Tag Archives: #higherdollar

Will Not Be Quelled

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

 

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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Rare Earths No More

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

 

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

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

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

First we saw this on Truth Social:

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

Good luck

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Warnings Arise

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The headline today is ‘bout peace
In Gaza, and hostage release
Can this program last?
And both sides hold fast?
Or once more will violence increase?
 
Now, turning to markets we see
Risk assets continue their spree
But it’s no surprise
More warnings arise
That markets shun reality

 

In what can only be described as a monumental breakthrough in the Middle East, a peace plan between Israel and Hamas has been agreed that will see to the release of the remaining hostages and the disarmament of Hamas fighters while the Israeli army pulls back to specified lines near the border.  The idea is that a group of Arab nations will oversee the Gaza strip with funding coming from the Saudis, amongst others, and it appears this may be the best chance for peace in the area in centuries if not millennia.  President Trump has orchestrated this and deserves enormous credit for a truly momentous outcome.  I certainly hope the plans are fulfilled and we can remove one historical warzone from the map.  While this has had no immediate market impact, its importance is such that it cannot be ignored IMHO.

Ok, let’s move to the markets. Stocks, gold and the dollar continue to rally, continuing the conundrum that we have observed for the past several weeks.  However, my take is there has been an increase in the number of warnings that the end is nigh.  For instance, Bloomberg has a headline article about Nassim Taleb, the author of Black Swans, explaining that a debt crisis is looming and you need to hedge against that outcome.  As well, all over my XFin feed, I continue to see comments about how the end is nigh with respect to the equity market rally as the debt situation is going to soon overwhelm everything.

And I understand this concept well (and have been carrying Index put options for a while accordingly) but thus far, the mooted equity market collapse seems to be awaiting the mooted recession that has also yet to arrive.  The government shutdown has had essentially no impact on markets, perhaps improving them given the lack of data that tends to cause significant gyrations.  The Russia/Ukraine war is just background noise to markets at this point and the one thing that remains constant is that money supply continues to grow around the world with the result that both asset prices and high street prices rise.  In other words, governments around the world are ‘running it hot’ and will continue to do so for as long as they can.

The FOMC Minutes were released yesterday, and they explained what we already knew based on the dot plot (shown below), there is a wide dispersion of views on the committee.

Perhaps the most interesting thing is that despite there being a pretty even split between those expecting two more rate cuts this year and those expecting no more rate cuts this year, the Fed funds futures market is still pricing a 95% probability for a cut at the end of this month and a 79% probability for a second cut in December as per the below CME table.

As well, given the absence of recent data, the Fed speak is not coalescing around a single narrative so that dot plot is still our best estimate of what FOMC members are thinking, i.e. there are 17 independent views right now.

I understand the concerns which range from an incipient debt crisis to the risks that stem from AI and AI investment representing virtually all economic growth right now to the exclusion of almost all other economic sectors.  But markets are going to do what markets are going to do, and right now, the bears are having a tough time making their case.  

Remember, timing is everything in life, and in markets being early is effectively the same as being wrong unless one has significant ability to withstand drawdowns.  There are certainly signs around of the beginning of the unraveling (sudden bankruptcies of large firms like Tricolor and First Brands; SOFR spreads widening; difficult Treasury auctions, etc.).  For now, there is no obvious catalyst to change the recent direction of travel, but markets don’t need a specific catalyst, sometimes it is just time to change.  This is why hedging matters.

Ok, let’s recap how things played out overnight.  After more record closes for the S&P 500 and NASDAQ, Tokyo (+1.8%) exploded higher again on the back of more AI related news.  China (+1.5%) opened higher after its one-week hiatus although HK (-0.3%) lagged.  The news on the mainland appears to be some optimism regarding the upcoming Trump-Xi meeting.  Korea remains closed although India and Taiwan both had positive sessions, which given the tech focus there should not be surprising.  Elsewhere it was mostly modest gains although the Philippines saw a decline despite the central bank cutting rates in a surprise move.

I fully admit I no longer understand the reaction function in European shares as the DAX (+0.3%) continues to rally despite one dire economic report after another.  This morning Germany released trade data showing both exports (-0.5%) and imports (-1.3%) fell far more than expected which given the declines indicates a complete lack of growth, if not shrinkage.  Too, the CAC (+0.2%) is modestly higher as the French are going to try to get another PM to pass a budget, although I am skeptical.  However, the rest of Europe is modestly softer this morning.  As to US futures, at this hour (7:00), they are essentially unchanged.

In the bond market, yields are basically unchanged across the board, with French OATs the best performers (-2bps) on the positive political news.  While we have definitely seen an uptick in commentary about the unsustainable debt story in the US over the past month, market participants don’t seem to be reading those stories.  A quick look at the chart below shows that we have spent the bulk of the time of the last month with 10-year Treasury yields trading between 4.05% and 4.15%, hardly a sign of crisis.

Source: tradingeconomics.com

On the commodity front, oil (-0.5%) continues to trade within the middle of its recent range and is just not very interesting right now.  Metals, however, remain the focus and while gold (0.0%) is unchanged consolidating at its new highs, we see silver (+1.65%, and just 35¢ from $50/oz), copper (+2.3%) and platinum (+1.6%) all continuing their recent rallies.

Finally, the dollar continues to rally as well with the euro (-0.2%) looking a lot like it is going to trade below 1.16 soon.  Remember, it wasn’t that long ago when the “consensus” view was it was going to trade to and through 1.20!  The pound (-0.3%) is slipping and JPY (-0.1%) while not moving much so far today, is just below 153 and shows no signs of stopping its recent decline (dollar rally).  The Scandies are weak, CLP (+0.4%) is benefitting from copper’s rise and overall, the DXY is now above 99.00 and looking like 100.00 is just a matter of days away.

Arguably, the biggest news this morning is Chairman Powell speaking at the Community Bank Conference in Washington, but given the venue, I have a feeling we will not hear very much of note regarding monetary policy.  

The current correlations seem to be holding, so higher stocks and higher metals lead to a higher dollar, although it is not clear that is the causation route.  Perhaps it is demand for those dollar-denominated instruments is driving dollar demand.  But I don’t see a reason for it to change for now.  Risk is still there, and hedging still matters, don’t forget that, but enjoy the ride!

Good luck

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The Chaos Extant

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

 

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

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

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

Source: tradingeconomics.com

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

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

Source: marketwatch.com

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

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Never Sold

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

 

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

Source: Bloomberg.com

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

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

The one-year history:

Compared to the one-month history:

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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The Winds of Change

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

 

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

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Tariff Redux

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While many have called for stagflation
The ‘stag’ story’s lost its foundation
Q2 turned out great
With growth, three point eight
While ‘flation showed some dissipation
 
Meanwhile, Mr Trump’s on a roll
As he strives to still reach his goal
It’s tariff redux
On drugs and on trucks
While ‘conomists tally the toll

 

Analysts worldwide have decried President Trump’s policies as setting up to lead the US to stagflation with the result being the dollar would ultimately lose its status as the world’s reserve currency while the economy’s growth fades and prices rise.  “Everyone” knew that tariffs were the enemy of sane fiscal and trade policy and would slow growth leading to higher unemployment and inflation while the Fed would be forced to choose which issue to address.  In fact, when Q1 GDP was released at -05%, there was virtual glee from the analyst community as they were preening over how prescient they were.

But yesterday, we learned that things may not be as bad as widely hoped proclaimed by the analyst community after all.  Q2 GDP was revised up to +3.8% annualized growth, substantially higher than even the first estimate of 3.0% back in July.  Not only that, Durable Goods Orders rose 2.9% with the ex-Transport piece rising 0.4% while the BEA’s inflation calculations, also confusingly called PCE rose 2.1%.  Initial Claims rose only 218K, well below estimates and indicative that the labor market, while not hot, is not collapsing.  Finally, the Goods Trade Balance deficit was a less than expected -$85.5B, certainly not great, but moving in President Trump’s preferred direction.

In truth, that was a pretty strong set of economic data, better than expectations across the entire set of releases, and clearly not helping those trying to write the stagflation narrative.  Now, Trump is never one to sit around and so promptly imposed new tariffs on medicines, heavy trucks and kitchen cabinets to try to bring the manufacture of those items back into the US.  Whatever your opinion of Trump, you must admit he is consistent in seeking to achieve his goal of returning manufacturing prowess to the US.

Meanwhile, down in Atlanta, their GDPNow Q3 estimate is currently at 3.3%, certainly not indicating a slowing economy.  

In fact, if that pans out, it would be only the 14th time this century that there were two consecutive quarters of GDP growth of at least 3.3%, of which 4 of those were in the recovery from the Covid shutdown.

It would be very easy to make the case that the US economy seems to be doing pretty well, at least based on the data releases.  I recognize that there is a great deal of angst about, and I have highlighted the asynchronous nature of the economy lately, but what this is telling me is that things may be syncing up in a positive manner.

So, what does this mean for markets?  Perhaps the first place to look is the Fed funds futures market as so much stock continues to be put into the Fed’s next move.  Not surprisingly, earlier exuberance over further rate cuts has faded a bit, with the probability of an October cut slipping to 85%, down about 10 points in the wake of the data, and a total of less than 40bps now priced in for the rest of the year.  Recall, it was not that long ago that people were considering 100bps in the last three meetings of the year.

Source: cmegroup.com

The next place to look is at the foreign exchange markets, where the dollar’s demise has been widely forecast amid changing global politics with many pundits highlighting the idea that the BRICS nations would be moving their business away from dollars.  For a long time, I have highlighted that the dollar is currently within a few percent of its long-term average price, neither particularly strong nor weak, and that fears of a collapse were unwarranted.  However, I have also recognized that a dovish Fed could easily weaken the dollar for a period of time.  Short dollar positions remain large as the leveraged community continues to bet on that outcome, although I have to believe it is getting expensive given they are paying the points to maintain that view.

But if we look at how the dollar has performed over the past several sessions, using the DXY as our proxy, we can see that despite a very modest -0.1% decline overnight, it appears that the dollar may be breaking its medium-term trend line lower as per the chart below from tradingeconomics.com

Again, my point is that the idea that the US is facing a catastrophic outcome with a recession due and a collapsing dollar is just not supported by the data or the markets.  And here’s an interesting thought from a very smart guy, Mike Nicoletos (@mnicoletos on X) regarding some of the key drivers of the current orthodoxy regarding the dollar, notably the debt and deficit.  What if, given the dollar’s overwhelming importance to the world economy, we should be comparing those things to its global scale, not just the domestic scale.  If using that framework, as he describes here, the debt ratio falls to 58% and the budget deficit is down to 2.9%, much less worrying and perhaps why markets and analysts are out of sync.

Markets are going to go where they will, but having a solid framework as to how the economy impacts them is a very helpful tool when managing money and risk.  Perhaps this needs to be considered overall.

Ok, a really quick tour.  Yesterday was the third consecutive down day in the US, although all told, the decline has been less than -2%, so hardly devastating.  Asia mostly fell overnight as concerns over both tariffs and a Fed less likely to cut rates weighed on equities there with Japan (-0.9%), China (-1.0%) and HK (-1.35%) all under pressure.  The story was worse for other regional bourses with Korea (-2.5%), India (-0.9%) and Taiwan (-1.7%) indicative of the price action.

However, Europe has taken a different route with modest gains across the board (DAX +0.3%, CAC +0.45%, IBEX +0.6%) as investors seem to be looking through the tariff concerns.  US futures are also edging higher at this hour (7:45).

In the bond market, Treasury yields have slipped -1bp this morning, and while they remain above the levels seen immediately in the wake of the FOMC last week, they appear to be finding a home at current levels of 4.15% +/-.  European sovereigns are all seeing yields slip -3bps this morning as today’s story is focusing on how most developed nations are reducing the amount of long-dated paper they are selling to restrict supply and keep yields down.  This has been decried by many since then Treasury Secretary Yellen started this process, but as with most government actions, the expedience of the short-term benefit far outweighs the potential long-term consequences and so everybody jumps on board.

Turning to commodities, oil (-0.1%) is still trading below the top of its range and while it has traded bottom to top this week, there is no sign of a breakout yet.  I read yet another explanation yesterday as to why peak oil demand is going to be seen this year, or next year, or soon, which will drive prices lower.  While I do think prices eventually slide lower, I take the other side of that supply-demand idea and believe it will come from increased supply (Argentina, Guyana, Brazil, Alaska) rather than reduced demand.  In the metals markets, yesterday saw silver (-0.2%) jump nearly 3% to yet another new high for the move as traders set their sights on $50/oz.  Meanwhile gold (0.0%) continues to grind higher in a far less flashy manner than either silver or platinum (+10% this week) as regardless of my explanation of relative dollar strength vs. other fiat currencies, against stuff, all fiat remains under pressure.

And finally, the dollar after a nice rally yesterday, is consolidating this morning.  The currency I really want to watch is the yen, where CPI last night was released at 2.5%, lower than expected and which must be giving Ueda-san pause with respect to the next rate hike.  Most analysts are still convinced they will hike in October, but if inflation has stopped rising, will they?  I would not be surprised to see USDJPY head well above 150, a level it is fast approaching, over the next month.

On the data front, this morning’s BLS version of PCE (exp 0.3%, 2.7% Y/Y) and Core PCE (0.2%, 2.9% Y/Y) is released at 8:30 along with Personal Income (0.3%) and Personal Spending (0.5%).  Then at 10:00, Michigan Sentiment (55.4) is released and somehow, I have a feeling that could be better than forecast.  We hear from a bunch more Fed speakers as well although a pattern is emerging that indicates they are ready to cut again next month, at least until they see data that screams stop.

The world is not ending and in fact, may be doing just fine, at least economically. Meanwhile, the dollar is finding its legs so absent a spate of very weak data, I think we may see another 2% or so rebound in the greenback over the next several weeks.

Good luck and good weekend

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A Centruy Hence

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A century hence
The BOJ’s equities
May well have been sold
 
But policy rates
Were left unchanged yet again
What of inflation?

 

Finishing up our week filled with central bank meetings, the BOJ left rates untouched last night, as universally expected, and really didn’t indicate when they might consider the next rate hike.  Ueda-san has the same problem as Powell-san in that inflation continues to run hotter than target while the economy appears to be struggling along.  In addition, the political situation in Tokyo is quite uncertain as PM Ishiba has stepped down and a new LDP leadership election is set to be held on October 4th with the two leading candidates espousing somewhat different views of the future.  If I were Ueda, I wouldn’t do anything about rates either.  Interestingly, there were two dissents on the BOJ board with both calling for another rate hike.

But there was a policy change, albeit one that does not feel like it is going to have a significant impact for quite some time.  The BOJ has decided to start to sell its equity and ETF holdings, which currently total about ¥37.2 trillion, at the annual rate of…¥330 billion.  At this pace, it will take almost 113 years for the BOJ to unwind the “temporarily” purchased equities acquired during the GFC to support the market.  While the Nikkei initially fell about 2% after the announcement, it rebounded over the rest of the session to close lower by a mere -0.6%.  However, in a strong advertisement for the concept of buy and hold, a look at the below chart shows when they started buying and how well the BOJ has done.

Source: finance.yahoo.com

There is no indication that the BOJ has unrealized losses on their balance sheet like the Fed does!

What of USDJPY you might ask?  And the answer is, nothing.  It is essentially unchanged on the day and in truth, as you can see from the chart below, it has done very little for the past 5+ months, trading at the exact same level as prior to the Liberation Day tariff announcements.  While there was an initial decline in the dollar then, that was a universal against all currencies, but we are back to where we were.

Source: tradingeconomics.com

Consider, too, that over the course of the past year, the Fed has cut Fed funds by 125bps while the BOJ has raised their base rate by 60bps, and yet spot USDJPY is effectively unchanged.  Perhaps, short-term interest rate differentials aren’t always the driver of the FX market after all. 

In fact, there is a case to be made that the driver in USDJPY is the capital flowing out of Japan by fixed income investors as they seek a less chaotic situation than they have at home.  This could well be the reason for the ongoing rise in long-dated JGB yields to record after record, while Treasury yields seem to have found a top.  Recall, in the latest 10-year auction, dealers took down only 4% of the auction with foreign interest rising to 71%.  While there has been much discussion amongst the punditry of how nobody wants to buy Treasuries and they are no longer the haven asset of old, the nobody of whom they speak are foreign central banks.  But foreign private investors seem pretty happy to scoop them up and are doing so at a remarkable pace.  I think there are a few more years left before the dollar disappears.

Ok, let’s tour the markets here as we reach the end of the week.  Record highs across the board in the US yesterday as investors apparently decided that the Fed was just like Goldilocks, not too hawkish and not too dovish.  And the hits keep on coming this morning as futures are all higher by about 0.25% at this hour (7:15).  As to Asia, we discussed Japan already, and both China and HK were unchanged.  But elsewhere in the region, the euphoria was not apparent as Korea, India, Taiwan, Singapore and Thailand all fell by at least -0.3% or more while Australia, New Zealand and Indonesia were the only gainers, also at the margin on the order of 0.3% or so.

Europe this morning is also mixed with the DAX (-0.2%) lagging after weaker than expected PPI data indicated that economic activity is slowing more rapidly than anticipated, while both the CAC (+0.2%) and IBEX (+0.4%) are edging higher absent any new data.  There was a comment by an ECB member, Centeno from Portugal, that the ECB needs to be wary of “too low” inflation, a particularly tone-deaf comment after the past several years!  But I guess that is the first hint that the ECB is ready to cut again.

In the bond market, Treasury yields have been bouncing since the FOMC meeting and are now higher by 13bps since immediately after the FOMC statement.  Again, my view is this is a case of selling the news after the market was pricing in the rate cut ahead of the meeting.  I would argue that no matter how you draw the trend line of the decline in yields over the past several months, we are nowhere near testing it.

Source: tradingeconomics.com

And in what cannot be a surprise, European sovereign yields are all rising alongside Treasuries, with today’s bump up of another 1bp to 2bps adding onto yesterday’s 5bp to 7bp raise across the board.  As well, we cannot ignore JGBs which have jumped 4bps after the BOJ meeting last night.  I guess Japanese investors didn’t get any warm and fuzzy feelings about how Ueda-san is going to fight inflation.

Turning to commodities, oil (-0.4%) remains firmly within its recent range, ignoring Russai/Ukraine news as well as inventory data and economic statistics.  I don’t know what it will take to change this equation, but it certainly seems like we will be in this range for a while yet.  Peace in Ukraine maybe does it, or a major escalation there.  Otherwise, I am open to suggestions.  Gold (+0.2%) continues to be accumulated by central banks around the world as well as retail investors in Asia, although Western investors appear oblivious despite its remarkable run.  Silver (+0.7%) too is rallying and has been outperforming gold of late.  Perhaps of more interest is that the precious metals are doing so well despite the dollar’s rebound in the FX markets.

Speaking of which, this morning the dollar is firmer by 0.25% to 0.4% vs most of its G10 counterparts although some of the Emerging Market currencies are holding up better.  So, the euro (-0.25%), pound (-0.5%), AUD (-0.25%), CHF (-0.35%) and SEK (-0.6%) are defining the G10 with only the yen (0.0%) bucking the trend.  As to the EMG currencies, HUF (-0.65%), KRW (-0.6%) and PLN (-0.3%) are the laggards with the rest showing far less movement.  However, while short dollar positions are rife, there is not much joy there lately.  I grant that the trend in the dollar is lower, and we did see a new low for the move print in the immediate aftermath of the FOMC meeting, but it appears that people have not yet abandoned the greenback entirely.  Perhaps the lure of more new record highs in the stock market is enough to get foreigners to reconsider their “end of American exceptionalism” idea.

There is no data today nor are any Fed speakers on the calendar.  Perhaps the most notable data we have seen is UK Public Sector Net Borrowing, which fell to -£17.96B, a massive jump from last month and much worse than expected.  As you can see from the chart below, while there is much angst over US budget deficits, at least the US has the reserve currency on which to stand.  The UK has nothing, and the fiscal situation there is becoming more dire each day.  Yet another reason that the Starmer government can fall sooner rather than later.

Source: tradingeconomics.com

It is hard to look at that chart and think, damn, I want to buy the pound!  

For all the hate it gets, the dollar is still the cleanest dirty shirt in the laundry, and while it may trade somewhat lower in the near term, it will find its legs and rebound.

Good luck and good weekend

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The Zeitgeist Could Shatter

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While crime throughout DC has dropped
And Trump’s Fed demands haven’t stopped
The story today
That really holds sway
Is whether Nvidia’s topped
 
The war in Ukraine doesn’t matter
Nor does if the yield curve is flatter
‘Cause stonks must go higher
And that does require
Good news, or the zeitgeist could shatter

 

Some mornings things just are not that interesting in markets despite the ongoing events happening around the world.  Arguably, the biggest headlines revolve around the remarkable decline in crime in Washington DC, which while most of the mainstream media decried the President’s actions at first, has grown in popularity, even amongst his foes.  From a market perspective, the number of stories and editorials written about President Trump’s efforts to fire Fed governor Lisa Cook has risen exponentially, with many still trying to explain the Fed will lose its independence if Trump is successful.  (Given they have not been independent since 1987, I would take this with a grain of salt).  The other noteworthy story is that the EU is going to fast-track legislation to remove all tariffs throughout the EU on US industrial good imports, one of the results of the trade negotiations.

But, while those may be of passing interest, the thing in markets that really has tongues wagging is the fact that Nvidia is set to release their Q2 earnings this afternoon after the equity markets in the US close.  I must admit, thinking back to the tech bubble in 2000-01, I do not remember any single company garnering the amount of attention that Nvidia gets these days.  Perhaps Cisco Systems is the closest analogy, but it was nowhere near this level of interest and excitement.  While this is an imperfect analysis, I think it is worth looking at the charts of both Nvidia and Cisco (from finance.yahoo.com) to help you see the magnitude of the rise in each case.  It is certainly not hard to draw the conclusion that Nvidia may be peaking.  After all, if it declines by 75%, it will still have a market cap > $1 trillion!

NVDA

CSCO

I think it is reasonable to ask whether AI is a bubble.  I also think it is reasonable to ask whether the so-called hyperscalers, Meta, Microsoft, Alphabet and Amazon, are spending too much on building out their AI platforms.  This would be the case if the promised revenues never materialize.  Certainly, other than for Nvidia, those revenues are paltry at best so far.  But these are all observations from a poet who doesn’t follow the stock closely and simply cannot avoid some of the story because it is so prevalent everywhere.  FWIW, which is probably not very much, my take is that history has shown that new innovations, e.g. the automobile, electricity, the internet, can have remarkably wide-ranging implications but usually take far longer to achieve those ends than equity investors assume.  In other words, the idea that the megacap companies are overvalued seems pretty compelling.

Enough of my amateur equity analysis, and I’m sorry, but that is all that seems to be of interest today.  So, let’s look at how markets have behaved overnight ahead of the news this afternoon.  After modest afternoon rallies resulted in higher closes in the US yesterday, Japan (+0.3%) followed suit as did Australia (+0.3%), but both China (-1.5%) and Hong Kong (-1.3%) fell sharply, reversing some of their recent gains as Chinese industrial profits fell -1.7%, a worse than expected outcome, and it seemed to have triggered some profit taking.  With that in mind, I have read a number of analysts who have become of the opinion that Chinese equities are setting up for a much larger move higher based on additional stimulus as well as the fact that Chinese interest rates are the lowest in the world right now (ex-Switzerland).  Elsewhere in the region, India (-1.0%) lagged alongside China and most of the others had much less movement in either direction.

In Europe, the picture is mixed with the CAC (+0.4%) the leading gainer which looks very much like a reaction to the past two sessions’ sharp declines.  Spain (-0.4%) is lagging, although there is no particular news, and Germany (-0.15%) is also softer after the GfK Consumer Confidence report was released at a weaker than expected -23.6.  As to US futures, at this hour (7:25) they are ever so slightly higher.

In the bond market, despite all the anxiety over the Fed and Trump’s attempt to remove Governor Cook, 10-year yields are higher by 1bp after falling 3bps yesterday.  European sovereign yields are lower by -1bp across the board and JGB yields are unchanged.  In other words, while the media’s hair is on fire, clearly the market’s is not.

In the commodity space, oil (-0.1%) is little changed this morning, maintaining yesterday’s declines which appear to have been a result of Russia seeking to export more crude after Ukrainian attacks on Russian refineries have slowed output.  Gold (-0.6%) which saw a strong rally yesterday is falling back a bit, but remains in that tight range I showed yesterday, although both silver (-0.9%) and copper (-1.3%) are under more pressure this morning, likely on the back of a stronger dollar.

Speaking of the dollar, it is firmer across the board this morning, rising 0.5% vs. the euro, yen and Aussie, with slightly smaller gains vs. the other G10 currencies.  In emerging markets, ZAR (-0.85%) is the laggard, not surprisingly on the back of weaker precious metals prices, but PLN (-0.75%) is also under pressure on a combination of the weak euro and concerns over the lack of progress in the Russia/Ukraine war.  Even CNY (-0.15%) is weaker despite a renewed belief that China is going to allow the yuan to strengthen as part of any trade deal.

There is no front-line data to be released today, with only EIA oil inventories expecting a modest net draw.  Richmond Fed president Barking speaks at 12:45 but given he just explained his views yesterday, that he didn’t foresee much change in rates at all given the current state of the economy, I cannot imagine he will have changed that view.

And that’s all we have today.  I anticipate a lackluster session in all markets as traders await the Nvidia numbers later.  Of course, President Trump could surprise us all with an announcement on Russia, the Fed, or any of a number of other situations, but those are outside my ability to anticipate.  The market is still pricing an 87% chance of a September cut and an 80% chance of two cuts by December.  If the Fed gets aggressive, for whatever reason, the dollar will suffer.  But that is not yet the case, so range trading seems the best bet.

Good luck

Adf

Crab Bisque

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Though troubles worldwide haven’t ceased
Investors continue to feast
On assets with risk
As if they’re crab bisque
And appetites all have increased
 
Perhaps they believe peace is near
Or maybe they’re just cavalier
‘Cause Bitcoin has rallied
And profits they’ve tallied
Convinced them they’ll have a great year

 

This poet is a bit confused this morning as I watch ongoing record high equity markets in the US and elsewhere indicate a bright future, but I continue to read about the problems around the world, specifically in Ukraine and Gaza, but also throughout Africa, as well as the apparent end of democracy in the US.  Though it is showing my age, I recall during the Reagan presidency, equity markets performed well amid a sense that the world was going in the right direction.  The Cold War ended and Fed Chair Volcker had shown he had what it took to fight inflation effectively.  This combination was very effective at brightening one’s outlook on the future.

Then, leading up to the dotcom bubble, attitudes were also remarkably positive as the future held so many possibilities while peace had largely broken out around the world.  Again, the rally albeit overdone, at least had a basis that combined financial hopes with a positive geopolitical background.  Of course, the events of 9/11 put the kibosh on that for quite a while.

Leading up to the GFC, though, I would contend that the zeitgeist was a bit different, and while housing markets were on fire, the geopolitical picture was far less rosy with Russia reasserting itself and taking its first piece of Ukraine, the Middle East situation much dicier with the ongoing military action in Iraq and Afghanistan, and China beginning to flex its muscles in the South China Sea.

Of course, the similarity to these times is they all ended with significant equity market declines and resets of attitudes, at least for a while as per the below chart of the S&P 500.  Of course, given the exponential move over time, the early dips don’t seem so large today, although I assure you, on October 19, 1987, when the DJIA fell 22.6%, it seemed pretty consequential on the trading desk.

Source: finance.yahoo.com

But today, I find the disconnect between market behavior and global happenings far harder to understand. Yes, there is a prospect that Presidents Trump and Putin will agree a ceasefire tomorrow when they meet in Alaska, although I’m not holding my breath for that.  At the same time, President Trump is doing his best to reorder the global economic framework, and doing a pretty good job of it, but causing significant dislocations around the world with respect to trade and finance.  Too, through all the other bubbles, consumer price inflation was not a concern of note, with CPI remaining quiescent throughout until the Covid response as per the below and, as Tuesday’s core CPI reminded us, inflation remains a specter behind all our activities.

And yet, all-time highs are the norm in markets these days, whether US equities, Japanese equities, European equities, Bitcoin or gold, prices for financial assets remain in the uppermost percentiles of their historic ranges.  Perhaps this is the YOLO view of life, or perhaps markets are telling us the technology futurists are correct, and AI will bring so much benefit to mankind that everything will be better.  Or…maybe this is simply the latest bubble in financial markets, and that permanently high plateau for asset values, as Irving Fisher explained in October 1929, is once more a mirage.  Is the value of Nvidia, at $4.466 trillion, really greater than the economic output of every nation on earth other than the US, China and Germany?  It is a comparison of this nature that has me concerned over the short- and medium-term prospects, I must admit.

However, the valuations are what they are regardless of any logic or financial comparisons.  If the Fed cuts 50bps in September, which as of now would be a huge surprise to markets based on pricing, would that really increase the value of these companies by that much?  Perhaps, as frequently has been the case, Shakespeare was correct and “something is rotten in the state of Denmark.”  Care must be taken with regard to owning risk assets I believe, as a correction of some magnitude seems a viable outcome by the end of the year.  At least to my eyes.  Just not today.

Today, this is what we’ve seen in the wake of yesterday’s ongoing US equity rally.  Tokyo (-1.45%) slipped on what certainly looked like profit-taking after reaching new highs.  China was little changed but Hong Kong (-0.4%) fell ahead of concerns over Chinese data due this evening and the idea it may not be as strong as forecast.  As to the rest of the region, the larger exchanges, Korea and India, were little changed and the smaller ones were mixed, all +/- 0.5%.  In Europe, gains are the order of the day, at least on the continent (DAX +0.5%, CAC +0.35%, IBEX +0.8%) although the FTSE 100 (0.0%) is struggling after mixed data showing stronger than expected GDP but much weaker than expected Business Investment boding ill for the future.  As to US futures, they are little changed at this hour (7:30).

In the bond markets, Treasury yields (-3bps) continue to grind lower as comments from Treasury Secretary Bessent have encouraged investors that interest rates will be declining across the curve.  Teffifyingly, there is a story that President Trump is considering Janet Yellen as the next Fed Chair, something I sincerely hope is a hoax.  European sovereign yields are lower by -1bp across the board but JGB yields (+3bps) are rising after Bessent basically said in an interview that the Japanese needed to raise rates to support the yen!

In commodities, oil (+0.4%) is stabilizing after several days of modest declines, but the trend of late remains lower.  If peace breaks out in Ukraine, I suspect the price will have further to fall as the next step will be the reduction or ending of sanctions on Russian oil.  Meanwhile, the metals markets are little changed to slightly softer this morning after a modest rally yesterday as a stronger dollar and a general lack of interest are evident.

As to that dollar, only the yen (+0.4%) is bucking the trend of a stronger dollar today although the pound is unchanged after the data dump there.  But the rest of the G10 is weaker by between -0.2% and -0.4% which is also a pretty good description of the EMG bloc, softer by those amounts.  It’s funny, once again this morning I read some comments about how the dollar’s decline in the first half of this year, where it has fallen about -10%, is the largest since the 1970’s, as though the timing within the calendar is an important part of the dollar’s value.  While I would guess that Bessent is conflicted to some extent, I believe the administration is perfectly happy with a decline in the dollar if it helps US export competitiveness as long as inflation remains under control.  Of course, that is the $64 thousand (trillion?) dollar question.

On the data front, this morning brings the weekly Initial (exp 228K) and Continuing (1960K) Claims as well as PPI (Headline 0.2%, 2.5% Y/Y and Core 0.2%, 2.9% Y/Y).  I always find that there is less interest in PPI when it is released after CPI, but a surprise, especially a hot surprise, could well impact some views.  Once again, we hear from Richmond Fed president Barkin, although so far all he has told us is he is the quintessential two-handed economist, so I’m not expecting anything new here.

Personally, I am getting uncomfortable with equity market valuations and levels based on the rest of the things ongoing and sense a correction in the offing.  As to the dollar, I suspect if I am correct, the dollar will benefit alongside bonds.  Otherwise, the summer doldrums seem likely to describe the day.

Good luck

Adf