Tag Archives: #higherdollar

Leverage Thumbscrews

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The President said that today
He’d let us know who’ll replace Jay
The favorite is Warsh
But that could be harsh
For markets, or so people say
 
But really, this morning, the news
Is silver and gold have the blues
It turns out their prices
Were causing a crisis
For players with leverage thumbscrews

The big news this morning, is that President Trump is ostensibly going to announce former Fed governor Kevin Warsh as his selection for the next Fed Chair.  His history has been as someone who has disagreed with many Fed decisions, and he skews to the hawkish side of the spectrum, which seems odd for Trump who everyone expected would nominate a dove. He is clearly quite capable of doing the job and brings a significant amount of intellectual firepower to the role.  It remains to be seen, if he is nominated, how the confirmation process will proceed, as well as what Jay Powell will do when his Chairmanship is up (his term runs until 2028).

The interesting connection for me is the number of stories that have linked this rumor to major market moves overnight, especially in the precious metals space.  So, let’s jump in and look at a few charts to offer some perspective on things.  

As we all live in the moment, it is often difficult to consider history in its fullness.  Look at the three charts of gold (from tradingecomomics.com) that follow, each over a different timespan, 1week, 1year and 5 years.

1 week:

1 year:

5 years:

What do you notice:  there is no question that gold (-4.7% or $250/oz) has fallen sharply overnight.  that is evident in the first two charts.  However, a look at the first chart shows you that despite a decline of that magnitude, the barbarous relic is still higher THIS WEEK!  While gold has been exploding higher, it only crossed above $5000/oz for the first time on Sunday night in Asian trading.  Now, I expect the bulk of the discussion will center around the 1-year chart which shows the dramatic decline as that is the newsworthy story, the ‘collapse’ in the price.  But if we zoom out further, to the 5-year perspective, which has weekly candles, the last down week was in December.  Market technicians will point to the shape of the most recent weekly candle, which is typically referred to as a hammer candle, and explain it signals a reversal in trend.  And maybe it does.  But the fact is volumes on the way up were much higher than those overnight, which does not portend panic selling.  Trees don’t grow to the sky, and a reversal was always expected.  Here we are.

The price action in silver overnight was almost identical, albeit more violent as has been the case with the rally as well.  Platinum too.  A couple of other things to consider about this:

  • Today is month end, a time when positions are typically adjusted and rebalanced, so given the tremendous rally seen this month in the metals, selling is what rebalances things.
  • China has not changed its policy regarding gold purchases nor its policy on license restrictions for the export of silver, so to the extent that those were driving forces in the rally, they still exist
  • There is no evidence the world is a safer place this morning than it was yesterday morning.  There’s no peace in Ukraine; the Ayatollah has not relinquished power; Cuba and Venezuela remain in the status quo, and Europe continues to try to figure out how to power themselves without relying on the two largest energy exporters in the world, the US and Russia.

It beggar’s belief that this is entirely a reaction to the rumored naming of Kevin Warsh as the next Fed chair.  As I type early this morning, the prices of precious metals are already bouncing nicely off their lows.  I do not know what drove this move specifically, but I do not believe that the big picture story has changed.

This segues nicely into another key narrative this week, the dollar’s massive break lower.  Earlier this week I had written about how the DXY was approaching a double bottom on the charts and many in the market were convinced that if we traded below that level, and more importantly, closed below the level, which was 96.22, that it opened the door for a much more significant leg lower.  I addressed this, pointed out that the dollar was still in the broad middle of its long-term trading range, but acknowledged that a move lower was quite realistic.  Well, as of yet, we have not closed below the key level, and this move is shaping up as a potential bounce back into the range.  As you can see in the chart below, the baseline is still holding on.

Source: tradingeconomics.com

Now, the dollar is stronger across the board this morning (EUR -0.2%, GBP -0.2%, JPY -0.5%, CHF -0.4%, ZAR -1.1%, CLP -0.6%) although these declines are abating in a similar fashion to the precious metals price action this morning.   Here, too, portfolio rebalancing would indicate that traders would be buying dollars given its decline this month.  Has anything really changed in the FX markets overnight?  All the recent policy decisions were exactly as expected.  Data overnight showed that European GDP continues to muddle along at just 1.3%, hardly a rationale to invest aggressively on the continent.  Is this dollar rebound just a response to the Warsh story and his presumed hawkishness?  Or is it the normal ebb and flow of markets.  I am not yet willing to concede the dollar is breaking lower, I need more proof for that, but I certainly cannot rule out that outcome, regardless of who the new Fed chair is.  

How about other markets?  Equities in the US yesterday were hampered by Microsoft’s earnings release Wednesday, with its decline dragging down the NASDAQ, although the DJIA managed to recoup all its early losses and finish in the green (barely).  But Asian bourses had a more difficult time.  While Japan (-0.1%) was little changed, both China (-1.0%) and HK (-2.1%) fell sharply, and I don’t believe those markets were responding to the Warsh rumor.  It appears that HK, especially, was the victim of month end profit taking and rebalancing as it has had quite a good run this month.  The other key laggard in the region was Taiwan (-1.45%) while the rest of the markets in the time zone were +/-0.5% or so, or less.  

European shares, though, are all firmer this morning led by Spain (+1.6%) after GDP data there was a tick better than expected at 2.6%.  But gains are universal (DAX +0.85%, CAC +0.7%, FTSE 100 +0.4%) as earnings results were enough to offset the generally lackluster data.  Perhaps the idea of another ECB rate cut is entering the collective consciousness, although according to the ECB’s own forecast tool, there is a 10% probability of a 25bp rate HIKE.  I’ll believe that when I see it.  As to US futures, they are softer this morning as I type (7:10), with declines on the order of -0.3% across the board, which is also a rebound from levels earlier this morning.

Bonds:  nobody seems to care.  Yields have edged higher by 1bp virtually across the board this morning and still remain within the recent trading ranges.  It is quite interesting how little financial markets are focusing on this key source of information.  

And before I leave, oil (-0.5%) has backed off its recent top, although remains higher by 6.5% this week as concerns over a possible US action in Iran continue to haunt traders.

On the data front, this morning brings PPI (exp 0.2%, 2.7% Y/Y) for headline and (0.2%, 2.9% Y/Y) for core as well as Chicago PMI (44.0).  Too, we get the first Fed speaker, Governor Bowman, but the only Fed news that is going to matter today is the mooted announcement about the next Chair.

What have we learned this week?  Volatility is alive and well in the commodity space, and, although not quite to the same extent, in the equity space.  Bonds are boring and the dollar continues to refuse to stick to the narrative that its days in the sun are over.  Regarding the dollar, remember that despite all the talk of the dollar’s collapse, the only thing we have heard from ECB members is that if the euro rises too much (i.e. the dollar falls sharply) that is a problem and they will need to respond.  It’s been an eventful month in the markets.  I suspect that this may be a map for at least the first half of the year.

Good luck and good weekend

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Too Potent a Force

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The headline today’s NFP
As pundits will try to agree
On whether the Fed
When looking ahead
Will like what it is that they see
 
But, too, the Supreme Court is due
To rule whether tariffs imbue
Too potent a force
For Trump, to endorse
Or whether they’ll let them go through

 

As the session begins in NY, markets have been relatively quiet as traders and algorithms await the NFP data this morning.  Recall, Wednesday’s ADP number was a touch softer than forecast, but still, at 41K, back to a positive reading.  Forecasts this morning are as follows:

Nonfarm Payrolls60K
Private Payrolls64K
Manufacturing Payrolls-5K
Unemployment Rate4.5%
Average Hourly Earnings0.3% (3.6% y/Y)
Average Weekly Hours34.3
Participation Rate62.6%
Housing Starts1.33M
Building Permits 1.35M
Michigan Sentiment53.5

Source: trading economics.com

Regarding this data point, there are two things to remember.  First, last month Chairman Powell explained that he and the Fed were coming to the belief that the official data was overstating reality by upwards of 60K jobs due to concerns over the birth/death portion of the model.  That is the factor the BLS includes to estimate the number of new businesses started vs. old ones closed in any given month.  Historically, at economic inflection points, it tends to overstate things when the economy is starting to slow and understate when it is turning up.  

The second thing is that given the changes in the population from the administration’s immigration policy, with net immigration having fallen to zero recently, the number of new jobs required to maintain solid economic growth is much lower than what we have all become used to, which in the past was seen as 150K – 200K.  So, 60K, or even 40K, may be plenty of new jobs to absorb the growth in the labor market, which will come from people re-entering the market who had previously quit looking for a job.

The ancillary data, like ADP and the employment pieces of ISM were both stronger in December than November, so my take is, the estimates are probably reasonable.  I have no strong insight into why it would be dramatically different at this point.  The question is, how will markets respond?  My take is this could well be a ‘good news is bad’ situation where a strong print will see pressure on bonds and stocks as the market reduces its probability of a Fed rate cut (currently 14% for January, 45% for March) even further.  The dollar would benefit, as would oil on the demand story, but I think metals will do little as that story is not growth oriented.  A weak number would see the opposite.

Of course, the other big potential news today is the Supreme Court ruling on the legality of Trump’s tariffs.  The odds markets are at ~70% they will overturn them, but there is the question of whether it will require the government to repay the tariffs or simply stop them.  As well, most of them will be able to be reimposed via different current laws, so net, while a blow to the administration I don’t believe it will have a major long-term impact with repayment the biggest concern.  This particular issue is far too esoteric for a simple poet to prognosticate.

And those are the market stories of note, although we cannot ignore the growing protests in Iran as videos show buildings burning in Tehran and there is word that the Mullahs are at the airport, which if true tells me that the regime is on the edge.  While this would be a great victory for the people of Iran, it would also have a dramatic impact on oil markets and specifically on China.  While sanctions could well be lifted, thus depressing the price as more comes to market, China currently benefits from buying sanctioned oil at a massive discount, and that discount would disappear.

As we await all the news, let’s review the overnight activity.  A mixed US session was followed by strength in Tokyo (+1.6%) as the Japanese government surprised one and all by reporting a stronger 30-year JGB auction than anticipated as well as an uptick in spending by households.  Too, nominal GDP growth has been outpacing deficit growth driving the net debt ratio lower, exactly what the US is seeking to do.  As to the rest of the region, both China (+0.45%) and HK (+0.3%) managed gains, as did Korea and Malaysia but India (-0.7%) continues to lag as it has all year.  Data from China showed inflation fell less than expected, although the Y/Y number remains at just 0.8%.

In Europe, gains are also the norm with France (+0.9%) leading the way with both the UK (+0.55%) and Germany (+0.4%) having solid sessions.  Retail Sales data from the Eurozone was firmer than expected at 2.3%, a rare positive outcome, but showing some support.  As to the US futures market, at this hour (7:30) all three major indices are higher by about 0.15%.

In the bond market, while yields have edged higher by 2bps this morning, as you can see from the chart below, they remain within, albeit at the top, of the recent 4.0% – 4.2% trading range.  

Source: tradingeconomics.com

The most interesting data point from yesterday was the dramatic decline in the Trade deficit, which fell to -$29B, its lowest level since 2009.  Recall that a long-time issue has been the twin deficits, with the budget and trade deficits linked closely.  I wonder, are we going to see Trump’s efforts at reducing government’s size and reach result in a smaller budget deficit?  Most pundits dismiss this idea, but I’m not so sure.  As to the rest of the world, European sovereigns are essentially unchanged this morning as investors everywhere await the US data and tariff ruling.

In the commodity markets, oil (+0.9%) is creeping higher but remains in its downward trend.

Source: tradingeconomics.com

Wednesday, we saw a large draw in crude inventories abut a massive build in both gasoline and distillates which feels mildly bearish.  The narrative is the Iran story is getting people nervous for potential short-term disruption, but I remain overall bearish for now.  As to the metals markets, gold (-0.3%) is slipping after having recovered early morning losses yesterday and finishing higher, while silver (+0.6%) is still bouncing along with copper (+1.8%) and platinum (+0.4%). Metals are in demand and supply is short.  Price here have further to rise I believe.

Finally, the dollar continues to rebound off its recent lows with the DXY back to 99 again this morning.  it has rallied in 11 of the past 13 sessions, not typical price action for a trading vehicle that is in decline.

Source: tradingeconomics.com

In fact, the greenback is firmer against virtually all its G10 and EMG counterparts this morning with the largest declines seen in JPY (-0.5%), KRW (-0.5%) and NZD (-0.5%) with others typically sliding between -0.1% and -0.3%.  again, it is hard to watch recent price action and see impending weakness.  We will need to see much weaker US data to change my view.  And along those lines, the Atlanta Fed’s GDPNow number just jumped to 5.4% for Q4 after the Trade data yesterday, again, atypical of further weakness in this sector.

And that’s really all as we covered data up top.  To me, the wild cards are Iran and the USSC.  While I do believe the regime will fall in Iran (they just shut down the internet to try to prevent a further uprising) my take on the Supremes is they may stop further tariffs but will not force repayment.  Net, that won’t change much at all and given the prediction markets are pricing a 70% probability of an end to tariffs, if it happens, it’s already in the price!

Good luck and good weekend

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Spinning More Heads

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The speed of the change underway
In global relations today
Is spinning more heads
And tearing more threads
Than ever before, one might say
 
For markets, the question of note
Is how will investors all vote
Are bulls still in charge
Or bears now at large
Who seek, excess profits, to smote

 

It is becoming increasingly difficult to focus only on market activity given the extraordinary breadth of important, non-market activities that are ongoing.  When I think back to previous periods of significant market volatility and uncertainty, it was almost always driven by something endogenous to finance and the economy.  Going back to Black Monday in 1987, or the Thai baht crisis in 1997 or the Russia Default in 1998, the dot-com crash in 2000, and the GFC in the wake of the housing bubble (blown by the Fed) in 2008-09, all these periods of significant market volatility were inward looking.

But not today.  Trump 47 has become the most significant presidency since Ronald Reagan with respect to changing both domestic and international realities.  The key difference is that Mr Reagan worked within the then consensus view of international relations, merely pushing them to the limit while Mr Trump sees those views as constrictions needing to be removed.

In fairness, the world was a very different place in the 1980’s, notably for the fact that China was not a major player in any sphere of economic activity and was essentially ignored.  That is no longer the situation, and the entry of another power player has complicated things.  Arguably, this is why the president sees the old rules as obsolete, they were built for a different time with a different cast of characters.  Regardless, for those of us paying attention to markets, it is imperative to widen our view to include international relations as well as international finance.

With that as preamble, a look at today’s headlines reminds us that keeping up with the news is not for the faint of heart.  Starting with Venezuela and the impact on oil (+1.6%), news sources are littered with articles explaining why the US acted as we did and the potential implications for energy markets and energy producing countries.  From what I can tell, Venezuela recognizes that they are completely beholden to US demands at this point with respect to their oil industry (mining as well I presume although that gets less press).  And you can be sure that means they will be expected to pump more, with US corporate help, and direct their sales to the US, as opposed to Cuba, China and Iran.

Despite today’s rally, it remains my strong opinion that the price of oil has further to decline.  The trend continues to be sharply lower, as per the below chart, and the domestic political demand of reducing gasoline prices is going to keep this particular trend intact, I believe.

Source: tradingeconomics.com

News overnight indicated that two more shadow fleet tankers have been apprehended which is simply all part of the same plan, bring Venezuela back online legitimately with a focus to sell to the US.  The other global issue that is going to weigh on the price of oil are the ongoing protests in Iran which if ultimately successful at overthrowing the Ayatollah’s theocracy, will almost certainly bring Iran back into the brotherhood of nations, and see the end of sanctions on Iranian oil.  While that is bad news for China (and India) who buy a lot of cheap sanctioned oil, it will increase production and weigh on market prices.

The other sector of the commodity markets, metals, have been their own roller coaster of late, with far more volatility than any other product, cryptocurrencies included.  It cannot be a surprise that we are seeing prices retrace after the extraordinary price action over the past several months.  The silver (-4.4%) chart below is the very definition of a parabolic move and history has shown that moves of this nature tend to see, at the very least, short-term sharp reversals, even if the ultimate trend is going to continue.  

Source: tradingeconomics.com

The underlying features in these markets remain supply shortages, meaning that there is more industrial demand for utilization than there is new supply that comes to market each year.  In silver, the number apparently is ~100 million ounces, and deliveries of physical metal remain the norm these days.  That is a telling feature of the market as historically, cash settlement was sufficient.  Given the recent run, it is no surprise that gold (-0.8%) and platinum (-6.5%) are also declining sharply, but nothing has changed my view that these will trend higher this year.  One last thing about silver (h/t Alyosha), the Bloomberg commodity index (BCOM) is rebalancing next week and given the huge moves in precious metals, along with the lack of change in percentage allocation, there will be significant selling over the course of the next week, upwards of 70 million ounces of silver, which will go a long way to satisfying the shortage this year.  It will be interesting to see if demand remains intact. 

If we turn to the dollar, rumors of its death remain exaggerated.  Certainly, the price action thus far this year, and even over the past six months, points to gradual strength (see chart below from tradingeconomics.com).

Again, I have a hard time understanding the argument that the dollar will decline this year based on the fact that the US economy continues to outperform the rest of the G10, there are substantial inward investment promises that are beginning to be seen (shipbuilding, semiconductors, steel) and the US interest rate structure remains higher than the rest of the G10.  While I understand markets look forward, it is becoming increasingly difficult for me to see the benefits of European monetary policy as a driver for owning the euro, and given their industrial/energy policies are disastrous, I don’t see the rationale.  The same can be said for the pound, I believe.

In today’s session, while the movement is mostly marginal (EUR 0.0%, GBP -0.1%, SEK -0.3%, AUD -0.4%), the trend remains intact and the movement is broad with almost all G10 and EMG currencies slipping a bit further.  Money goes where it is best treated, and I am hard pressed to find other nations that treat money better.  Although…

The equity markets are a bit shakier this morning after two presidential tweets yesterday regarding institutional ownership of housing (he wants to end that for single family homes) and defense company spending priorities (he wants defense companies to end stock buybacks and dividends and invest in R&D and production).  It is not clear to me whether he can successfully force these actions, but his bully pulpit is significant.  These resulted in sharp declines in directly impacted companies, but regarding defense, he also came out of a meeting with Congressional leaders and said he wants to budget there to grow to $1.5 trillion.  

The upshot is confusion here which was evidenced by more weakness than strength in the US session and similarly, declines in Asia (Japan -1.6%, China -0.8%, HK -1.2%).  Elsewhere in the region, India (-0.9%) continues to be the laggard, but there was more red than green overall.  In Europe, red is also today’s color, albeit not as bright as in Asia.  The DAX (-0.2%), CAC (-0.25%) and FTSE 100 (-0.3%) are emblematic of the situation as investors dismissed better than expected German Factory Order data (+5.6%) although the rest of the data released was mostly at expectations.  I guess the question is does Europe treat money better than the US?  I would argue not, but that’s just my view.  Meanwhile, at this hour (7:55), US futures are down slightly, about -0.1% across the board.

Finally, the bond market remains an afterthought almost everywhere.  Perhaps the most amazing thing President Trump has accomplished is to remove the focus on the latest tick in the 10-year bond as a key metric for the economy.  So, this morning, its 1bp rise just leaves it right in that 4.0% – 4.2% range that has existed for months.  Most European sovereign yields edged higher by about 3bps with Germany (+7bps) the outlier here after that strong Factory Orders data.  Also worth noting is that JGB yields slipped -5bps overnight as the market prepares for the first 30-year JGB auction of the year.  Recent 10-year auctions have been received quite well, hence the anticipation of something good here.

On the data front, Initial (exp 210K) and Continuing (1900K) Claims lead the way along with the Trade Balance (-$58.9B) and then Consumer Credit ($10.0B) this afternoon.  Yesterday’s ADP data was a touch softer than expected but the JOLTS data was much worse, showing a decline in job openings of 300K and falling well short of expectations of 7.6M.  At this point, though, to the extent that people are paying attention to the data, tomorrow’s NFP is of far more import I believe.  

The hardest thing about these markets is the White House bingo card and its surprises that can change working assumptions.  Absent something new there, I see the dollar drifting higher helped by both its recent trend and the short-term pullback in metals.  

Good luck

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Markets Ain’t Fair

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The pundits, when looking ahead
All fear that their theses are dead
‘Cause bitcoin’s imploding
And that is corroding
The views they have tried to embed
 
The thing is, it’s simply not clear
What caused this excessive new fear
But those with gray hair
Know markets ain’t fair
And force us to all persevere

 

It all came undone yesterday around 10:45 in the morning for no obvious reason.  There was no data released then to drive trader reaction nor any commentary of note.  In fact, most of the punditry was still reveling in the higher Nvidia earnings and planning which Birkin bag they were going to buy for their girlfriends wives.  But as you can see from the NASDAQ chart below, in the ensuing two hours, the index fell by 4% and then slipped another 1% or so from there into the close, the level that is still trading at 6:30 this morning

Source: tradingeconomics.com

As a member in good standing of the gray hair club, I have seen this movie before, and I have always admired the following image as a perfect example of the way things work in markets.  

And arguably, this is all you need to know about how things work.  Sure, there are times when a specific data release or Fed comment is a very clear driver of market activity, but I would contend that is the exception rather than the rule.  The day following Black Monday in 1987, the WSJ asked noted Wall Street managers what caused the huge decline.  Former Bear Stearns Chairman, Ace Greenberg said it best when he replied, “markets move, next question.”  And that is the reality.  While I believe that macroeconomics offers important information for long-term investing theses, on any given day, anything can happen.  Yesterday is a perfect example of that reality.

But let us consider what we know about the overall financial situation.  The Damoclesian Sword hanging over everything is excessive leverage across the board.  I have often discussed the idea that global debt is more than 3X global GDP, a clear an indication that there will be repayment problems going forward.  And something that seems to have been driving recent equity market gains has been an increase in margin buying of stocks and leverage in general.  After all, the fact that there are ETFs that offer 3X leverage on a particular stock or strategy is remarkable.  But a look at the broad levels of leverage, as shown by the increase in margin debt in the chart below from Wolfstreet.com (a very worthwhile follow for free) tells me, at least, that when things turn, there is going to be an awful lot of selling that has nothing to do with value and everything to do with getting cash for margin calls.

It is this process that drives down the good with the bad and as you can see in the chart, happens regularly.  I’m not saying that we are looking at a major reversal ahead, but as I wrote earlier this week, a correction seems long overdue.  Perhaps yesterday was the first step.

One last thing.  I mentioned Bitcoin at the top and I think it is worthwhile to look at the chart there to get a sense of just how speculative assets behave when times are tough.  Since its peak on October 6th, 46 days ago, it has declined ~45% as of this morning.  That, my friends, is a serious price adjustment!

Source: tradingeconomics.com

Ok, let’s see how other markets are behaving in the wake of this, as well as the recent news.  Remember, yesterday we saw a slew of old US data on employment, but it is all we have, so probably has more importance than it deserves.  After all, it is pre-shutdown and things have clearly changed since then.

Starting in Asia, it wasn’t pretty with the three main markets (Nikkei, Hang Seng, CSI 300) all declining by -2.40%.  Korea (-3.8%) and Taiwan (-3.6%) fared even worse but the entire region was under pressure.  The narrative that is forming as an explanation is that there is trouble in tech land, despite the Nvidia earnings, and since Asia is all about tech, you can see why it fell.

Meanwhile, the antithesis of tech, aka Europe, is also lower across the board this morning, albeit not as dramatically.  Spain’s IBEX (-1.3%) is leading the way down but weakness is pervasive; DAX (-0.8%), CAC (-0.4%), FTSE 100 (-0.4%), as all these nations also released their Flash PMI data which came in generally softer across the board.  But there is one other thing weighing on Europe and that is the publication of a 28-point peace plan designed to end the Russia/Ukraine war.  The plan comes from the US and essentially ignored Europe’s views as it is patently clear they are not interested in peace.  In fact, it appears peace will be quite the negative for Europe as it will undermine their rearmament drive and likely force governments there to focus on domestic issues, something which, to date, they have proven singularly incompetent to address.  In fact, if the war really ends, I suspect there are going to be several governments to fall in Europe with ensuing uncertainty in their economies and markets.  As to the US futures markets, at this hour (7:30) they are basically unchanged to leaning slightly higher.  Perhaps the worst is past.

In the bond market, yields are lower across the board led by Treasuries (-4bps) while European sovereign yields have slipped -2bps to -3bps.  Certainly, the European data does not scream inflationary growth, but I have a feeling this is more about tracking Treasuries than anything else.  I say that because JGB yields also fell -4bps despite the passage of an even larger supplementary budget than expected, ¥21.7 trillion, which is still going to be paid for with more borrowing.  That is hardly the news to get investors to buy JGBs and I suspect yields will climb higher again going forward.  I think it is worth looking at the trend in US vs. Japanese 10-year yields to get a fuller picture of just how different things are in the two nations.  Of course, there is one thing that is similar, inflation continues to remain above their respective 2.0% targets and is showing no signs of returning anytime soon.

Source: tradingeconomics.com

You will not be surprised to know that commodity prices remain extremely volatile.  Oil (-1.0%) had a bad day yesterday and is continuing lower this morning although as you can see from the chart below, it is off its worst levels of the session.  But the one thing that remains true despite the volatility is the trend remains lower.

Source: tradingeconomics.com

Metals markets also suffered yesterday and are under pressure this morning with gold (-0.4%) and silver (-2.5%) sliding.  One thing to remember is that when margin calls come, traders/investors sell what they can, not what they want, and given the liquidity that remains in both gold and silver, they tend to get sold to cover margin calls.  Too, today is the weekly option expiry in the SLV ETF and as my friend JJ (writes at Market Vibes) regularly explains, there is a huge amount of silver activity driven by the maturing positions.

Finally, the dollar continues to remain solidly bid, although is merely consolidating recent gains as it trades just above the key 100 level in the DXY.  Two things of note today are JPY (+0.5%) which responded to comments from not only the FInMin, but also Ueda-san explaining that a weak yen is driving inflation higher and might need to be addressed.  Step 4 of the dance toward intervention?  As to the rest of the G10, movement has been minimal.  But in the EMG bloc, INR (-1.1%) fell to record lows (dollar highs) after the RBI stepped away from its market support.  It sure seems like it is going to break through 90 soon and I imagine 100 is viable.  As well, ZAR (-0.7%) is suffering on the weaker metals prices, along with CLP (-0.5%) while BRL (-0.5%) slipped as talk of a more dovish central bank stance started percolating in markets.

Today’s data brings US Flash PMI (exp 52.0 Manufacturing, 54.6 Services) and Michigan Sentiment (50.5).  We hear from five more Fed speakers, with a mix of hawks and doves.  It will be interesting to see how the doves frame yesterday’s better than expected September NFP report as their entire thesis is softening labor growth is going to be the bigger problem than rising prices.

I, for one, am glad the weekend is upon us.  For today, I am at a loss for risk assets.  The case can be made either way and I have no strong insight.  However, the one thing that I continue to believe is the dollar is going to find support.  Remember, when things get really bad (and they haven’t yet) people still run to T-bills to hide, and that requires buying dollars.

Good luck and good weekend

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Turned to Sh*t

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While headlines are all ‘bout elections
And some have discussed stock corrections
The dollar keeps climbing
As some think pump priming
By Jay will find no real objections
 
The punditry, though, remains split
One side claims things have turned to sh*t
The other side, though
Is really gung-ho
And weakness they will not admit

 

The Democrats had a good election, sweeping the big three races in NYC, NJ and Virginia and many down ticket ones as well.  One spin is this is all a vote against President Trump but given that those three venues are all heavily Democratic to begin with, that may be an exaggeration.  Of the three, my concern turns to NYC as having lived there prior to Mayor Rudy Giuliani’s cleanup of the city, I can tell you, things were not fantastic.  Mayor-elect Mamdani’s stated plans have failed every time they have been tried around the world and I suspect that will be the situation here as well. Alas, that will not prevent him from trying.  Ironically, regarding high rents, it is possible that the increased outmigration from the city by those in the center and on the right will reduce housing demand and arguably housing costs.  We will all watch as it unfolds.

But will that directly impact markets?  Of that I am far less concerned.  I read that JPMorgan already had more employees in Texas than NY prior to the election and given that the concept of a physical exchange has basically disappeared, trading can relocate quickly.  My take is, this will get the talking heads quite excited for a while but will have a minimal impact on markets.

Which takes us to yesterday’s price action and its drivers.  First off, one might have thought that we experienced another Black Monday based on some of the hysteria in commentaries, but in the end, US equity indices only fell between -0.5% (DJIA) and -2.0% (NASDAQ).  In fact, using the S&P 500, a look at the chart shows that the decline over the past several sessions amounts to just -2.3% there, hardly calamitous!

Source: tradingeconomics.com

I continue to read about the K-shaped economy with the massive split between the top 10% of income/wealth representing 87% of spending and enjoying life while the bottom 90% struggle immensely.  This has been made possible by the ongoing support of financial assets by the Fed (and other central banks) which has accrued to asset holders, i.e. the top 10%.  In fact, this is a far more likely rationale for Zoran Mamdani’s victory yesterday, he has promised to help those who are struggling by freezing rents, offering free stuff and taking over the grocery stores to remove the profit motive and lower prices.  And when it comes to elections, the bottom 90% have a lot more votes!

Here is as good an explanation of the forces driving this narrative as any:

While equity and asset prices continue to climb, the working class is finding life increasingly difficult as job opportunities seem to be shrinking.  This latter issue seems only to be exacerbated by the growth in AI spending and the announcements by numerous companies that they will be reducing staffing because of the efficiencies created by AI in their operations.

Arguably, the reason we have seen such a large dichotomy between analyst views is that some are focused on data that represents the bottom leg of the ‘K’ and see a recession around the corner, if not already upon us.  Meanwhile, others see the arm of the ‘K’ and see good times ahead.  Certainly, if we look at the broad-based GDP readings, at least based on the Atlanta Fed’s GDPNow forecast, Q3 was remarkably strong at real GDP growth of 4.0% annualized (see below chart).  Calling for a recession with that as backdrop is a very difficult case to make, in my view, but that won’t stop some analysts from trying.

Net, while nobody likes to see their portfolios’ value shrink, the declines so far have been very modest.  It is entirely reasonable to expect a correction of 10% – 15%, especially if we look at the chart at the top showing a 36% rally with limited drawdowns over the past 6 months.  It feels too early to panic.

And with that in mind, let’s see how markets behaved overnight.  Asian markets followed US ones lower with Tokyo (-2.5%) leading the way, although that was well off the early session lows which touched -4.0%.  Korea (-2.9%) and Taiwan (-1.4%) both suffered as well although the rest of the region was far less impacted.  Both China and HK were little changed and other gains and losses were on the order of +/-0.5% or less.  European bourses are all in the red as well this morning, although the one thing of which we can be sure is it is not related to the tech selloff given Europe has no tech industry of which to speak.  But Spain (-0.9%) and Germany (-0.75%) are both down despite reasonable Services PMI data from both nations and better than expected German Factory Orders (+1.1%).  UK equities are unchanged, and the rest of the continent is somewhere between unchanged and Spain.  Negative sentiment has clearly carried over, but there have been no strong reasons to sell aggressively.

In the bond market, Zzzzzz is today’s message.  Every major government bond is within 1bp of yesterday’s close, and yesterday’s price action was only worth 1bp to 2bps.  In fact, as you can see from the chart below, since the FOMC and Powell’s hawkish press conference, nothing has changed.  This is true from Fed funds futures as well, with a 71% probability still price for a December cut.

Source: tradingeconomics.com

In the commodity space, oil (-0.3%) seems to be lower every morning when I write, but continues to trade in a narrow range around $60/bbl.  Perhaps the most interesting thing I read this morning was Javier Blas’ op-ed in Bloombergregarding the rationale for a US-led regime change in Venezuela given it is the nation with the largest known oil reserves.  If you are President Trump and seeking to get oil prices lower, that could be a very effective source of the stuff.  As to the metals markets, yesterday saw a sharp decline in precious metals and this morning they are rebounding with both gold and silver higher by 0.9%.  Copper (+0.25%), too is rising a bit, although remains well off the highs seen when gold peaked.

Finally, the dollar continues to impress.  While this morning it is little changed against most of its counterparts, it is, apparently, consolidating its recent gains.  The DXY remains above 100.00, which many have seen as a key resistance level.  The pound (+0.2%) while bouncing slightly this morning is hovering just above 1.30, a level last seen on Liberation Day, and certainly appears to be working its way lower from its summer peak.  If I consider the fiscal problems and the energy policy in the UK, it is very difficult to expect a significant amount of demand for the pound.

Source: tradingeconomics.com

Elsewhere, ZAR (+0.4%) is responding to the rise in gold prices and otherwise, +/-0.2% is today’s trading story.  Over time, given the promised investments into the US based on trade deals that have been signed, I expect there will be consistent demand for the greenback.  And as I wrote yesterday, the idea of a two-currency world in the future cannot be dismissed.

We do have data today with ADP Employment (exp 25K), ISM Services (50.8) and then the EIA oil inventory data where limited net change is expected although the API data yesterday showed a large build of 6.5mm barrels.  Remarkably, there are no scheduled Fed speakers, but that story remains caution but a tendency toward cutting.

For all the election hype, I don’t perceive that things have changed very much at all.  Perhaps the Supreme Court hearings on the legality of President Trump’s tariffs are the real story today, but regardless of the hearings, no verdict will be rendered for many weeks.  Which leaves us with a world in which tech is still dominant in equity markets and the US is still dominant in tech.  With the perception of the Fed being somewhat more hawkish, I don’t see a good reason to sell dollars.

Good luck

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Filled With Chagrin

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The vibe in the market is fear
As equities get a Bronx cheer
Commodities, too
Most traders eschew
The dollar, though’s, getting in gear
 
So, what has the catalyst been
To drive such a change in the spin
No story stands out
But there is no doubt
Investors are filled with chagrin

 

Ladies and gentlemen, boys and girls, this morning things just feel bad.  As I peruse the headlines around the major publications, there is no obvious story that is driving today’s weakness in risk assets, but there is no mistaking the vibe.  Certainly, there are several issues outstanding that might be seen as a negative, but none of them are new.  

  • The government has been shut down for 35 days as of today, and it doesn’t sound like the Senate Democrats are ready to vote to reopen it.  Granted, the problems of the shutdown increase with time, but there has been no apparent change in tone for at least the past two weeks, so why is today the day when things look bad?
  • The war in Ukraine continues apace with no obvious timeline to ending, but this has been ongoing for nearly 4 years, so what is it about today that may have changed?
  • Concerns over fraud have increased after the recent bankruptcy filings by First Brands and Tricolor, as well as accusations by banks of other situations, but again, no new story broke overnight.
  • Perhaps it is the fact that today is Election Day in the US, and there is concern that Zoran Mamdani, a self-described Democratic Socialist, could become the next mayor of NYC, which given it is still home to so many financial markets, has those market participants unnerved.

Some days, it’s just not clear why markets move in the direction they do, and there can be far less dramatic drivers.  For instance, we have seen a major rally in equity markets, and risk assets in general, over the past 5 years, with an acceleration over the past 6 months and they are simply taking a breather.  Whatever the driver, the movement is clear.

Source: tradingeconomics.com

So, given the absence of obvious drivers to discuss, let’s simply recap the damage. After yesterday’s mixed session in the US, Asia was under significant pressure led by Tokyo (-1.75%) with HK (-0.8%) and China (-0.75%) slipping as well.  But Australia (-0.9%) fell after the RBA left rates on hold, as expected, although Governor Bullock sounded a touch more hawkish than expected, and the rest of the region saw almost universal weakness with Korea (-2.4%) the worst of the bunch, but declines everywhere (India, Taiwan, Indonesia, Singapore, Thailand) except New Zealand, which managed a small gain, to reach yet another record high, on solid earnings numbers from key companies.

Meanwhile, European bourses are all sharply lower as well (DAX -1.3%, CAC -1.2%, IBEX -1.1%) as the overall market vibe weighs on these markets, all of which recently traded at new all-time highs.  Ironically, the UK (-0.6%) is about the best performer despite a speech from Chancellor of the Exchequer, Rachel Reeves, which explained…well, it is not clear what it explained.  The UK has major budget problems and has discussed raising taxes, but given growth is lagging, there is a lot of pushback, even within the Starmer government, on that subject.  As with virtually every G10 economy, the government is spending far more than they take in and they don’t know how to address the deficit.  Unfortunately for the UK, the pound is not the global reserve currency and so they are subject to market discipline, unlike the US…so far.  But, in this space, US futures are all lower this morning, down -1.0% or so as I type at 7:10am.

Now, your first thought might be that bonds have rallied nicely on all this risk aversion, but while they have, indeed, moved higher (yields lower) I don’t know that nicely would describe the movement.  Rather, barely is a better description as 10-year yields are lower by -2bps in the Treasury market and between -1bp and -2bps in all European sovereign markets.  In fact, despite the weakness in Japanese stocks overnight, JGB yields are unchanged.  The message is, bonds are not that appealing, even if stocks aren’t either.

Turning to commodities, oil (-1.4%) is having a hard time this morning alongside the equity markets, with virtually all energy prices lower across the board.  Given there has been no announcement of a major energy breakthrough, this has the feel of growing concern over economic activity going forward.  With that in mind, though, WTI is still trading right around $60/bbl, which seems to be its “home” lately.

In the metals markets, gold (-0.15%) continues to trade around the $4000/oz level, which seems to be its new “home” as traders await the next catalyst in this space.  Silver (-0.3%) is similarly fixated on its level of $48/oz and seems likely to follow gold’s lead going forward.  However, copper (-2.3%) seems like it is more in sync with oil lately, as the two are both so intimately linked with economic activity and changes thereto.  It’s funny, despite the risk asset weakness, I have not seen anything new on a pending recession in the US, nor globally, although there continues to be a steady stream of analysts who have been explaining we are already in one.

Finally, the dollar is today’s winner, rising against every one of its counterparts except the yen (+.45%) which responded to a second round of verbal intervention from FinMin Katayama, who once again drew from the MOF seven-step playbook with a half-step overnight: “I’m seeing one-sided and rapid moves in the currency market. There’s no change in our stance of assessing developments with a high sense of urgency.”  

But away from the yen, it is merely a question of which currency looks worst.  The pound (-0.65%) has traded down to levels not seen since Liberation Day, as it appears the FX market did not take Chancellor Reeves’ comments that well.

Source: tradingeconomics.com

For those who view the DXY as the key indicator, it has traded above 100 for the first time since August, and I know many technicians are looking for a breakout here.  The fact remains that the Fed’s recent seeming mildly hawkish turn is out of sync with most of the rest of the world and will support the dollar for now.  Of course, the futures market is still pricing a 72% probability of a rate cut in December, so traders are taking the ‘hawkish’ comments by Chair Powell at the press conference last week with a grain or two of salt.  In fact, one of the things weighing on the pound is the idea that the BOE may cut this week despite still high inflation.

But wherever you look in this space, the dollar is sharply higher.  ZAR (-1.0%), NOK (-0.9%), MXN (-0.85%) and SEK (-0.9%) lead the way, but declines of -0.5% are rampant across all three regional blocs.  Today is a straight up dollar story.

And that’s all we have today.  Yesterday’s ISM data was a touch weaker than forecast, and last month, slipping to 48.7 with Prices Paid (58.0) slipping as well.  Weirdly, the S&P PMI was a better than expected 52.5, rising from last month and beating expectations.  It seems a mixed message.  Yesterday’s Fed speakers didn’t tell us anything new, with Governor Cook explaining that December is a “live” meeting.  I’m not sure what that means.  Is the implication they may not cut there?  That would not go down well in either markets or the White House.

Given how far equity prices have come in the past 6 months, it would not be a surprise to see a more substantial pullback.  In fact, it would be healthy for the market to remove some of the excesses that abound.  The fraud stories are concerning as they tend to flourish at the end of bull markets, and while they are not yet flourishing, they are starting to become more common.  In the end, while I expect the Fed will cut in December, and then again in January, I don’t see a reason for the dollar to decline sharply.

Good luck

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Woes and Scraps

Posted on by

The PMI data is in
And so far, it’s not really been
A sign of great strength
When viewed from arm’s length
No matter the punditry’s spin
 
That said, we are not near collapse
Despite many trade woes and scraps
And stocks keep on rising
So, t’will be surprising
For all when we see downside gaps

 

It was a quieter weekend than we have seen recently in the global arena with no new wars, no mega protests and no progress made on any of the major issues outstanding around the world.  Thus, the US government remains shut down, the war in Ukraine remains apace and the AI buzz continues to suck up most of the oxygen when discussing markets.

With this as background, arguably the most interesting market related news has been the manufacturing PMI data released last night and this morning.  starting in Asia, the story was some weakness as Chinese, Korean and Australian data all fell compared to last month, although India and Indonesia continued along well.  Meanwhile, in Europe, the data improved compared to last month, but the problem is it remains at or below 50 virtually across the board, so hardly indicative of strong economic activity.

                                                                                                      Current         Previous               Forecast

Source: tradingeconomics.com

I don’t know about you, but when I look at the releases this morning, I don’t see a European revival quite yet, not even if I squint.

I guess the other thing that has tongues wagging is Election Day tomorrow with three races garnering the focus, gubernatorial contests in New Jersey and Virginia and the mayoral race in New York City.  The first two are often described as harbingers of a president’s first year in office and I think this time will be no different.  But will they impact market behavior?  This I doubt.

So, let’s get right into markets this morning.  Friday’s further new record highs in the US were followed by strength through much of Asia (Tokyo was closed for Culture Day) with China (+0.3%), HK (+1.0%), Korea (+2.8%) and Taiwan (+0.4%) leading the way with only the Philippines (-1.7%) bucking the regional trend as earnings growth in the country continues to disappoint relative to its peers around the region.  Europe, too, has seen broad based gains with the DAX (+1.2%) leading the way higher and gains in the IBEX (+0.45%) and CAC (+0.3%) as well.  I guess the PMI data was sufficient to excite folks and despite Europe’s status as a global afterthought, at least in terms of geopolitical issues, their equity markets have been rising alongside the rest of the world’s all year.  And you needn’t worry, US futures are all higher at this hour (6:50), with the NASDAQ (+0.7%) leading the way.

Perhaps more interesting than equities though is the fact that government bond markets are doing so little.  Treasury yields jumped ~10bps in the wake of the FOMC meeting and, more accurately, Chairman Powell’s ostensible hawkishness.  However, as you can see in the below tradingeconomics.com chart, since then, nothing has happened. 

Recall, the probability of a December rate cut by the FOMC also fell from virtual certainty to 69% now.  In fact, if you think about it, that 30% probability decline translates into about 7.5bps, approximately the same amount as 10-year yield’s rose.  It appears that the market is consistent in its pricing at this point, and when (if?) data starts coming back into the picture, we will see both these interest rates rise and fall in sync.  As to European sovereigns, they continue to track the movement in the US and this morning, this morning, the entire bloc has seen yields edge higher by 1bp, exactly like the US.

Commodities remain the most interesting place, although the dollar is starting to perk up a bit.  Oil (-0.3%) slipped overnight after OPEC+ indicated they were increasing production by another 137K bbl/day, although there would be no more increases for at least three months given the seasonality of reduced oil demand at this point on the calendar.  Something I have not touched on lately is NatGas, which traded through $4.00/MMBtu late last Thursday, and is now up to $4.25.  in fact, in the past month it has risen nearly 27%, which given it is massively underpriced compared to oil (on a per unit of energy basis) should not be that surprising.  Nonetheless, sharp movements are always noteworthy, and this is no different.

Source: tradingeconomics.com

Certainly, part of this is the fact that winter is coming and seasonal demand is rising in the US. 

Combine that with the European needs for LNG, of which the US is the largest provider, and you have the makings of a rally.  (I wonder though, did the fact that Bill Gates changed his tune on global warming no longer being an existential threat signal it is now OK to burn more fossil fuels?)

Turning to the metals markets, the ongoing fight between the gold bugs and the powers that be continues as early in the overnight session, gold was lower by nearly -1% but as I type, just past 7:00am, it is slightly higher (+0.1%) compared to Friday’s closing levels.  Silver (+0.1%) has seen similar price action although copper (-0.5%) appears more focused on the economic story than the inflation story.  

Which takes us to the dollar and its continued rally. Using the DXY (+0.1%) as our proxy, it is higher again this morning and pushing back to the psychological 100.00 level.  Now, I have made the case several times that the dollar has done essentially nothing for the past six months, and the chart below, I believe, bears that out.  We have basically traded between 96.5 and 100 since May.

Source: tradingeconomics.com

You will also recall that there is a narrative around about the end of the dollar’s hegemony and how nations around the world are trying to exit the USD financial system that has been in place since Bretton Woods, or at least since the fiat currency world took off when President Nixon closed the gold window.  And there is no doubt that China is seeking to become the global hegemon and thus wants a renminbi-based system to use to their advantage.  However, let’s run a little thought experiment. 

The Trump administration has embraced the cryptocurrency space, and especially the use of stablecoins.  Legislation has been passed (GENIUS Act) to help clarify the legal framework and the SEC has been solicitous in its willingness to ensure that these creations are not securities, thus placing them outside the SEC’s oversight.  When looking at the world of stablecoins, their current total value is approximately $311 billion (according to Grok) of which only ~$1.2 billion are non-USD.  

Now, if stablecoins represent the payment rails of the future, an idea that is readily believable, and the stablecoin market is virtually entirely USD, with massive first mover advantage, is it not possible that economies around the world are going to find it much easier to dollarize than to maintain their own native currency?  While there are calls for Argentina to dollarize, what would the world look like if the EU fell apart (an entirely possible outcome given the inconsistencies in their current energy and immigration policies and the stress within the bloc) and the euro with it?  Would smaller nations opt for their own currency, or would they see the value of having a dollarized economy given the many efficiencies it would present, especially for their export industries?

While I have no doubt that China will never accept that outcome for themselves, is the future a world where there are two currency blocs, USD and CNY, and everything else simply disappears?  Remember, we are merely spit balling here, but if that is the outcome, demand for dollars will continue to rise, and the value of other currencies will continue to decline until such time as they succumb.

Again, this is a thought experiment, but one that offers intriguing possibilities for the future.  And one where the foreign exchange market may ultimately meet its demise.  After all, if there are only two currencies, that doesn’t make much of a market.

One other thing I must note, in the stablecoin realm, there is a remarkable product, USDi (usdicoin.com), which tracks US CPI exactly, yet can fit within those same payment rails.  If you are looking into this space, USDI is worth a peek.

Ok, back to the markets, looking across the FX space, +/-0.2% is today’s theme virtually across the board, with the more important currencies slipping against the dollar (EUR, GBP, JPY, CHF, CAD) than rising vs the greenback (MXN, CLP, NOK, CZK), although the magnitudes are similar.

With the government still closed, there is no official data, but we do get ISM Manufacturing (exp 49.5) with the Prices Paid subindex (61.7) released at the same time.  There are two Fed speakers today, Daly and Cook, and then 9 more speeches throughout the week.  We also get the ADP Employment data on Wednesday (exp 24K), but I imagine that will get more press after the election results are learned Tuesday evening.

It is hard to get excited about things today, but nothing points to a weaker dollar right now.

Good luck

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A Strong Sense of Urgency

Posted on by

Katayama said
“A strong sense of urgency”
Informs our views now

 

The wonderful thing about Japanese translations into English is that they can be both consistent and nonsensical at the same time.  The term, “a strong sense of urgency” has been used by virtually every Japanese FinMin for the past 40 years, and probably longer, when they discuss the yen after a sharp move.  But ask yourself, is that how you would express this sentiment?  While I have no doubt that the MOF (and the BOJ) are closely watching the movements in the FX market as the yen continues to weaken, if it was urgent, they would have done something.  And they are not going to do anything, I think, until 160 is seen again.  As it happens, the yen is at its weakest point since mid-February and it is hard to make the case that it is going to reverse course soon.

Source: tradingeconomics.com

But this is the first step in their typical seven step plan before intervention.  And I get it, the combination of Chairman Powell suddenly sounding hawkish on Wednesday afternoon, telling us a December rate cut was not a foregone conclusion and the BOJ continuing to sit on its hands despite inflation running at 2.9%, the 42nd consecutive month (see below) that it has been above their 2.0% target (sound familiar?), indicates that the current policy stances will likely lead to further dollar strength vs. the yen.  

Source: tradingeconomics.com

There is something of an irony in the current situation in Japan.  Recall that for years, the Japanese economy was in a major funk, with deflation the norm, not inflation, as government after government issued massive amounts of debt to try to spend their way to growth.  In fact, Shinzo Abe was elected in 2012, his second stint as PM, based on his three arrows plan to reinflate the economy because things were perceived so poorly.  If you look at the chart below, which takes a longer-term view of Japanese inflation, prior to 2022, the two positive spikes between 1992 and 2022 were the result of a hike in the Japanese VAT (they call it the Goods and Services Tax) which raised prices.  In fact, during that 30-year period, the average annual CPI was 0.25%.  And the Japanese government was desperate to raise that inflation rate.  Of course, we know what HL Mencken warned us; be careful what you wish for, you just may get it…good and hard.  I have a sense the Japanese government understands that warning now.

Data source: worldbank.org

Net, it is hard to make a case that the yen is going to reverse course soon.  For receivables/asset hedgers, keep that in mind.  At least the points are in your favor!

So, now that a trade deal’s agreed
Can China reverse from stall speed?
The data last night
Sure gave Xi a fright
More stimulus is what they need!

The other noteworthy macro story was Chinese PMI data coming in weaker than expected with the Manufacturing number falling to 49.0, vs 49.8 last month, with all the subcategories (foreign sales, new orders, employment and selling prices) contracting as well.  The Chinese mercantilist model continues to struggle amid widespread efforts by most developed nations to prevent the Chinese from dumping goods into their own economies via tariffs and restrictions.  The result is that Chinese companies are fighting on price, hence the deflationary situation there as too many goods are chasing not enough demand (money).  

There have been many stories lately about how the Chinese have the upper hand in their negotiations with the US, and several news outlets had stories this morning about how the US got the worst of the deal just agreed between Trump and Xi.  As well, this poet has not been to China for a very long time, so my observations are from afar.  However, things in China do not appear to be going swimmingly.  While there continues to be talk, and hope, that the government there is going to stimulate domestic consumer spending, that has been the story for the past 3 or 4 years and it has yet to occur in any effective manner.  The structural imbalances in China remain problematic as so many people relied upon their real estate investments as their nest egg and the real estate bubble continues to deflate 3 years after the initial shock.  Chinese debt remains extremely high and is growing, and while they certainly produce a lot of stuff, if other nations are reluctant to buy that stuff, that production is not very efficient for economic growth.

Many analysts continue to describe the US-China situation as China is playing chess while the US is playing checkers, implying the Chinese are thinking years ahead.  If that is so, please explain the one-child policy and the decimation of their demographics.  Just sayin.

Ok, let’s look at markets overnight.  While yesterday’s US markets were blah, at best, strong earnings from Amazon and Apple has futures rocking this morning with NASDAQ higher by 1.3% at this hour (7:40).  Those earnings, plus the euphoria over the Trade deal with the US sent Japanese shares (+2.1%) to another new all-time high which dragged along Korea (+0.5%) and New Zealand (+0.6%) but that was all.  The rest of Asia was under pressure as the weak Chinese PMI data weighed on both HK (-1.4%) and mainland (-1.5%) indices and that bled to virtually every other market. Meanwhile, European bourses are all somewhat lower as well, albeit not dramatically so, as the tech euphoria doesn’t really apply here.  So, declines between -0.1% (Spain) and -0.4% (UK) are the order of the day.

In the bond markets, yields have essentially been unchanged since the FOMC response with treasury yields edging 1bp higher this morning, now at 4.10%, while European sovereign yields are either unchanged or 1bp higher.  The ECB was a nothingburger, as expected, and going forward, all eyes will be on the data to see if any stances need change.

The commodity markets continue to be the place of most excitement with choppiness the rule.  Oil (-0.25%) is a touch softer this morning but continues to hover around the $60/bbl level.  I’m not sure what will get it moving, but right now, neither war nor peace seems to matter.  Regime change in Venezuela maybe?

Source: tradingeconomics.com

In the metals markets, volatility is still the norm with gold (-0.45%) lower this morning after a nice rebound yesterday and currently trading just above $4000/oz.  Silver and copper are unchanged this morning with platinum (-0.9%) following gold.  However, regardless of the recent market chop, the charts for all these metals remain distinctly bullish and the theme of debased fiat currencies is still alive.  Run it hot is still the US playbook, and that is going to support all commodity prices.

Finally, the dollar, after another step higher yesterday, is little changed this morning.  Both the euro and yen are unchanged and the rest of the G10 has slipped by between -0.1% and -0.2%.  In truth, today’s outlier is ZAR (-0.4%).  Now, let’s look at two ZAR charts, the past year and the long term, which tell very different stories.  In fact, it is important to remember that this is often the case, not merely a rand situation.  First, the past year shows the rand with a strengthening trend as per the below from tradingeconomics.com.  That spike was the response to Liberation Day.

But now, let’s look at a longer-term chart of the rand, showing the past 21 years.

Source: finance.yahoo.com

Like most emerging market currencies, the rand has been steadily depreciating vs. the dollar for decades.  It’s not that we haven’t seen a few periods of modest strength, but always remember that in the big picture, most EMG currency’s slide over time.  This is merely one example, and it is a BRICS currency.  The demise of the dollar remains a long way into the future.

On the data front, Chicago PMI (exp 42.3) is the only release, and we hear from three more Fed speakers.  It appears every FOMC member wants to get their view into the press as quickly as possible since there seem to be so many differing views.  In the end, I continue to think the Fed cuts in December, and nothing has changed.  But for now, there is less certainty as this morning, the probability of a cut is down to 66%.  I guess we’ll see.  But regardless, I still like the dollar for now.

Good luck and good weekend

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Will Not Be Quelled

Posted on by

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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