Tag Archives: investing

Quite Sublime

Posted on by 
Though skeptics do not yet believe
That Trump, a peace deal, will achieve
The markets are saying
This sunshine they’re haying
And fading this move is naïve

So, oil continues to fall
And stocks are just having a ball
It’s peace in our time
And all quite sublime
To many, though, this tale is tall

It is not clear what else to say about the current situation other than the markets are starting to believe that the Iran conflict is coming to a close.  The headlines from the administration and news from Pakistan seem to indicate a deal is near, something we all should welcome.  Certainly, the market is ready to accept this as gospel, at least based on the current risk appetite being demonstrated across all markets.  So, this morning, oil (-2.8%) continues its rapid decline, down more than $18/bbl from its highs just one week ago.

Source: tradingeconomics.com

The commentariat refuses to accept that the conflict is ending and I cannot tell if that is because they hate President Trump so much, they cannot stand the idea of him concluding things having achieved objectives, or because if the conflict is over, they will need to find the next thing to prove their ‘expertise’ and they don’t know what that is yet (hantavirus anyone?)  Regardless, markets are on board with this narrative as the moves we saw yesterday are simply extending this morning.  

Meanwhile, the data from yesterday showing that ADP Employment was a stronger than expected 109K and the JOLTs quit numbers rose, meaning more people are willing to quit their jobs for a new one, indicating a growing confidence in the labor market, point to a continuation of the US equity rally, and by extension, the global rally.  (As an aside, I chuckled at the article in the WSJ this morning about how the next target of taxes should be ‘compute’ since AI is going to replace human workers.  My comment here, which has been confirmed by my time this week at the Consensus 2026 cryptocurrency conference, is that machines are great, but people still want to deal with people they can trust!)

Anyway, with the conflict ostensibly coming to a close, there is not much else to discuss outside actual market activity, so let’s see how things responded to this news.

By this time, you have all checked your PA’s and saw the green from yesterday there.  Overnight, Asian markets were also quite positive with Japan (+5.6%) exploding higher after their Golden Week holidays ended.  Excitement on tech as well as a market that is looking forward to Treasury Secretary Bessent’s visit were the drivers.  But we also saw strength in China (+0.5%), HK (+1.6%), Korea (+1.4%) and Taiwan (+1.9%).  In fact, looking across the region, you are hard pressed to find a true laggard, as India (0.0%) was the worst performer of note.  European markets, though, are not quite in as fine a fettle with most of them essentially unchanged this morning although the UK (-0.7%) is lagging after some underwhelming earnings reports as it appears profit taking is today’s motive.  As to US futures, at this hour (6:45), they too, like Europe, are essentially unchanged

In the bond markets, yields continue to slide with Treasury yields lower by -2bps and virtually all European sovereign yields slipping -1bp.  Overnight, JGB yields fell -3bps as markets there reopened and essentially all Asian government bonds saw yields decline as well.  Apparently, fears over rampant inflation are ebbing.  You may recall on Tuesday I discussed the 30-year Treasury as it traded above 5.0% on Monday and stayed there for about a minute.  That had engendered a great deal of apocalyptic discussion.  However, here we are this morning with 30-year yields slipping another -2bps, and now 10 bps below that little spike, and back below 5.0%.  But I think it is worthwhile to offer a little perspective on the 30-year bond and the idea that 5.0% is deadly.  Here is the chart of 30-year Treasury yields since 1985.  Perhaps the anomaly was much lower yields, not 5.0%!

Source: finance.yahoo.com

Precious metals are continuing to benefit from the peace initiative and oil’s delice with gold (+1.0%) and silver (+4.0%) both stronger again after big gains yesterday.  In fact, I am starting to read more about why silver is set to make massive gains because of shortages, a narrative that was set aside for the past two months but seems to be reawakening.  Now, I am no technician, but I am given to understand that if you look at this trend line in silver from its January peak, we have broken above the line and that portends a massive move higher.  (full disclosure, I am long silver so would be happy to see that but have not spent the extra money yet!)

Source: tradingeconomics.com

Finally, the dollar is softer again this morning, which should be no surprise based on the overall market zeitgeist this morning.  So, the DXY (-0.15%) is a pretty good approximation of what is happening, although we have seen some larger moves, notably NOK (+0.8%) which seems to be responding to the fact that the country is going to reopen some shuttered oil and gas drilling sites in the North Sea as Europe tries to figure out where to get energy from.  As to the yen (0.0%) after a series of what appeared to be modest interventions by the BOJ during Golden Week, it appears the market may be explaining that the fundamentals are still pointing to yen weakness and while the BOJ may be able to cap the dollar for a short time, establishing real JPY strength will take a lot more effort, and real policy changes (i.e. much higher interest rates).

Source: tradingeconomics.com

Turning to the data this morning, we get the weekly Initial (exp 205K) and Continuing (1800K) Claims data, which continues to hover near historic lows despite the angst over the labor market.  We also see Nonfarm Productivity (1.4%) and Unit Labor Costs (2.6%) and hear from several more Fed speakers, although most of their comments are back page news.  Of course, tomorrow we will see the NFP report, and that will certainly garner all the attention.  Personally, I will be focused on the Manufacturing Payrolls outcome as a proxy for the reshoring initiative and the potential for continued strong economic activity going forward.

And that’s really it.  Despite the ongoing narrative of the dollar’s demise, it remains well within its recent trading range, and I keep reading about other nations issuing dollar debt as that is the market with the most liquidity.  Over time, I continue to see the dollar as the best fiat around, although I still like stuff more than paper.

Good luck

Adf

Greatly Vexed

Posted on by 
For weeks it appeared that the war
Was something we all could ignore
As equities rallied
And most people tallied
Their gains as those prices did soar

But yesterday, things took a turn
And suddenly, stocks, folks, did spurn
While oil went higher
As missiles did fire
And UAE oil did burn

The question today is what’s next?
Will Hormuz soon wind up annexed?
Or will Iran’s forces
Back up their discourses
And keep Mr Trump greatly vexed?

For nearly two weeks, it appeared that the market was completely willing to accept the narrative that the Iranians were on their last legs and that the Strait would be reopened soon, thus relieving the pressure on the oil markets, and global markets in general.  After all, US equity markets, as well as those in Korea and Taiwan, were making new all-time highs regularly despite the ongoing stress in Iran.  

But yesterday, those happy thoughts were called into question as evidenced by the equity markets’ collective sharp decline throughout Europe and the US.  Of course, most of Asia was closed on Monday, but the few markets that were open performed well then.  Alas, last night was a different story with more losers (HK, India, Australia, New Zealan, Singapore) than gainers (Malaysia, Indonesia).  Even if markets don’t decline much further, there has been a distinct change in sentiment about things, at least in my view.

The timing of the progress in potential negotiations and the question of potential escalation of fighting again are suddenly weighing more heavily on investor perceptions than they had for the last several weeks.

In the meantime, if we turn our attention to economic data, yesterday’s Factory Orders came in much stronger than expected, just the latest in a line of “surprisingly” strong data points from the US.  If we look at the chart below from macromicro.me, showing the Citi Surprise Index and their earnings index, we can see that both the economic indicators and US corporate earnings results are moving higher.  This seems at odds with the narrative of imminent collapse that is still making the rounds but is likely the cause of the equity market’s resilience.

In fact, this morning, markets are once again pointing in a more favorable direction as yesterday’s skirmishes in the Gulf have been quickly forgotten, it seems, and European bourses are all higher (Germany +1.0%, France + 0.6%, Spain +1.1%) recouping yesterday’s losses although UK equities (-1.0%) are suffering on a combination of yesterday’s concerns as well as a surprisingly negative HSBC earnings report.  And US futures are also higher at this hour (5:45) by about 0.4% across the board.  It is difficult to get markets downbeat for very long these days, which is remarkable given the sentiment indicators which have consistently been reading quite poorly.

This dichotomy is quite interesting to me as I am currently reading “Narrative Economics” by Robert Shiller, where he describes how social narratives have, throughout history, led to economic outcomes, whether positive or negative.  His implication is that the data tends to follow the current zeitgeist, and then almost regardless of any government efforts to change that narrative, the zeitgeist is what drives the economy.  For those of us who have been observing markets for any extended length of time, I don’t think this is a surprising revelation, although Shiller does a great job highlighting all the different times the narrative drove the bus.  

And that is what makes the current situation so remarkable, the narrative is that things are terrible with the nation dramatically split politically while gasoline prices have risen so much and inflation is a major problem.  You can see that in the Michigan Sentiment Survey and the political polls.  Yet Retail Sales remain firm and we just saw those strong Factory Orders, two things which one would expect to soften given the current narrative.

Perhaps what we have seen is the impact of social media and ‘influencers’ whose goal is to show the good life and why/how you should live it.  Given they only maintain their followers if they show an ideal situation, there will be no shaming for ostentatious consumption, that is their stock in trade.  So, while during the Great Depression, social pressures were such that buying anything new, like cars or houses, was seen as inappropriate, today, buying new cars is seen as a requirement, the more expensive the better.  Or going on an expensive holiday, or some other extravagance.  I wonder if the gloomy narrative will end up overcoming the influencers.  I suppose much will depend on just how much longer the war in Iran continues, as a clear end soon would almost certainly see a major sentiment change and another wave higher in risk assets while the longer it drags on, the more likely negativity overwhelms.

But this morning, having already looked at equity markets, we see a key piece of that story is oil (-2.0%) having slipped back.  Perhaps the fact that there have been no new skirmishes has people back to a brighter outlook.  Or perhaps, as the conspiracy theorists would explain, governments are in manipulating the price lower again.  As I look at the chart, though, it remains remarkable to me that despite the Strait having been closed for two months now, oil prices have not risen further.

Source: tradingeconomics.com

The question at this point is how quickly things can return to any semblance of normal when the hostilities end.  From what I have read, and I am not an expert, it almost seems like every day the Strait remains closed will require one and a half days more before things get back to the pre-war situation.  Of course, even if that is the case, if the war ends, the zeitgeist will change far faster and that will likely be overlooked.

Meanwhile, given the current gold/oil relationship, we cannot be surprised that gold (+0.6%) and silver (+1.3%) are higher this morning.

In the bond market, after yields rose sharply yesterday (Treasuries +8bps), this morning, things are less dramatic with 10-year Treasury yields slipping -1bp and European sovereign yields all softer with Greece and Italy (-5bps) seeing the largest declines although German bunds (-1bp) were more in line with Treasuries.  There has been much discussion lately about 30-year Treasuries and how they have traded back above 5.0% again, indicating it is a sign of the apocalypse.  However, if you look at the chart below, you can see we have been at or above that level several times in just the past year.  I understand 5.0% is a big round number, but I don’t see this as an imminent disaster because of the move. (Don’t misunderstand, the US fiscal situation is a major problem with many potential problems going forward, I just don’t think this is the final straw.)

Source: tradingeconomics.com

Finally, turning to the dollar, after modest gains yesterday, it is little changed this morning.  The RBA raised rates by 25bps, as expected and AUD is unchanged, as are the euro and pound.  With the BOJ on holiday, JPY (-0.2%) is slipping slightly, but not showing any major activity.  However, we have seen several EMG currencies improve with MXN (+0.3%) and BRL (+0.4%) both benefitting from the increased risk appetite we are seeing in overall markets.  The thing about the dollar is it has not been interesting for quite some time, trading within a fairly narrow range.  However, while we continue to hear many pundits describe the dollar’s ultimate demise, there is an interesting story in the FT about the dollar’s dominance in global markets as can be seen in the chart below from Kobeissi on X.

This is not a demonstration of the world shunning dollars, just sayin!

On the data front, this morning brings the Trade Balance (exp -$60.5B) along with ISM Services (53.7) and JOLTs Job Openings (6.83M).  We also see New Home Sales (668K) and hear from two Fed governors, Bowman and Barr.

But it is all still about the war and oil, and until something definitively changes there, I expect we will chop with every headline.

Good luck

Adf

Twiddle Their Thumbs

Posted on by 
While nations worldwide celebrate
The holiday Marxists made great
Most markets are closed
With traders disposed
To twiddle their thumbs and just wait

Almost every market in both Asia and Europe was closed last night and this morning as the May Day holiday, which while it became a labor celebration in the late 1800’s was actually a pagan ritual in ancient times, coincides with the Golden Week holidays in most of Asia.  Yes, US markets are open, and so are UK markets, but that’s pretty much it.

The biggest market news, I would argue, was the BOJ intervention that we saw early yesterday morning, and then, apparently, again during the session.  Bloomberg calculated they spent ¥5.4 trillion in their efforts, a cool $35 billion or so.  As you can see from the chart below, it did look like there might have been a second, smaller wave this morning, but there is no confirmation of that happening.  The second sharp decline could simply be an order in thin holiday markets.

Source: tradingeconomics.com

Of course, the Japanese intervening in the FX markets is not that newsworthy in the big picture, they have done so many times.  What was much more interesting was the fact that they ostensibly intervened in the oil market as well, selling futures to help cap the price there.  While there are many market participants who decry official intervention in markets, and I understand their concerns, long ago I recognized that governments, by the very fact that they make the rules, are going to do what they want.  And while some will claim this was a sop to President Trump to help keep energy prices down, it helps the Japanese economy as well.  Japan has been negatively impacted to a much greater degree than the US by high oil prices.

Source: tradingeconomics.com

My final thought on this subject is that it is likely to be a huge win for the Japanese as well, shorting oil at $108/bbl, or whatever their price is will be seen as genius when the end game plays out and oil prices tumble due to massive supplies becoming available.

But really, it is hard to look around and see much more than that.  While there is still some discussion of Powell’s decision to remain on the FOMC after his chairmanship ends, I don’t think the market cares all that much anymore as all eyes are now on Mr Warsh to see how he navigates things.

Otherwise, every other story is clickbait and largely unrelated to financial markets today.  Rather, it is a good day to play golf, or sit outside and read a book, at least in NJ where it is sunny and heading to 65 degrees.

So, let’s do a quick recap of the few things that did happen overnight.  Apple reported strong earnings last night which helped confirm the new record highs in US equity markets, at least in the S&P 500, and helped all US markets to a strong session yesterday.  This morning, though, the NASDAQ futures are pointing slightly lower, -0.2%, as I type at 7:15 although the other major indices are in the green.  Overnight saw Tokyo (+0.4%) rally a bit as did Australia (+0.7%) and New Zealand (+1.0%), but they were the only markets open.  The rest of Asia was on holiday.  In Europe, only the UK (-0.5%) is open today with a lackluster performance on weaker banking profits and forecasts.

In the bond market, Treasury yields (+2bps) have moved a bit higher as have UK gilt yields (+2bps) with the rest of Europe closed.  One of the interesting things about the bond market is the fact that US economic activity continues to prove remarkably resilient as yesterday’s data showed strong Personal Income and Spending data (0.6% and 0.9% respectively), with GDP growing 2.0% and Initial Claims falling to 189K, its lowest print since 1968!  Meanwhile US energy exports have been growing to record levels, and the US economy is benefitting massively from the relative abundance of energy available here, especially with NatGas prices still one-sixth their price in Europe.  I must admit it doesn’t feel like the data points toward the need to cut rates.

Turning to commodities, oil (-0.6%) has not been able to reverse the impact of the Japanese intervention yet as all eyes remain on Iran to see if the blockade will force them to concede soon.  As well, the fact that the UAE has left OPEC, the 4th nation to do so in the past seven years, is an indication that OPEC has lost virtually all its pricing power.   I remain medium term and longer term bearish on oil as the political constraints fall away with the war just accelerating that process.  As to the metals markets, after a nice rally yesterday, gold (-1.0%) is backing off a bit while silver and copper are essentially unchanged.

Finally, the FX markets are also extremely quiet overall once you move away from the yen, which today is also little changed from yesterday’s closing level.  In fact, the entire market has only moved +/-0.25% or less from yesterday.  There is no story here.

And in fact, there is no story anywhere today.  ISM Manufacturing (exp 53.0) and Prices Paid (80.0) are on the docket and that’s it.  No speeches, and quite frankly I expect very little price action overall as most trading desks will take my advice and leave early.

Good luck and good weekend

Adf

That’s Nuts

Posted on by 
Seems Jay is a narcissist too
Refusing to leave when he’s through
He claims he won’t try
To stop the new guy
But sticking around is the clue

Meanwhile, in his last vote as Chair
The poll, for his views, didn’t care
As one wanted cuts
And three said that’s nuts
Seems politics is in the air

Starting with the FOMC meeting, as universally expected, they left policy on hold with the Fed funds rate target 3.50% to 3.75%.  However, in an extension of the last meeting’s three dissents, this time there were four, so the vote was 8-4 to leave rates on hold.  However, that seems a bit disingenuous to my eyes, as while Governor Miran wants a 25bp rate cut, as he has said all along, the other three ‘dissents’, regional presidents Hammack, Kashkari and Logan, “did not support inclusion of an easing bias in the statement at this time.”

However, after having read the statement numerous times, I challenge anyone to highlight where they expressed an easing bias.  Here is the exact wording:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

But that is the narrative.  Of course, the fact that there were four dissents led to much tongue wagging by the narrative set with some claiming that Powell had lost the room, while others claimed that this is a warning to Warsh that he will not be able to get his way.  

During Warsh’s nomination hearing, one of the things he discussed in terms of the institutional changes necessary, was that there needed to be less communication by FOMC members as it didn’t do anything to help the process.  I heartily agree with this approach, and perhaps this was all the regional presidents, who are looking ahead and seeing that they will not be able to move markets anymore, certainly a heady feeling I’m sure, trying to stake their turf.

Meanwhile, Chair Powell, the arch traditionalist as we have been told, will be breaking with tradition and remaining on the board in his governor’s role after his chairmanship has ended, although he claims this is to ensure the institution remains protected from politics. (🤣🤣🤣🤣🤣🤣🤣🤣🤣). Whatever.  I am willing to wager that Mr Powell is a consistent dissent as long as he is on the board.

In the end, no policy changes were expected nor forthcoming.  As of the close of yesterday’s session, the Fed funds futures market looks like this:

Source: cmegroup.com

Basically, market participants do not believe the Fed is going to do anything for nearly the next two years.  I hope they are right!

Remember Monday?
Ueda explained…nothing
That’s what the yen heard

Early this morning
Katayama, with a smile,
Hinted at bold action

Monday’s BOJ meeting resulted in no policy changes, as was widely expected, but Ueda-san perfectly illustrated the futility of central bank chiefs trying to guide markets with their words instead of deeds.  Basically, he fumbled around exhibiting no commitment to anything.  And, one look at the chart below shows that traders continued to sell the yen in the wake of the BOJ meeting on the 28th.  However, traders are nothing if not attentive to signals and while it took her a little while, Japanese FinMin Katayama livened things up a bit after Tokyo markets closed as follows [emphasis added]:“We are nearing the point where bold action on exchange rates will be necessary,” and more entertainingly, “I just want to remind everyone: whether you’re traveling or taking a break, don’t put down your smartphone.”

Source: tradingeconomics.com

One of the problems for them is that we are coming to Golden Week, with the first of the holidays already past yesterday.  But Friday through next Wednesday are all Japanese holidays with no markets open.  On the one hand, lack of liquidity can suit the BOJ as any intervention may have a much larger than normal impact.  On the other, holiday activity is very rare.  The term ‘bold action’ is, I believe, step 6 in the 7 steps to intervention and as you can see from the above chart, traders are listening.  The problem Katayama and Ueda have is that the fundamentals remain negative for the yen.  Is it really speculative to respond to weakening Japanese economic data that is worsened by the current energy situation vs. surprisingly strong US economic data where the energy situation is a benefit for the US?

If history is any guide, the dollar is likely to trade below that 160 level for a little while as traders may not want to test things during the Golden Week lack of liquidity, but ultimately, I suspect that dollar can push higher and the BOJ will be in.  Their problem, though, is fundamental, and until the fundamentals change, the yen will be under pressure.

Speaking of fundamentals, let’s take a quick look at GDP figures and ask ourselves about the prospects for currencies in the future.  The below chart from tradingeconomics.com shows annual GDP for the US (grey bars), Germany (blue bars), France (red bars) and Italy (black bars).  See if you can tell the difference!  The US number for Q1 is to be released this morning and expected at 2.3%.

Yesterday’s US data surprised on the high side with strong Durable Goods and Housing data.  This follows stronger than expected Retail Sales data as well, which is the opposite of the situation in Europe.  In fact, a look at the Citi Surprise Index below shows just how surprisingly bad things are in Europe relative to the US.

Again, please explain to me the case for the euro’s strength.

Ok, on to markets.  Bonds were the big tell yesterday as yields in the US rose sharply, up 8bps at their peak, although have since retraced -3bps to 4.40%.

Source: tradgineconomics.com

While that is not the highest yield we have seen since the war began, it is near the upper bound, but I suspect that has more to do with the fact that the US economy, as demonstrated above, is anything but weak right now.  Maybe the dollar should be considered a petrocurrency going forward!  European sovereign yields tracked Treasury yields and this morning, they too are lower by between -2bps and -4bps.  One noteworthy aspect is that ahead of the BOE meeting this morning, 10-year Gilt yields are above 5.0% for the first time since 2008, higher even than during the Liz Truss inspired liability management crisis.

Of course, the other thing weighing on bonds is the oil price (+0.1%) which while it is little changed this morning has climbed steadily and is higher by nearly 12% in the past week.  The entire discussion here is about the naval blockade and whether it will be able to force Iran to capitulate soon.  Certainly, President Trump is doing all he can to apply increased pressure on the Iranians with more secondary sanctions on all the banks that have surreptitiously handled Iranian money in the past.  WTI remains below the spike highs from the first night of the war, but it has been climbing steadily of late.  There is no doubt that there has been material damage done to the oil infrastructure in the Middle East and it will take time to repair once the fighting is done.  As the blockade continues, it appears some of that destruction is being priced in.  However, with the UAE out of OPEC and Venezuela likely to leave as well, there will be a race to see who can pump oil fastest.  I remain convinced that there is a firmer cap than floor over time.

Perhaps the biggest surprise today is that gold (+2.0%) and silver (+3.2%) have rebounded sharply despite oil’s continued rally.  That inverse correlation had been quite strong, although I continue to have a difficult time understanding its underlying cause.  Nonetheless, commodities across the board are in demand today.

In the equity markets, yesterday’s US performance was lackluster ahead of the big earnings releases, two of which were quite strong (GOOG and AMZN) while two were less optimistic (MSFT and META).  Asian markets were broadly negative as rising oil prices continue to weigh on the region with the Nikkei (-1.1%) and Hang Seng (-1.1%) leading the way lower amid mostly poor outcomes throughout the region.  Only Singapore (+1.1%) and New Zealand (+1.0%) managed to buck the trend, after better-than-expected PMI data.   Meanwhile, in Europe the picture is mixed with France (-0.5%) and Spain (-0.3%) softer while Germany (+0.3%) and the UK (+1.0%) are in better shape.  The BOE just announced no policy change but seemed to sound more hawkish as they are going to try to use monetary policy to prevent higher oil prices.  Historically, that has been a catastrophic central bank error, but I will not be surprised if they go down that road.  As to US futures, at this hour (7:15), they are pointing higher across the board by between 0.3% and 0.6%.

Finally, the dollar is softer this morning, with the yen (now +2.0%) leading the way, although that is hardly a dollar story and decidedly limited to the yen.  But, vs. the G10, the greenback is universally softer (EUR +0.3%, GBP +0.35%, AUD +0.6%, CHF +0.7%).  Frankly, this doesn’t make sense to me, but markets will do that to you.  Versus the EMG bloc, the dollar is also softer across the board with KRW (+1.0%) the leader as it follows the yen higher, and the rest of the block showing gains of between 0.25% and 0.5%.  I still stand by my view that the dollar benefits over time, but apparently not today.

And while I fear I have gone on too long already today, there is a lot of data coming out as follows: Personal Income (exp 0.3%), Personal Spending (0.9%), Q1 GDP (2.3%), PCE (0.7%, 3.5% Y/Y) and Core PCE (0.3%, 3.2% Y/Y), Initial Claims (215K), Continuing Claims (1820K) and then later this morning, Chicago PMI (53.0) and Leading Indicators (-0.1%).  With the Fed ostensibly showing a hawkish bias, all eyes will be on the Core PCE data.  But really, my take is the combination of position liquidation in the yen and the twists and turns in the war are going to be today’s drivers.  While you cannot catch a falling knife, I do see this dollar downtick as quite temporary.

Good luck

Adf

Less Than Ideal

Posted on by 
Some mornings the quiet is real
With limited news of appeal
But traders still need
Their families, to feed,
A story far less than ideal

Yes, oil prices have traded a bit higher overnight and this morning, albeit amid extremely low volumes.  In fact, it is the volumes that speak to how little people seem to care about markets right now.  We are seeing extremely low volumes across oil, gold, stocks, bonds and even FX markets are quiet.  It’s not that they haven’t moved a bit, it’s just that there is no conviction amongst the trading community as to where things should be heading.  

Of course, this is never true of the narrative community, who will spin up something to get clicks, but frankly their stuff, which is often the thinnest of gruel, has even less traction now.  Arguably, reading through as much as I could this morning, the most noteworthy thing was the following clip I saw on X (and it is a worthwhile use of 13 seconds, I assure you) showing Representative Ilhan Omar discussing World War Eleven.  I wish there was more to say, but since there is not, let’s head to the markets.

The most relevant argument in markets right now is how long can Iran hold out while their revenue stream is stopped by the US naval blockade and correspondingly, how long before they have to start shutting in production?  How full is their storage?  I have seen estimates from what I believe are credible sources of between half full and 80% full which would mean, even in the best case for them, they have about another 2 weeks before shut-ins begin.  And if that happens, they are looking at the permanent destruction of upwards of half their current output.  In other words, this war is not merely existential for the IRGC and their grip on power, but potentially for Iran’s longer-term future as an economy.

In the meantime, oil prices (+3.3%) continue to grind higher on limited volumes as you can see in the chart below with the lower bars indicating volumes.

Source: finance.yahoo.com

As consumers, we are all feeling the pain of this price action, but BP just reported record profits, and we can expect similar outcomes from all the oil majors, making hay while the sun shines as all corporates do.  At the same time, gold (-1.6%) and silver (-3.2%) continue their direct negative correlation to oil.  This relationship seems quite robust at this point.  It appears that the ongoing dollar strength on the back of the rise in oil prices is undermining the status of gold as a haven asset.  I continue to believe this is a temporary phenomenon, but for those long gold, it is nonetheless a painful reminder of how markets can remain perverse.

Speaking of the dollar, yesterday’s modest declines have been reversed this morning with the greenback gaining on the order of 0.25% this morning across the board.  The biggest news here was the BOJ meeting last night where, as expected, Ueda-san left policy unchanged, although the vote was 6-3, with the three dissents seeking a rate hike.  From what I can tell, Ueda-san prattled on for an hour in his press conference without giving any clear direction as to the future, confusing one and all by explaining they may not reach their objectives but may raise rates anyway.  You can see in the chart below when Ueda started speaking as it initially sounded hawkish, but here we are, 7 hours later and it was as though he never opened his mouth.

Source: tradingeconomics.com

The overriding concern in the yen is whether it will weaken through (dollar above) the 160 level, which it briefly touched back in late March, but has since been trading just below.  That is perceived by many as the ‘line in the sand’ regarding intervention.  However, if we go back to the summer of 2024, when the BOJ last intervened, USDJPY was pushing 162 before they pulled the trigger as you can see below.  It certainly suits them that the market is afraid of pushing this envelope, but my take is it will happen before too long.

Source: tradingeconmics.com

As to the rest of the FX space, zzzzz is the story.  Perhaps the other interesting thing is that NOK (-0.15%) is weaker despite oil’s climb.  Everything else is softer vs. the dollar by -0.2% and -0.4% with no real outliers.  FX is just not that interesting, like most markets these days.

In the equity space, yesterday’s US performance was uninspiring, but we saw more weakness (Tokyo -1.0%, HK -1.0%, China -0.3%, India -0.5%, Australia -0.6%) than strength (Korea +0.4%, Malaysia +0.7%) across Asia.  However, there are no new stories to drive things here with the Iran war and energy prices the only topic of note.  In Europe, markets are feeling better this morning with gains across the board led by Spain (+1.0%) and the UK (+0.6%). I must admit I am confused by the Spanish performance as the only data point of note released this morning was Spanish Unemployment which jumped to 10.83% (such precision), far above last month’s 9.93% and a full point above economists’ forecasts.  But I guess if you look at the longer-term history of Spanish Unemployment, this is still far better than it has been in the past and the trend remains intact.

Source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:25) with OpenAI having missed its own targets for user acquisition undermining the overall AI thesis thus far this morning.  Plenty of time for that to change though, at least based on how buying remains the default position.

Finally, bond markets have sold off with yields continuing to edge higher across the board.  While it’s not really a rout, as you can see from the Bloomberg screenshot below, every European sovereign yield is higher along with treasuries, although JGB’s managed to remain unchanged overnight.

Certainly, there is nothing new in the bond market right now, although I imagine as the Iran war drags on, we will see increased government borrowing across the board which ought to pressure yields higher.

And that’s it, really, for this morning.  We see the Case-Shiller Home Price Index (exp 1.1%) at 9:00 this morning and Consumer Confidence (89.0) at 10:00.  Neither of these is going to matter to traders anywhere, not even algos.  

Until there is a change in the situation in Iran, it is hard to see more than lackluster interest across most markets.  I imagine that if this extends for weeks, the offsetting forces of reduced supply and demand destruction will find an equilibrium point, which may well have already been found around $100/bbl.  Remember this with respect to the dollar, since oil is priced in dollars almost universally, there is going to continue to be demand for the greenback everywhere in the world.  It is hard for me to make a significant bearish case for the dollar right now, at least in the medium or long-term.  In the short term, who knows?

Good luck

Adf

Disconcerting

Posted on by 
The third time, it wasn’t a charm
As thankfully, Trump saw no harm
But it’s disconcerting
The left keeps on flirting
With killing Trump by firearm

But absent more news on the war
Investors, most stocks, still adore
And there’s still a call
The dollar should fall
Though so far, they’re down on that score

It is certainly disconcerting that there have been three bona fide assassination attempts on President Trump in the past two years, something I fear speaks loudly about his opponents.  Fortunately, this one also failed.  Interestingly, as this occurred at the White House Correspondents Dinner, the entire Washington press corps, who largely detest the man, were there.  I wonder if this experience will alter their rhetoric, which I would argue has been the key driving force behind these attempts.  Alas, I fear that will not be the case, at least not for more than a few days at best.  

But that was a far more exciting weekend than anybody imagined as there is no new news regarding the Iran war with potential talks never occurring over the weekend.  Neither have the marines moved in on Kharg Island, so the status quo, a US naval blockade, remains the primary situation.  This leads to two questions; first, how long can Iran withstand the lack of revenue with the government, or more accurately the military, still operating effectively? And second, how long before Iran’s oil wells need to be shut in, which is likely a death sentence on those wells, and by extension, on Iran’s long-term revenue stream?

Frankly, that’s what the weekend brought, so let’s turn to markets.  While the DJIA lagged on Friday, both the NASDAQ and S&P 500 rallied to yet further new all-time highs as US corporate earnings remain robust and the market looks ahead to this week where 5 (MSFT, GOOG, AMZN, META, AAPL) of the Mag7 report earnings this week on Wednesday and Thursday.  As well, Wednesday brings the FOMC decision, with no change expected.  As to US futures this morning, as I type (6:50), they are essentially unchanged.

Overnight, Asia’s session was mixed with Japan (+1.4%) putting in a nice performance along with Korea (+2.15%), India (+0.8%) and Taiwan (+1.8%) although there were laggards (HK, Australia, Indonesia, Singapore) as well, with much smaller declines.  China was basically unchanged.  Perhaps the biggest news was that an oil tanker from the US arrived in Japan for the first time, although certainly not the last time.  European bourses are all a bit firmer this morning, seemingly responding to decent earnings throughout many nations there.  Thus, Germany (+0.6%) is leading while Spain, France and Italy (+0.5% each) lag slightly and the UK (+0.1%) brings up the rear as King Charles prepares to visit President Trump and the US starting today, ostensibly trying to resurrect the once special relationship that has deteriorated over time.

In the bond market, nothing continues to happen with Treasury yields higher by 1bp this morning and similar price action across all of Europe.  JGB yields (+4bps) were the big mover as market participants await three key central bank meetings this week, the Fed, ECB and BOJ.  But here’s the thing, of all the major economies around, Japan’s is the only one where the bond market is offering any real signal.  The below chart from tradingeconomics.com shows US (blue line), German (tan line) and Japan (green line) 10-year yields over the past 5 years.

While we all remember the pain in markets when the Fed, and then all other central banks, figured out that the Covid policy inflation wasn’t going to be as transitory as they hoped and pushed rates up at a historically fast pace in 2022, since then, it is pretty easy to make the case that neither US nor Germany (and by extension the rest of Europe) have seen any substantive change in their bond markets.  I am speaking in a big picture reference here, not the day-to-day noise that we see.  Meanwhile, Japan has finally begun to feel the pressure of a massive debt/GDP ratio and rising inflation.

Contrary to popular belief, Treasury bonds remain the reserve asset of choice around the world as every nation needs to hold a certain amount of USD simply to function in the world today (which is why there is so much recent discussion regarding USD swap lines for numerous countries).  While it sounds great for the panican set to discuss how Chinese “official” holdings of Treasuries have collapsed and that is a signal they are selling bonds, the reality is they have switched their custodians from the Fed to Clearstream and Euroclear in Brussels and Luxembourg while many of those assets are now held in large Chinese ‘private’ banks rather than on the PBOC’s balance sheet.

Source: @Brad_Setser

Notice the large grey bar at the right, foreign assets of the state banks.  Which brings us to the central bank meetings this week where no major central bank is expected to change policy.  Japan seems the diciest call, but the word was put out last week that June is the likely date. As well, the ECB’s own market watching website is now looking at June as a probable rate hike as per the below from ecb-watch.eu.

For the FOMC, no change today and now that the DOJ has referred the cost overrun investigation to the IG at the Fed, the hold on Kevin Warsh by Senator Tillis has been lifted.  I expect he will be confirmed in time for Powell to leave on his scheduled date.  It remains to be seen if Powell will stay on the FOMC (his term technically runs until January 2028), but historically, once a Fed chair leaves that role, they step away completely.  Ultimately, until the markets begin to understand that inflation is going to be structurally higher than in the past, I suspect bond yields are going to remain range bound.

In the commodity space, oil (+0.7%) is a touch higher as the market seems to be becoming increasingly concerned that the impacts of the closure of the Strait of Hormuz are going to be longer lasting than previously assumed.  However, the futures curve remains steeply backwardated as per the below chart form tradingview.com.

Personally, I see this as confirmation of my own view that oil prices are likely to decline over time as more and more supply becomes available with new projects.  If anything, this war has accelerated that process.  Meanwhile, metals prices are essentially unchanged this morning, biding their time for the next big piece of news.

Finally, the dollar is under modest pressure this morning, down about -0.2% across the board as risk appetites continue to build with the war receding in traders’ collective mindset.  But here, too, just like in the bond market, it is difficult to make the case that anything of note has happened to the dollar, writ large, over the past year.  I know I show this chart frequently, but it is simply to hammer home the idea that the dollar is not collapsing.  It has basically had a 3.5% range 96.50 – 100.00 for the past twelve months.  I’m sorry, that is not a death omen!

Source: tradingeconomics.com

On the data front, there are a total of 5 central bank meetings with no changes expected anywhere, and then PCE data later on.

TonightBOJ Rate Decision0.75% (unchanged)
TuesdayCase-Shiller Home Prices1.1%
 Consumer Confidence89.2
WednesdayHousing Starts1.4M
 Building Permits1.39M
 Durable Goods0.5%
 -ex Transport0.4%
 Goods Trade balance -$86.0B
 BOC Rate Decision2.25% (unchanged)
 FOMC Rate Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 ECB Rate Decision2.0% (unchanged)
 Q1 GDP2.2%
 Personal Income0.3%
 Personal Spending0.9%
 Initial Claims215K
 Continuing Claims1820K
 PCE0.7% (3.5% Y/Y)
 Core PCE0.3% (3.2% Y/Y)
 Chicago PMI53.0
 Leading Indicators-0.1%
FridayISM Manufacturing53.0
 ISM Prices Paid80.0

Source: tradingeconomics.com

It remains difficult to get too excited about the data, though, as war stories remain top of mind.  Until something changes there, I suspect we will see equities continue to rally on earnings data with the rest of the markets doing very little overall, data be damned.

Good luck

Adf

A Bad Bet

Posted on by 
While nothing is terribly clear
It seems there’s more worry and fear
The war’s gonna start
To blow things apart
Once more, thus risk gets a Bronx cheer

At this point the navy is set
With carriers, three, as the threat
Meanwhile, Iran’s leaders
Are fighting seceders
It could be they made a bad bet

As the week draws to a close, there is no clarity regarding the potential for a peace deal to end the war as both sides continue to claim the other is the problem with respect to getting to talks.  There continues to be a massive amount of propaganda from both sides and maritime traffic remains at a standstill in the Strait of Hormuz.  Arguably the most noteworthy occurrence was that the USS George H.W. Bush has arrived in theater, bringing the navy armada up to 19 ships, I believe.  That is an enormous amount of firepower.  In fact, there is a theory that the entire purpose of the ceasefire was to allow the US to move all its assets into theater to ensure that the next action completes the process.  

But there has been a change amongst the views of market participants about how things are going to proceed as evidenced by the price of oil.  Arguably, there is no better barometer of the situation than that price and as you can see from the below chart, crude oil’s price (+1.6%) has traded higher consistently all week.

Source: tradingeconomics.com

Too, the fact that we are approaching the weekend has me thinking that the next step in this war is about to kick off.  President Trump has shown that he favors military action when markets are closed and I am pretty certain that view hasn’t changed.  So, keep alert for the news when you wake up tomorrow morning.

However, until such time that the situation on the ground there changes, we are left with a great deal of pontification (present company included, although I try to simply focus on the markets and how their price action offers indications of current events).  Beyond the war, there is precious little new news of market import, though, right now.  Data continues to be a secondary consideration for traders and investors as everything is being distorted by the sudden impacts of the sharp rise in energy prices.  Politics is always a long-term phenomenon, with the daily machinations rarely having a market impact.  Which leaves us with speculative activity, which never rests!

With that in mind, let’s look at the markets and see what they are telling us (or me at least).  Having already highlighted the fact that oil has been creeping higher all week, which I reiterate, implies to me that market participants have begun to believe further military action is imminent, we cannot be surprised that gold (-0.4%) and silver (-0.7%) are slipping as the correlation between the metals and oil has turned negative since the war began about 2 months ago.  Historically, this had almost always been a positive correlation, but right now, that relationship has clearly inverted as you can see in the below chart.

Source: tradingeconomics.com

It certainly remains an enigma that what many perceive to be the ultimate safe haven, gold, is performing so relatively poorly during the greatest strife we have seen in a number of years.  But there you go.

Of course, for risk appetite, the most consistent place to look is the equity market.  Yesterday saw US markets slip a bit, about -0.5% or so across the board, but they remain within spitting distance of their all-time highs.  Certainly, no panic yet.  And this morning, as I type (7:05), the futures markets show the NASDAQ firmer by nearly 1.0% while the DJIA is lagging, -0.2% and the SP500 is in between (+0.3%).  Last night, Tokyo (+1.0%) had a strong session after inflation data was released right at expectations and has not yet shown signs of running away higher.  At the same time, market participants are increasingly certain the BOJ will remain on hold next week, although there is now a 60% probability priced for a 25bp rate hike at the June meeting.  The rest of the region was mixed with China (-0.35%), India (-1.3%) and Indonesia (-3.4%!) all under pressure, the latter suffering after 4 major banks there were downgraded by Fitch, while Taiwan (+3.2%) soared after positive earnings data and economic data showing IP exploding higher by 28.7% in March.

In Europe, though, there are no happy faces with Spain’s IBEX (-1.4%) leading the way lower for the entire continent (CAC -1.1%, DAX -0.4%, FTSE 100 -0.6%).  It is a bit surprising as the only data of note was German Ifo Business Climate (84.4 and the grey line) and Expectations (83.3 and the blue line), both of which printed at their lowest levels since August 2023 and are both clearly trending lower.

Source: tradingeconomics.com

Bond yields are doing very little this morning, with Treasury yields lower by -1bp while European sovereign yields are all higher by between 1bp and 2bps.  Bond investors remain quite concerned about energy driven inflation but are also looking at the negative impacts on economic activity and so remain uncertain which way to go.  One thing to remember is that yields have really done very little over the past 6 months, at least, and that Treasury yields continue to be the global driver.  You can see the similarity in the shape of the price curves for both Treasuries and Bunds below, and both lines are pretty flat to my eye with one blip higher at the beginning of the war.

Source: tradingeconomics.com

Finally, the dollar is softer this morning, which is not in accord with its usual relationships to other assets.  Although it turns out that in the course of the hour I have been writing, things have changed and I cannot see a reason.  So, oil is now lower by -1.6%, gold is higher by 0.2%, and the dollar is softer across the board by 0.2% or so.  For me, I’m happy the relationships still hold, but I would love to be able to offer a catalyst for the change in sentiment.  And yes, US futures are higher across the board now.

Regarding the dollar, though, I couldn’t help but notice the Bloomberg article regarding the carry trade and how it has come back into favor as implied volatilies have fallen over the past month.  What this tells me is that there are no long-term views in the FX market despite all the dollar is going to collapse pap that comes from the FinTwit (FinX?) community.  Shorting yen remains the favored funding vehicle and the discussion is how BRL, MXN and TRY are the asserts favored to be held.  The thing about the carry trade is, it is great until it isn’t, but they don’t ring a bell before things change.  It is also a very different thing to short JPY and be long USD against it, with the USDJPY market amongst the most liquid markets in the world.  But if you are long BRL and short JPY, be prepared for a pretty wide spread on a forced exit because things have changed.  And if that is TRY or ZAR, the spread will be even wider!  Just sayin’.

On the data front, this morning brings Michigan Sentiment (exp 47.6) unchanged from the preliminary reading which was the lowest in the 84-year history of the series.  Are things really that bad?  Maybe, but that certainly doesn’t jibe with the Retail Sales and PMI data.  The problem with survey data is there is an element of politics that distorts the reading and President Trump is such a polarizing figure, it exacerbates the situation.  Nobody likes high gasoline prices, but it is hard to reconcile gasoline prices, which by the way, remain lower than what we saw in the immediate wake of Russia’s invasion of Ukraine as per the chart below, with such a dramatic decline in confidence, hence my view of the political angle.

Source: tradingeconomics.com

Personally, I am on the lookout for the next military incursion or a deal this weekend, with diametrically opposed market impacts on Monday morning.  Once again, my advice is risk mitigation is the way you stick around to play again next week.

Good luck and good weekend

Adf

Dumfound

Posted on by 
The clock has been wound and rewound
And meantime stock buyers dumfound
The good and the great
Who mostly, Trump, hate
And fear that their power’s southbound

But still the blockade is in force
And info depends on your source
Will Trump send marines
To take Iran’s means
And break them as matter of course?

Another day and nothing has changed in the Persian Gulf or the Strait of Hormuz.  The US’s naval blockade is still in force with several Iranian tankers being stopped on outbound routes.  As well, Iranian small gunboats have attacked several freighters seeking to exit the Gulf.  No negotiations are on the calendar, although Pakistan, Egypt and Turkey are ostensibly working to get the two sides together.  This has become a waiting game, it seems, to see if Iran can suffer the loss of 90% of its revenue for longer than President Trump can suffer the political damage that higher oil prices are inflicting on the economy.

The funny thing is the economy doesn’t seem to be that bad overall.  Clearly, nobody is happy to pay more for a tank of gas, but the data has yet to show a major disruption in the US economy.  And in fact, this morning’s Flash PMI data from around the world has shown a pickup in manufacturing activity as per the below table (data from tradingeconomics.com):

CountryActualPrevious
Australia51.049.8
Japan 54.951.6
India 55.953.9
France52.850.0
Germany51.252.2
Eurozone52.251.6
UK53.651.0
US52.5 expected52.3

The narrative on this improvement centers on the idea that people/companies are trying to get ahead of the future where price hikes and shortages of goods become extant, similar to the front-running of the tariffs in Q1 last year and that is certainly part of the story.  But it also appears that, in the US at least, there is real manufacturing growth occurring.  

Freightwaves is a company that tracks trucking and freight movement around the US, and its latest data show solid increases in activity along with a tighter market (rising costs) as demand rises.  Too, this activity is emanating from the center of the country not the West coast, indicating this is domestic production and not imports.  Anecdotally, I have a friend in the trucking business, and I asked him about this situation yesterday.  He confirmed that the trucking business is booming.  

Remember, too, that in the last NFP report, Manufacturing employment rose 15K, far surpassing expectations.  I make these points to highlight that the US economy continues to perform pretty well despite the angst over the war and rising gasoline and diesel prices.  One last tidbit is Retail Sales, which rose a greater than expected 1.7% last month, and 0.7% in the control group which excluded gasoline.  Those numbers do not confirm economic weakness.  

And you know what helps confirm that the US economy is ticking over nicely?  The continued equity market rally.  Since the war began, after the initial fears that rising oil prices were going to collapse the global economy, the market has completely reversed course as you can see in the below. Chart.

Source: tradingeconomics.com

From the nadir on March 30th, the S&P 500 has rebounded 12.5% to new all-time highs.  Earnings data that has been released for Q1 thus far has shown significant growth, upwards of 18% profit growth, again not a sign of a struggling economy.  And perhaps the key feature of my argument is the following cover of The Economist magazine, which seems to have an almost perfect track record in terms of its cover articles, it is wrong nearly 100% of the time.

There continues to be a great deal of doom porn available if you like that type of stuff, but I am having a hard time seeing the depth of the damage that many claim.  Certainly, things can get worse if Iran lashes out in final death throes of the regime and seeks to destroy as much GCC infrastructure as possible, but right now, I don’t see that outcome.  My belief is the marines go for Kharg island shortly and are better than even odds to be successful.  If that is the case, then we will be in the final stages of this conflict and people will move on.  After all, who remembers Venezuela as a major crisis today?  Most people have very short attention spans.

Ok, let’s see how things stacked up overnight after yesterday’s continued US equity rally.  This morning, feelings are not as buoyant although it is not clear why.  Equity markets in both Asia and Europe were broadly lower although that could simply be a bit of profit taking after some strong runs all around.  Tokyo (-0.75%), HK (-1.0%) and China (-0.3%) all slipped as did Australia (-0.6%), India (-1.1%) and Taiwan (-0.4%).  But Korea (+0.9%) bucked the trend along with Malaysia (+0.6%) while the rest of the region was weak.  The Korean economy showed surprising strength in Q1 with GDP last night released at 3.6% annualized in Q1 supporting the market there.

As to Europe, despite the solid Manufacturing PMI data, Services data has been under more pressure and equity markets seem to be following that with Spain (-1.3%), the UK (-0.9%) and Germany (-0.5%) all slipping although France is unchanged this morning.  As to US futures, they are softer as well at this hour (6:55), down by -0.5% or so across the board.

In the bond markets, Treasury yields have backed up 2bps this morning with European sovereign yields higher by between 1bp and 3bps.  The outlier here is UK gilts (+5bps), which seems to be responding to general financing concerns in the UK as the budget deficit there continues to grow faster than forecast.  JGB yields also backed up 2bps.

Oil (+1.2%) is beginning to get concerned again about the Iran situation as we are currently in the midst of a 3-day rally.  While the WTI price, at around $94/bbl, is sitting in the middle of its range since the inception of the war, clearly there is some concern.  

Source: tradingeconomics.com

The EIA inventory data showed a build in crude inventories but a pretty large draw of gasoline and distillates.  Perhaps it was the latter that is the driver.  As to the metals markets, the negative correlation between oil and gold is back with the barbarous relic (-0.8%) slipping while silver (-3.8%) is really having a rough session.  It is key to remember, though, that silver is an inherently more volatile commodity than gold given the market’s much smaller size.  In truth, looking at the chart over the past six months, it is hard to get the sense that it is doing too much at all right now.

Source: tradingeconomics.com

Finally, the dollar is rebounding a bit this morning, with the DXY (+0.2%) continuing to trade in its broad range from the past year as per the below chart.

Source: tradingeconomics.com

While the death of the dollar and de-dollarization narratives remain popular amongst a broad set of analysts, data outovernight from SWIFT shows that the dollar’s portion of international transactions rose to a record 51.1% in March, its highest level since SWIFT revised its procedures.

Source: Bloomberg.com

I regularly read analysts who are very smart explaining all the reasons why the dollar is destined to collapse amid concerns over the unsustainable debt and the use of the dollar as a political tool, and those things are true as far as they go, but for the foreseeable future, TINA is the rule.  No other fiat currency is going to be an effective substitute because no other nation has the heft and strength of capital markets to do so.

The dollar’s strength today is pretty universal with nothing terribly noteworthy regarding specific moves.  Perhaps the one surprise is NOK (-0.3%) which is not following oil higher.

On the data front, this morning brings the weekly Initial (exp 212K) and Continuing (1820K) Claims data as well as the above-mentioned Flash PMI data.  Again, despite all the teeth gnashing, the labor market seems to be holding in quite well overall.  Perhaps my glasses are tinted rose and I don’t see that, but the data releases that we continue to see do not point to an imminent collapse in the US economy.  Rather, continued strength seems the most likely result.  With that in mind, I do not see the dollar falling sharply under any scenario and suspect that a test of 100 on the DXY and 1.15 in the euro may be on the horizon.

Good luck

Adf

Quite Severe

Posted on by 
The current conclusion to draw
Which could be a huge, fatal flaw
Is war’s not deciding
For traders in guiding
Positions, as few hem and haw

But right now, a deadline draws near
Which ought, by all rights, instill fear
The war’s escalation
Will lead to stagflation
With outcomes in stocks quite severe

As I type some 14 hours from the latest Trumpian deadline for Iran to reopen the Strait of Hormuz or have their electricity and transportation infrastructure destroyed, investors appear to be quite sanguine about the entire process.  It seems very clear to me that market participants are quite certain the President will back away from this threat and extend the deadline or announce some other outcome.  That is the only conclusion I can draw from the fact that equity markets around the world are consistently higher this morning.  Investors clearly perceive this as an empty threat, which tells me that the pain trade is a sharp decline in equity markets if the US and Israel do destroy Iranian infrastructure.  I guess we shall all learn more sometime this evening in NY.

But that is the backdrop for markets this morning.  As I freely admit I do not know what the outcome will be, there is little point in hashing out the issue here.  However, I cannot help but laugh at this clip as a description of the President’s negotiating style.

Moving on, in brighter news, the 4 astronauts have circled the far side of the moon, setting the record for the furthest any humans have been from Earth, and are now starting their return trip after having sent some remarkable imagery of the moon.  

In truth, though, there’s little else to discuss so let’s look at markets.  Yesterday’s session in the US continued the rebound in share prices from the recent nadir on March 30th.  Since then, it has been four consecutive up days although futures this morning are little changed to very slightly lower.  But the US move has been mirrored around the world with essentially all of Asia and Europe back at it today.  

In Asia, while both Japan and China were essentially flat, Korea (+0.8%), India (+0.7%), Taiwan (+2.0%, catching up because it had been closed longer) and Australia (+1.7%) all had strong sessions.  Hong Kong (-0.7%) did slip, as did several of the other smaller regional exchanges, but the mood was pretty bright.  

In Europe, I’ll let the following Bloomberg screenshot do the talking, but you can clearly see that fear is not on the menu right now.  

In the bond market, Treasury yields are higher by 1bp this morning after a flat session yesterday while European sovereign yields have all risen about 3bps as they catch up from their long weekend with no trading.  JGB yields are unchanged this morning as their long, slow climb takes a day of rest.

In the commodity space, I first must correct an error I have made regarding the relative prices of WTI and Brent.  My go to source for oil pricing has been tradingeconomics.com.  Their methodology shows the front month of the futures contract, but they don’t list the month in question.  Due to the nature of the two different markets, currently, WTI’s front month is May while Brent’s front month is June.  Given the steep backwardation in the oil markets, that difference is enough to explain the anomaly that I had seen.  Below I have screen shots from barchart.com of the front contracts of both WTI and Brent and you can see the difference yourself.

If you look at the corresponding month in both contracts, you can see that Brent is consistently higher than WTI. (h/t Victor Adair, thank you Victor).

With that in mind, you can see that oil prices are a touch higher this morning, although they remain below the spike high seen at the beginning of the war.  The chart below of WTI is certainly ominous with respect to the strength of the trend higher, and I must believe that if the US does take out Iranian infrastructure, we will breech the spike high on the chart and go higher still.

Source: tradingeconomics.com

Turning to the metals markets, this is perhaps the least surprising headline one can imagine from Bloomberg:

China Ramps Up Gold Buying as Middle East War Dents Prices

With gold prices having fallen nearly 18% from their peak back in late January, and China continuing to diversify reserves out of USD directly, they saw this as a great buying opportunity.  This morning, the barbarous relic is little changed, although continues to trade lightly well above its spike lows.  Silver (-0.9%) is also doing little and it appears that commodity traders are a bit more uncertain how to move forward with the Trump ultimatum hanging over the Iranian’s heads.

Finally, as we might expect given the willingness for investors and traders to add to equity positions, the dollar is slipping a bit this morning, although as I type at 7:00, it has recouped most of its overnight declines.  Thus, the DXY is trading right at 100.00, the euro and pound have edged higher by just 0.1% and USDJPY continues to hover just below the 160 level, having touched it once on March 30, but not since.  The biggest mover today has been SEK (-0.8
%) which has fallen on the back of softer than expected inflation data which has encouraged traders to believe the Riksbank will be able to cut rates ahead of other central banks in the event economic activity slows sharply.  There is also a lot of discussion regarding INR (-0.3%) as the RBI has instituted policies restricting the size of short rupee positions local banks are allowed to maintain and forcing a lot of rupee buying to close those positions.  Thus, the rupee remains caught between the forced position closures and concerns about oil prices depending on how things evolve in Iran.

Source: tradingeconomics.com

The one other currency move of note has been KRW (+0.6%) which continues to rebound from its worst levels seen on March 30th, as it is trading far more in line with the equity markets than the oil markets.  If things escalate in Iran, I suspect the won is going to suffer greatly.

On the data front, this morning brings only Durable Goods orders (exp -0.5%, +0.5% -ex Transport) and speeches from two Fed members, Governor Jefferson and Chicago Fed president Goolsbee.  Services PMI data was released throughout Europe this morning and it was broadly weaker than forecast (Italy, Germany, UK) although both France and Spain managed slightly better outcomes.  

While I remain cautious and hedged personally, apparently my views are out of vogue.  However, it strikes me that today will see little in the way of large movement ahead of the deadline, unless, of course, the president changes something before then.  

Good luck

Adf

Beware

Posted on by 
While news from Iran shows the war
Continues apace, like before
On Wall Street it seems
It’s over, with dreams
Of stock market rallies galore

Now, I realize stocks look ahead
And discount the future instead
But wars tend to last
They don’t end so fast
Beware in which markets you tread

As March and Q1 ended, it appears that there have been some changes in opinions in the investment community.  At least that is what I glean from the following Bloomberg screenshot of major global equity markets including yesterday’s US session and the overnight activity.

As far as I can tell, missiles are still flying in the Middle East, the US and Israel continue to attack specific targets with B-52’s dropping significant amounts of precision guided bombs, the Strait of Hormuz continues to have extremely restricted movement and the UAE, according to the WSJ, is now ready to join the war directly.  None of that seems like de-escalation of fighting, but then I am not a military strategist, so perhaps I don’t understand the concept of de-escalation well.

One take I saw this morning was that equity markets are pricing in the increased likelihood that the US will be leaving the conflict.  On the surface, I liked that idea, and that would certainly explain some of the US rally yesterday, but that doesn’t explain why Asia soared and Europe has rallied as well, given they would have to deal with the rest of the process.  This evening at 9:00 President Trump will be addressing the nation, so I presume we will have a better understanding of things after that.  

One other thing to remember is that the president uses his Truth Social posts to add to the fog of war and create strategic uncertainty for all parties involved.  I read this morning that the administration has been speaking (not directly) with some Iranians and creating a plan for the future, but it is not clear if those people have sufficient power to unite the country there yet.  All in all, while anything is possible, it strikes this poet that things in Iran have not ended, nor will they until the Strait of Hormuz is back to full operational capacity regardless of the President expressing the view that the US (and Israel) have done the hard part and Europe and Asia can deal with the Strait themselves.

But that is where we stand this morning, with risk back in vogue across the board as oil (-1.5% and back below $100/bbl) slipping while gold (+1.5%) continues its rebound.  Bonds (-3bps this morning and down by 20bps from their peak on Friday) continue to rally and have taken European sovereigns along for the ride with most of Europe seeing yields slide between -7bps and -9bps although German bunds, which have held up the best, are only lower by -4bps.  Happy Days are here again!

With all that good news, let’s consider what else is going on, away from Iran, that may impact markets.  At this point, we know the Fed is on hold this month, and likely through the autumn, at least, given the short-term inflation impacts of the oil situation.  

Source: cmegroup.com

As an aside, there have been a number of analysts who are calling for a significant rise in food inflation but be careful on that front.  As @inflation_guy, Mike Ashton points out, [emphasis added]

“…secondary knock-on effects that will be felt eventually in CPI. One that has gotten a lot of press recently is that less oil means less fertilizer and less fertilizer means less crop production and less crop production means higher prices for food. I actually think that’s probably overblown in terms of what the consumer will see, because most of the cost of consumer food items is in the packaging and delivery and not the raw goods, and so as raw food commodity prices go up it will likely be partially offset by transportation prices declining.” 

In fact, I expect that most central banks are terrified of the current situation as they understand, intellectually, that the oil price shock will be temporary, but will feel significant pressure when inflation starts to rise to “do something about it”.  Australia already hiked rates, but that was assumed prior to the onset of the war.  The calculation they are all trying to make is will the negative impacts on growth outweigh the rising pressure on inflation and what will the timeline be like.  In the end, my take is very few will hike in response to this event, especially if the military activity ends before the end of April.  And that is why they get paid the big bucks, to get those decisions right.  Alas, their collective track record is not great.

And beyond that, I don’t see much news directly driving the narrative.  It is still the war, and all the individual takes there, and a much lesser role to the Fed and other central banks.  Economic data is decidedly not part of the current discussion in any meaningful way and given the impact the war is going to have on data for a while going forward, it will be very difficult to suss out underlying trends from headline numbers.  

I’ve already discussed most market segments, leaving just currencies untouched at this point.  Given the reversal in views, we cannot be surprised that the dollar, which has been a major beneficiary of the war, has reversed its recent price action as well.  In fact, using the euro as our proxy, we can see in the below chart that the reversal started at 7:00am yesterday morning and the single currency has rebounded by 1.25% since then.

Source: tradingeconomics.com

And while the euro (+0.5% today) has rallied this morning, it mostly lags other currencies with the pound (+0.7%), AUD (+0.8%), CHF (+1.0%) and SEK (+1.0%) all having very strong sessions.  As well, the yen (+0.2%) has backed away from the 160 level and even CAD (+0.2%) and NOK (+0.5%) are stronger despite the decline in oil prices.  It should be no surprise that the EMG bloc is also showing strength with CLP (+1.1%) leading the way followed by HUF (+1.0%) and ZAR (+0.9%). One disappointment is KRW (+0.2%) which has been one of the worst performers for the past month (-4.0%) and is barely rebounding.  Chile is intricately bound to the price of copper, which has rallied slightly (+1.0%) in the past week, but continues to lag the precious metals.  However, there is a story about the major copper company there, Codelco, which is supporting the currency this morning.  Net, the dollar is giving back some of its recent gains today and will likely continue to do so if risk appetite remains robust.

While data hasn’t had much impact, this morning we see ADP Employment (exp 40K) as well as Retail Sales (+0.5%, +0.3% ex autos) and then ISM Manufacturing (52.5) and Prices Paid (73.0).  Yesterday’s data was in line with expectations and did nothing to alter any perceptions about the economy or path of interest rates.

And that’s all we have.  US futures are rising this morning (+1.0% across the board at 8:00) and for now, risk is the way.  I guess we will have to hear what the President says this evening to consider changing views.

Good luck

Adf