Tag Archives: #gold

A Day to Give Thanks

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Today is a day to give thanks
To those who flew planes and drove tanks
In multiple wars
And too many tours
No matter which service or ranks
 
Now, turning to markets at hand
The bulls, yesterday, had command
So, risk assets rose
While pundits compose
A narrative, things are just grand

 

It was certainly a positive day in markets yesterday, with equities and commodities rising sharply while bonds sat in the corner with the dollar, neither one trying to rain on the parade.  The imminent end of the government shutdown had everyone feeling euphoric.  But that is so yesterday. It appears that reopening the US government is not enough to keep global markets rallying.

And the thing is, there is just not that much new of note to discuss this morning.  As it is Veteran’s Day here in the US, banks and the bond market are closed, although equities and commodities markets are open.  But the news cycle overnight was led by the fact that Softbank sold their NVDA stake for a $5.8 billion profit.  And that’s pretty thin gruel for someone who writes about market activities.  Everything else is about who won/lost regarding the shutdown and frankly, that is something markets tend to ignore.

With that in mind, and given the absence of any substantive data, let’s go right into market activity overnight.  Asian equity markets were mixed although I would say there was more red (Japan, China, Taiwan, Australia, Indonesia, Thailand, Philippines) than green (HK, Singapore, Malaysia, Korea, India) but it appears most of the activity had limited volumes and there are few stories of note as drivers.  

In Europe, though, things are looking better with all the major bourses higher this morning, led by the UK (+0.8%) where bad news was good for stocks as the Unemployment Rate ticked higher, to 5.0%, which has markets now pricing an 80% probability of a rate cut by the BOE next month.  This has been enough to help most European markets higher (CAC +0.65%, IBEX +0.5%) except for the DAX (0.0%) which is lagging after the ZEW Sentiment Index was released at a weaker than forecast 38.5, which was also down from last month’s reading.  

I think it might be worthwhile, though, to take a longer-term perspective on this sentiment survey.  As you can see from the chart below (data from ZEW.de), the current level is very middle of the pack.  In fact, the long-term average reading is 21.3, but of course, that includes numerous negative readings during recessions.  I might argue that things in Germany are not collapsing, but nowhere near robust.  My concern, if I were a German policymaker, is that it appears the survey has peaked at a much lower level than history, an indication that the best they can hope for is still mediocre.

Finally, US futures are pointing slightly lower, -0.2% or so, at this hour (7:50), arguably a little hangover from yesterday.

In the bond market, of course, Treasury yields aren’t trading, but European sovereigns are essentially unchanged as well, except for UK Gilts, which have seen yields slip -7bps on that higher Unemployment data driving rate cut expectations.  Given the ongoing fiscal issues in the UK, where they cannot seem to come up with a budget and all signs point to a worsening debt position, I’m not sure why yields there would decline, but that’s what’s happening.

Turning to the commodity markets, oil (+0.5%) continues to trade either side of $60/bbl, making no headway in either direction.  I listened to an excellent podcast yesterday with Doomberg, who once again highlighted his view that the long-term direction of the price of oil is lower.  The case he makes is that on an energy basis, NatGas, even though it is up 48% in the past year, remains significantly cheaper than oil, one-quarter the price, and that the arbitrage will close driving the price of oil lower and the price of NatGas higher.  Remember, politics is far more impactful on oil drilling than geology.  Ask yourself what will happen to the price of oil if Venezuela’s government falls and is replaced by a pro-US government allowing the oil majors in to help tap the largest oil reserves on the planet.  I assure you that is not bullish for the price of oil.

As to the metals markets, after yesterday’s very impressive moves, they are continuing higher this morning, at least the precious metals are with gold (+0.5%), silver (+0.8% and now over $50/oz) and platinum (+0.75%) all extending their gains.  These are the same charts in the metals, and my take is we had a blowoff run which has now corrected, and we could easily see another leg higher of serious magnitude.

Source: tradingeconomics.com

Finally, the dollar is mostly drifting lower this morning, although not universally so.  While the euro (+0.15%), CHF (+0.6%) and Scandies (NOK +0.6%, SEK +0.4%) are all firmer, the pound (-0.2%) and Aussie (-0.2%) are suffering a bit.  Yen is unchanged along with CAD.  In the EMG bloc, it is also a mixed bag with INR (+0.25%) and PLN (+0.25%) having solid sessions although KRW (-0.6%) is going the other way and the rest of the bloc is +/- 0.1% or so different.  Again, the dollar is just not that exciting in its own right.

There is a new data point coming out, ADP Weekly Employment change, seemingly in an effort to fill in gaps until the BLS gets back to work.  However, given its newness, it is not clear what value it will have to markets.  There is also a speech by Governor Barr but tomorrow is when the Fedspeak really hits.

It is shaping up to be a quiet day, and I suspect absent a major equity move, or some White House bingo, FX markets are going to drift nowhere of note.

Good luck

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Like a Fable

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It seems there’s a deal on the table
To end the shut down and enable
The chattering classes
To force feed the masses
A story that’s quite like a fable
 
Both sides will claim they have achieved
Their goals, though they were ill-conceived
But markets will love
The outcome above
All else, and we’ll all be relieved

 

While the shutdown is not technically over as the House of Representatives need to reconvene (they have been out of session since September 19th when they passed the continuing resolution) and adjust the bill so that it matches the one the Senate agreed last night and can be voted on in the House, it certainly appears that the momentum, plus President Trump’s imprimatur, is going to get it completed sometime this week. 

The nature of the deal is unimportant for our purposes here and both sides will continue to claim that they were in the right side of history, but the essence is that there appeared to be some movement on health care funding so, hurray!

As you can see in the chart below, while the story broke late yesterday afternoon and futures responded on the open in the evening session, the reality is the market sniffed out something was coming around noon on Friday.  In fact, the S&P 500 has rallied 2.4% since noon Friday.

Source: tradingeconomics.com

So, everything is now right with the world, right?  After all, this has been the major topic of conversation, not just by the talking heads on TV, but also in markets as analysts were trying to determine how much damage the shutdown was doing to the economy.  While I have no doubt that there were many people who felt the impact, my take is there were many, many more who felt nothing.  After all, the two main features were air travel and then SNAP benefits.  Let’s face it, on average (according to Grok) about 2.9 million people board airplanes in the US, well less than 1% of the population, although SNAP benefits, remarkably, go to 42 million people.  However, those have only been impacted for the past week, not the entire shutdown.

I’m not trying to make light of the inconveniences that occurred, just point out that from a macroeconomic perspective, despite the fact that the shutdown lasted 6 weeks, it probably didn’t have much of an impact on the statistics as all the money that wasn’t spent last month will be spent next month.  Different analyst estimates claim it will reduce Q4 GDP by between 0.2% and 0.5% with a concurrent impact on the annual result.  I am willing to wager it is much less.  However, it appears it will have ended by the end of the week and so markets are back to focusing on other things like AI, unemployment and QE.

Now, those three things are clearly important to markets, but I don’t think there is anything new to discuss there today.  Rather, I would like to focus on two other issues, one more immediate and one down the road, which may impact the way things evolve going forward.

In the near term, as winter approaches, meteorologists are forecasting a much colder winter in the Northern Hemisphere across both North America and Europe, something that is going to have a direct impact on NatGas.  Bloomberg had a long article on the topic this morning with the upshot being that the Polar Vortex may break further south early this year and bring a lot of cold weather along for the ride.  This is clearly not new news to the NatGas market, as evidenced by the fact that its price has exploded (no pun intended) higher by 43% in the past month!

Source: tradingeconomics.com

While oil prices have remained stuck in a narrow range, trading either side of $60/bbl for the past 6 weeks amid a longer-term drift lower as you can see in the below chart, oil is only utilized by ~4% of homeowners for heating with 46% using NatGas.

Source: tradingeconomics.com

Ultimately, I suspect that we are going to see this feed through to inflation as not only are there the direct costs of heating homes, but NatGas is also the major source of generating electricity, with 43% of the nation’s electricity using that as its source.  We have already seen electricity prices rise pretty sharply over the past months (I’m sure you have all felt that pain) and if NatGas prices continue to climb, that will continue.  Remember, the current price ~$4.45/MMBtu is nowhere near significant highs like those seen just 3 years ago when it traded as high as $10/MMBtu.  With all this price pressure, will the Fed continue down their path of rate cuts?  Alas, I believe they will, but that doesn’t make our lives any better.

Which takes me to the second, longer term issue I wanted to mention, European legislation that is seeking to effectively outlaw the utilization of cash euros.  This substack article regarding recent Eurozone legislation is eye-opening as the ECB and Europe try to combat the coming irrelevance of the euro.  For everyone who either lives in Europe or does business there, I cannot recommend reading this highly enough.  There are many changes occurring in financial architecture, and by extension financial markets.  Keep informed!

Ok, enough of that, let’s see how markets have responded to the Senate deal.  Apparently, US politics matters to the entire global equity market.  Green is today’s color with Japan (+1.25%), HK (+1.55%) and China (+0.35%) all performing well, although not as well as Korea (+3.0%) which really had a good session.  Pretty much all the other regional markets were also higher.  In Europe, the deal has everyone excited as well with gains across the board (Germany +1.8%, France +1.4%, Spain +1.4%, UK +1.0%).  As to US futures, at this hour (7:45) they are higher by about 1% across the board.

I guess with that much excitement about more government spending, we cannot be surprised the yields have edged higher.  This morning Treasury yields are up by 3bps, which is what we saw from JGB markets last night as well, although European sovereign yields are little changed on the day.  I suspect, though, if equities continue to rally, we will see yields there edge higher.

In the commodity space, oil (+0.5%) continues to trade in its recent range.  The most interesting thing I saw here was that the IEA is set to come out with their latest annual assessment of the oil market and for the first time in more than a decade they are not going to claim that peak fossil fuel demand is here or coming soon.  The climate grift is truly breaking down.  But the commodity story of the day is precious metals which are massively higher (Au +2.5%, Ag +3.3%, Pt +2.6%) with copper (+1.6%) coming along for the ride.  The narrative here is that with the government shutdown due to end soon, President Trump talking about $2000 tariff rebate checks and the Fed likely to cut rates in December (65% probability), debasement is with us and metals is the place to be!

Interestingly, the dollar is not suffering much at all despite the precious metals story.  While AUD (+0.6%), ZAR (+0.6%) and NOK (+0.6%) are all stronger on the commodity story, the euro is unchanged, JPY (-0.4%) continues to decline and the rest of the G10 is not doing enough to matter.  In truth, if I look across the board, there are more currencies strengthening than weakening vs. the greenback, but overall, at least per the DXY, the dollar is little changed.

There is still no data at this point, although it will start up again when the government gets back to work.  Actually, there has been much talk of the weakness in Consumer sentiment based on Friday’s Michigan Index which fell to 50.3, the second lowest in the history of the series with several subindices weakening substantially.  However, that was before the news about the end of the shutdown, so my take is people will regain confidence soon.  As well, we hear from 9 Fed speakers this week, with 5 of them on Wednesday!  Both dissenters from the October meeting will speak, so perhaps things have changed in their eyes, but I doubt it.

At this point, all is right with the world as investors anticipate the US government getting back to work while the Fed will continue to support markets by easing policy further.  In truth, the dollar should not benefit here, but I have a feeling that any weakness will be short-lived at best.  Longer term, I continue to believe the dollar is the place to be.

Good luck

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Curses and Squeals

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Though data is scarce on the ground
This week has the chance to astound
Four central banks meet
And when it’s complete
Two cuts and two stays ought abound
 
Meanwhile, Mr Trump’s signing deals
In Asia, an act that reveals
His fervent desire
To drive markets higher
As foes let out curses and squeals

 

Some days, there’s very little to note, with the news cycle a rehash of stories that have been festering for weeks.  This is especially true in the political sphere, but also on the economic front.  As well, given the ongoing government shutdown and the lack of government data being released, a key market focus is missing.  But not today!

News across the tape moments ago is that President Trump has agreed a trade deal with South Korea, although the details of the deal are yet to be revealed.  When it comes to Trump and trade deals, it is always difficult to get through the hype to determine if things will actually improve, but if we use the KRW as a proxy for market sentiment, as you can see in the chart below, the announcement was seen as a benefit to the won.

Source: tradingeconomics.com

This is hardly definitive, and the nature of a trade deal is that it takes time to be able to determine its benefits for both sides, but for now, it appears markets are giving it the benefit of the doubt.  As well, it continues to be reported that Presidents Trump and Xi will be sitting down tomorrow (tonight actually) and that a trade framework has been agreed by Secretary Bessent and Chinese Vice Commerce Minister Li Chenggang which includes reduced tariffs, fentanyl, soybeans, semiconductors and rare earth minerals as key pieces of the puzzle.  

The ongoing competition between the US and China is not about to end with this deal, but perhaps it will be able to revert to a background issue rather than a headline one, and that is likely a positive for all.  Certainly, equity markets continue to believe that this dialog is a benefit as evidenced by their daily trips to new highs.

Which takes us to the other key discussion point in markets, central banks.  Over the next twenty-seven hours (it is 6:30am as I type) we are going to hear four major central banks explain their latest policy steps starting with the Bank of Canada (expected 25bps cut) at 9:45 this morning, then the FOMC at 2:00 this afternoon with their 25bps cut.  This evening at 11:00, NY time, the BOJ is expected to leave rates on hold, although there are those who believe a 25bps hike is possible, and then tomorrow morning at 9:15 EDT, the ECB will also leave rates on hold.  

While this is certainly a lot of new information, the question is, will it have any market impact?  Given the market pricing of these events, if any of the central banks do something different, you can be sure its markets will respond.  If I had to assess what might be different, both the BOC and FOMC could cut more than 25bps, and the ECB could cut 25bps rather than standing pat.  In all those cases, the currency would likely weaken sharply at first, although if all those things happened, I suppose it would simply create a new equilibrium.  But understand, I don’t think any of that WILL happen.

Regarding the Fed, though, there is another question and that is, what is going to happen to QT and the balance sheet.  Lately, there has been a great deal of discussion regarding how much longer the Fed will allow the balance sheet to shrink.  Last week I discussed the difference between ample and abundant reserves, but in numeric terms, the signals are coming from the SOFR (Secure Overnight Financing Rate) market, the one that replaced LIBOR.  It seems that there is increasing concern over the recent rise in the rate.  This is seen by numerous pundits, as well as by some in the Fed, as a signal that the reserve situation is getting tighter, thus offsetting the Fed’s attempts at ease. 

The below chart from the NY Fed shows the daily wiggles, but also, it is pretty clear that the recent trend has been higher.  You can see the September Fed funds cut in the sharp drop, and the first peak after that was September 30th, the quarter-end when banks typically look to spruce up their balance sheets, so borrow more aggressively.  But since then, this rate has been edging higher, an indication that there may not be sufficient reserves available for the banking system.

This begs the question; will the Fed end QT today?  Or wait until December?  My money is on today as they are growing concerned about the employment situation with the uptick in recent layoff announcements, and the pressure on SOFR is the best indicator they have that things have reached the point where their balance sheet no longer needs to shrink.  One other thing to keep in mind, at some point, it seems likely that the Fed is going to need to find more buyers of Treasuries as the market may develop indigestion given the amount being issued.  That pivot back to QE, whatever it is called, is easier if they are not simultaneously reducing their own balance sheet.

And one final point on the Fed.  Apparently, when they cut today, it will be the twenty-second time the Fed will have cut with stock indices at all-time highs, and of those previous twenty-one, twenty-one times equity markets were higher one year later.  Let’s keep that party rolling!

Ok, let’s look at how things have gone overnight.  Tokyo (+2.2%) was basking in the glow of all the love between President Trump and PM Takaichi, as it, too, traded to new all-time highs.  China (+1.2%) gained on the news of the trade framework, but interestingly, HK (-0.3%) did not follow suit.  And it should be no surprise that Korea (+2.1%) rallied on that trade news with India and Taiwan rising as well.  Australia (-1.0%) though, had a rougher go after a higher than forecast inflation print (3.5%) put paid to the idea that the RBA would be cutting rates again soon.

In Europe, Spain (+0.65%) is rallying on solid GDP data (1.1% Q/Q) although the rest of the continent is doing very little with virtually no change there.  In the UK, the FTSE 100 (+0.6%) is rallying on stronger corporate earnings from miners (metals are higher) and pharma companies.  As to US futures, at this hour (7:30) they are all nicely in the green, about 0.35% or so.

In the bond market, Treasury yields have backed up 2bps, but are still just below the 4.00% level, hardly signaling major concern right now.  European sovereign yields are all essentially unchanged this morning and overnight, only Australia (+5bps) moved after that CPI data Down Under.

Turning to commodities, oil (+0.5%) is bouncing after a couple of weak sessions, but net, we are right back to the $60 level which appears to be a comfortable level for both buyers and sellers.  It is also a high enough price to encourage continued exploration, so my take is we are likely to trade either side of this level for quite a while going forward.  My previous bearish views are being somewhat tempered, although I don’t foresee a major rally of any note.  

Source: tradingeconomics.com

In the metals markets, gold (+1.7%) is bouncing off its recent trading low and currently back above $4000/oz.  A look at the chart for the past month shows just how large the movements have been as the parabolic blow-off to near $4400 was seen through the middle of the month, and after a second try, the rejection was severe.  I don’t believe the long-term story in the precious metals has changed at all, the idea that fiat currencies are going to maintain their current status as reserve assets is going to be more and more difficult to defend with gold the natural replacement.  But in a market with a history of manipulation, don’t be surprised to see many more sharp moves ahead.

Source: tradingeconomics.com

As to the rest of the metals, they are all higher this morning with silver (+2.1%) leading the way and copper (+0.6%) and platinum (+1.6%) following in its wake.

Turning to those fiat currencies, the dollar is broadly firmer this morning, with only AUD (+0.15%) managing any gains against the greenback after that inflation print got traders thinking about higher rates Down Under.  But otherwise, in the G10, the dollar is ascendant.  In the EMG bloc, we already discussed KRW, but ZAR (+0.2%) is also gaining today on the back of the metals bounce.  Elsewhere, though, modest dollar strength is the rule.  What makes this interesting is the dollar is back to rallying alongside precious metals.

Ahead of the Fed, we only see EIA oil inventories with a small draw expected.  In theory, with President Trump in South Korea, one would expect him to be sleeping throughout most of today’s session, but apparently the man rarely sleeps.

The big picture is that run it hot remains the play, and that means equities should benefit, bonds should have a bit more trouble, but the dollar and commodities should do well.  I see no reason for that to change soon.

Good luck

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A Pox

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The world is a wonderful place
We know this because of the chase
For more and more risk
Though Washington’s fisc
Continues, more debt, to embrace
 
Investors can’t get enough stocks
And bonds have found buyers in flocks
But havens like gold
Are actively sold
As though they’ve come down with a pox

 

I’m old enough to remember when there was trouble all around the world; war in Ukraine was escalating, anxiety over a more serious fracture in the trade relationship between the US and China was growing, and President Trump was building a ballroom at the White House!  Ok, the last one is hardly a problem.  But just two weeks ago, risk assets were struggling and havens seemed the best place for investors to hide.  But that is sooooo last week.

By now you are all aware that the delayed CPI report on Friday came in on the soft side, thus reinforcing the Fed’s plans to cut rates tomorrow.   While Fed funds futures pricing, as seen below, has not changed very much at all, with virtual certainty of cuts tomorrow and in December, plus two more by the April meeting next year, the punditry is starting to float the idea that even more cuts are coming because of concern over the employment situation and the fact that inflation appears under control.

Source: cmegroup.com

Now, it is a viable question, I believe, to ask if inflation is truly under control, but the problem with this concern is that Chairman Powell told us, back in September, that they are not really focused on that anymore.  The fact that the official payroll data has not been released allows the Fed to avoid specific scrutiny, but literally everything I read tells me that the employment situation is getting worse.  The latest highlight was Amazon’s announcement yesterday that they would be reducing corporate staff by about 14,000 folks in the coming months as, apparently, AI is reducing the need for headcount.

In fact, I would contend the answer to the question; if the economy is doing so well, why does the Fed need to cut rates, is there is a growing concern over the employment situation which has been masked by the lack of data.

But we all know that the economy and the stock market behave very differently at times, and this appears to be one of those times.  Yesterday, yet again, equity markets in the US closed at record highs as earnings releases were strong virtually across the board.  Adding to the impetus was the news that Treasury Secretary Bessent announced a framework for trade between the US and China had been reached with the implication that when Presidents Trump and Xi meet later this week, a deal will be signed.

Putting it all together and we see the concerns that were driving the “need” for owning havens last week have virtually all dissipated.  While the Russia/Ukraine situation remains fraught, I don’t believe that equity markets anywhere in the world have paid attention to that war in the past two years.  Oil markets, sure, but not equity markets.

There is a fly in this ointment, though, and one which only infrequently gets much airtime.  The US is continuing to run substantial fiscal deficits.  Lately, as evidenced by the fact that 10-year yields have slipped back to their lowest level this year, and as you can see below, are clearly trending lower, this doesn’t seem to be an issue.  But ever-increasing federal deficits cannot last forever, and if the Trump plans to boost growth significantly does not work out, there will be a comeuppance.  I have described before my view that the plan is to ‘run it hot’ and nothing we have seen lately has changed that sentiment.  I sure hope it works for all our sakes!

Source: tradingeconomics.com

Ok, let’s see if the euphoria evident in the US markets has made its way around the world.  The answer is, no.  Interestingly, despite a high-profile meeting between President Trump and Japanese PM Takaichi, where Trump was effusive in his support for the new PM and her plans to increase defense spending, Japanese equities were under pressure all evening, slipping -0.6%.  Too, both China (-0.5%) and HK (-0.3%) could find no traction despite the news that a trade deal was imminent.  In fact, the entire region was under pressure with losses in Korea, Taiwan, Australia and virtually every market there.  Was this a sell the news event?  That seems unlikely to me, but maybe.  As to Europe, pretty much every major index is modestly softer this morning, down between -0.1% and -0.2%, so not terrible, but clearly not following the US.  As to US futures, at this hour (7:30), they are little changed to slightly higher.

Global bond markets are quiet this morning, with almost all unchanged or seeing yields slip -1bp.  While US yields have been trending lower, in Europe, I would say things are more that yields have stopped rising and, perhaps, topped, but are not yet really declining in any meaningful fashion yet.  Germany’s bund market, pictured below, exemplifies the recent price action.

Source: tradingeconomics.com

One interesting note is that JGB yields slipped -3bps overnight, despite PM Takaichi reaffirming that the defense budget was going up with no funding mentioned.  Like I said, the world is a better place this morning!

In the commodity markets, gold (-1.5%) continues to get punished as all those who were chasing the haven story have been stopped out.  The price went parabolic two weeks ago, and price action like that cannot hold for any length of time.  This has taken silver (-1.1%) and copper (-0.5%) lower as well, and I suspect that there could well be further to decline.  Oil (-1.1%) meanwhile seems far less concerned about the sanctions on Lukoil and Rosneft this morning.  The conundrum here is if the economy is performing well, that would seem to be a positive demand driver.  I have not seen word of major new oil sources being discovered to increase supply dramatically, but if you think back to last week, the narrative was all about a glut.  I guess we will learn more with inventory data this week.

Finally, the dollar… well nobody really seems to care.  As you can see from the below chart of the DXY, it is approaching six months where the index has traded in a very narrow range, and we are pretty close to the middle.  I don’t know the catalyst that will be needed to change this story, but frankly, I suspect that nobody (other than FX traders) is unhappy with the current situation.

Source: tradingeconomics.com

It’s not that there aren’t currencies that move around on a given day, but there is no broad trend in place here.

On the data front, the key release today is the Case-Shiller Home Price Index (exp 1.9%) and then the Richmond Fed Manufacturing Index (-14) is also due later this morning.  However, all eyes are on tomorrow’s FOMC outcome with the focus likely to be more on QT and its potential ending, than on the rate cuts, which are universally expected.  One other thing, with the government shutdown ongoing, GDP and PCE data, which were originally scheduled for this week, will not be released.

Life is good!  That is the only conclusion I can draw right now based on the ongoing strength in risk assets, at least US risk assets.  Keynes was the one who said, markets can remain irrational longer than you can remain solvent, and I have a feeling that we are approaching some irrationality.  But for now, enjoy the ride and if FX is your arena, I just don’t see a reason for any movement.

Good luck

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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

Adf

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

Adf

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

Adf

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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