-0.7%) could find no joy in the Japanese election.  But Korea (+2.7%), India (+0.7%) and Taiwan (+1.5%) all rallied nicely with only the Philippines (-1.8%) showing contrary price action as investors grew increasingly concerned over a growing corruption scandal with the government there and infrastructure embezzlment allegations.  I didn’t mention above but the rationale behind the Japanese jump is that Takaichi-san is expected to push for significant fiscal expansion on an unfunded basis, great for stocks, not as much for bonds.

In Europe, though, you won’t be surprised that France (-1.6%) is leading the charge lower, although in fairness, the rest of the continent is doing very little with the other major exchanges +/- 0.1% basically.  As to US futures, at this hour (7:15), they are all pointing higher by 0.5% or so.

In the bond market, Treasury yields have moved higher by 4bps this morning, adding to a similar gain on Friday as it appears there are lingering concerns over what happens with the government shutdown.  (Think about it, that issue hasn’t even been a topic of discussion yet this morning!). But remember, the government shutdown does not impact the payment of coupons on Treasury debt, so the issues are very different than the debt ceiling.  As to European sovereigns, not surprisingly, French OATs are the wors performers, with yields jumping 8bps (they have real fiscal problems) but the rest of the continent has tracked Treasury yields and are higher by 3bps to 4bps as well.

I’ve already highlighted precious metals, although copper (-0.7%) is bucking the trend, albeit after having risen more than 10% in the past month.  Oil (+1.4%) is also continuing to bounce off the bottom of the range trade and remains firmly ensconced in the $61.50 to $65.50 range as it has been for the past six months.  In fact, looking at the chart below from Yahoo finance, you can see that except for the twelve-day war between Israel and Iran, nothing has gone on here.  The net price change in the past six months has been just -0.19% as you can see in the upper left corner.  While this will not go on forever, I have no idea what will break this range trade.

Finally, the dollar is stronger across the board with the pound (-0.4%) and SEK (-0.5%) the next worst performers in the G10 while CAD and NOK are both unchanged on the day, reflecting the benefits of stronger oil and commodity prices.  In the EMG bloc, the CE4 are all softer by between -0.6% and -0.9%, tracking the euro, and we have seen APAC currencies slip as well (KRW -0.5%, CNY -0.15%).  MXN (-0.2%) and ZAR (-0.3%) seem to be holding in better than others given their commodity linkages.

And that’s all we have today.  With the shutdown ongoing, there are no government statistics coming but we will hear from 8 different Fed speakers, including Chairman Powell on Thursday morning, over a total of 15 different venues this week.  Again, there is a wide dispersion of views currently on the FOMC, so unless we start to see some coalescing, which given the lack of data seems unlikely in the near term, I don’t think we will learn very much new.  As far as the shutdown is concerned, the next vote is scheduled for today, but thus far, it doesn’t seem the Democratic leadership is willing to change their views.  Funnily, I don’t think the markets really care.

Overall, I see more reasons to like the dollar than not these days, and it will take a major Fed dovish turn to change that view.

Good luck

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