Tag Archives: #JPY

No Desire

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Some days markets have no desire
To move, lacking seller or buyer
But don’t be concerned
The one thing we’ve learned
Is narratives always point higher

While it is clearly not summer as I look out my window and see a snow-covered yard, the doldrums seem to be the best description of markets right now.  A dearth of data, and in truth, a lack of commentary by all the usual players, at least new commentary, has both investors and traders looking elsewhere for signals.

Now, this is not to claim that there is nothing happening in the world, but right now, it all seems to be on hold.  With the SOTU behind us, we have had nothing new from the White House regarding virtually anything, tariffs, taxes, Iran, you name it.  Nvidia earnings last night beat expectations, but apparently not by enough to get people excited.  And virtually every other story is a warmed-over version of things we already know.

I think the most interesting market related news that I saw this morning was that the most hawkish member of the BOJ, Hajime Takata, said the BOJ needed to raise rates to fight Japan’s “heated” inflation.  This seemed a response to Takaichi-san appointing two doves to the board there.  However, the market response was essentially nil, as it should be, with the yen (+0.2%) edging higher while JGB yields (+2bps) also edged higher.  

Other than that, seriously, I cannot find a single thing that seems to matter to markets.  And it’s not like we have that much to look forward to today in the US, with Initial Claims the only data, so there is no reason to go on too long.

Here is a recap of the overnight session.  As I touched on JGB’s above, I will start with the rest of the government bond markets. What we see is that yields are literally unchanged this morning from yesterday’s closing levels.  All of them!  I am hard-pressed to describe a less exciting market than this.

Turning to equities, yesterday’s solid US performance was followed by mixed outcomes in Asia (Tokyo +0.3%, HK -1.4%, China -0.2%) in the major markets while most other regional bourses saw modest gains or losses with no driving stories.  The exception to this was Korea (+3.7%) which has been on an amazing tear lately, as the two largest market cap stocks there, Samsung and SK Hynix, continue to explode higher on demand for memory chips.  In fact, I think it is worthwhile to visualize this move as it is rare for equity markets to go parabolic like this.

Source: finance.yahoo.com

Of course, remember what happens to parabolic markets.  We just saw that in silver one month ago as per the below, so traders beware!

Source: tradingeconomics.com

Turning to Europe, France (+0.9%) is rallying on some earnings data from key companies, but the rest of the continent, and the UK, are doing little (Germany +0.4%, Spain -0.2%, UK +0.1%).  Fittingly, US futures are also unchanged at this hour (7:00).

In the commodity space, oil (-1.7%) has softened substantially this morning as the absence of a war in Iran weighs on long positions, but more importantly, I believe, yesterday’s EIA data showed a massive build of inventories of 16mm barrels, far higher than expected and the largest build since February 2023.  Back then, it appeared to be the residual response to the Russian invasion of Ukraine as there was a scramble for barrels.  Perhaps this is a signal that in the event of a war, there is supply around.  If you look at the inventory chart below, we have certainly seen a net build over the past three years.  Again, it is hard for me to look at things like this and see significantly higher prices in the future.

Source: tradingeconomics.com

In the metals markets, gold is unchanged this morning, though trading well above the $5000/oz level and seems like it is consolidating before moving higher.  Silver (-2.5%) is sliding as there continues to be a discussion regarding deliveries into COMEX contracts with the first notice day for the March contracts tomorrow.  There are many pundits who claim there is insufficient silver available to handle the likely deliveries which, if true, would likely cause a significant short squeeze.  However, I have no insight into how this will play out.  My longer-term view remains that there is a structural shortage of the stuff for industrial applications and the price trend will continue higher, but we have learned how volatile it can be.

Finally, the dollar is modestly stronger this morning with the yen’s rise the exception in the G10 space (EUR -0.1%, GBP -0.2%, AUD -0.2%, CHF -0.3%, NOK -0.3%).  In the EMG bloc, we are seeing similar modest weakness across the board (PLN -0.2%, ZAR -0.3%, MXN -0.2%) with the outlier here being CNY (+0.2%).  Regarding the renminbi, the Chinese have been marching it slowly higher for the past year, as per the below chart.  My take is President Xi is very focused on convincing others the CNY is a viable reserve currency candidate despite all the capital flow restrictions.  I’m not sure how that would work, but that is the best I can come up with.

Source: tradingeconomics.com

And that’s all we have in markets this morning.  On the data front, Initial (exp 215K) and Continuing (1860K) Claims are the only releases and we hear from Fed governor Bowman, although to the best of my knowledge, nobody is listening to Fedspeak right now.  The market continues to price just one 25bp cut for 2026 at this point, although that seems likely to change once we get a better idea as to what Mr Warsh would like to do when he gets the Chair.

My guess is that if there is going to be an attack on Iran, it will happen this weekend, so until then, given the absence of data, I think we drift in all markets and wait for Monday.  Today, and tomorrow, ought to be quiet.

Good luck

Adf

To Excess

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The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

Adf

A Future, Dystopic

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On Monday, an analyst wrote
His thoughts how AI might promote
A future, dystopic
Though somewhat myopic
And offering no antidote
 
Although prior views had explained
That once AI’s suitably trained
Most labor would suffer
And lacking a buffer
Folks’ politics would be quite strained

This is the research report that got tongues wagging on Wall Street yesterday and the fear it allegedly engendered was impressive.  In essence, it said that by 2028, AI would replace vast swaths of the labor force, notably white-collar workers, and that it would lead to a massive recession, and more importantly to the Street, a significant decline in stock prices.  The back and forth on X was amusing all day as there were those who hyperventilated over the coming tragedy, and those who fought back.

It is important to understand this was not a prediction, per se, but one of the scenarios they came up with, although clearly the most dramatic one.  It certainly gained a lot of clicks and notoriety, and let’s face it, isn’t that the idea these days?

Given that the tariff story has now become too complex for anyone to truly understand, and while we all await the denouement in Iran, this appeared to be the best thing to occupy time amongst the trading community.  Personally, I spent the entire morning shoveling snow, but then, I’m no longer a trader.

The upshot is that the major indices all fell more than 1% while gold and silver rallied and bond yields fell.  Fear was palpable.  But will it last?

Last month’s yen rate checks
Came not from Ueda-san
But Bessent, himself

The other story of note was almost an aside, although it helps outline recent movement in USDJPY.  We all remember last month when the yen rallied very sharply during a Friday session in NY as word got out the Fed was “checking rates”.  As a reminder, this is when the Fed calls out to bank FX desks and asks for prices, although doesn’t actually deal.  However, the signal is strong as all the banks recognize the opportunity for intervention, and the news quickly spreads through the market with the effect you can see in the chart below.  During the next three sessions, the yen rallied 4.5%.

Source: tradingeconomics.com

During my career, I had never heard of this activity driven by anyone other than the BOJ, as they were always the most concerned with the yen’s value.  Certainly, they may have been responding to US pressure, but it was always their call.  Now the news comes out that Treasury Secretary Bessent did this on his own last month, a clear indication that the administration is not happy with an over weak yen.  This sets an interesting precedent regarding who controls any given currency.  Now, I doubt we will see this type of thing frequently, but we need to keep it in the back of our mind.  Meanwhile…

Seems Takaichi
Told Ueda, higher rates
Are not helping her

Last night, in a surprise to many in the market, news of a meeting between PM Takaichi and BOJ Governor Ueda resulted in Takaichi-san imploring Ueda-san to leave rates alone, rather than continue raising them.  Higher rates are not helping her growth agenda, and I imagine her belief set is that if the yen weakens too far, she can always intervene, and now that we know about Bessent’s actions, she can count on the US to help.  But I cannot observe this and think anything other than the market is going to test 160 and do so before long.  One poet’s opinion.

Ok, let’s see how markets traded overnight.  First off, last night was the first that all of Asia was back at work so overall liquidity was improved.  However, the results were mixed with Tokyo (+0.9%) ignoring the AI driven US rout while the Hang Seng (-1.8%) fell right alongside the US.  China (+1.0%) rallied in its first day back but consider that simply offset the decline of their last session and, like most other markets, it remains relatively unchanged over the period.  Meanwhile, the tech sense was strong with Korea (+2.1%) and Taiwan (+2.75%) both up nicely while India (-1.3%) suffered under the AI fear umbrella.  Elsewhere in the region, there was no pattern of note with both gainers and losers.

In Europe, the largest markets (UK, Germany and France) are basically unchanged this morning while both Spain (-0.7%) and Italy (-0.4%) are under some pressure.  There is talk of tariff issues, but I’m not sure why only those two markets are taking the heat.  As to the US, at this hour (7:00), all three major indices are higher by about 0.2%.

In the bond market, after a -4bp decline in Treasury yields yesterday they are unchanged this morning while European sovereigns are seeing yields slip -1bp across the board.  Too, JGB yields (-2bps) have continued their slow descent as it appears investors have acclimatized to the risks of Takaichi-nomics.  I think we will have to see inflation figures there to get a better sense.  Regarding Treasury yields, I’m not sure I can explain why I feel this way, but given how bearish sentiment is for bonds, (leveraged players are short >1 million futures contracts), it feels to me like we could see a short-term continuation of the recent rally with yields heading back to test the 3.8% level at least.  I understand both the fiscal argument and the technical argument (see long-term chart below) but neither rules out a short-term rally to inflict pain.  After all, that is what markets do best!  (full transparency, I bought some June TLT call spreads yesterday, so I am talking my book!)

Source: finance.yahoo.com

In the commodity markets, oil (+0.3%) continues to hold its recent Iran inspired gains as the world awaits the outcome of Friday’s meetings between the US and Iran.  I have no insight as to the potential outcome here other than what I read, but it does seem like there will be some type of military action as I do not see Iran ceding anything.  As to the precious metals, gold (-1.0%) is giving back yesterday’s gains but remains in its recent uptrend after the end-January crash, although it has yet to regain the old highs.  I imagine this will take more time, but it also seems quite likely to happen. This is still a quite bullish chart in my view.

Source: tradingeconomics.com

Interestingly, silver is little changed this morning as there continues to be much talk of delivery questions at the COMEX given the apparent lack of available ounces relative to outstanding contracts.  My take is things will get rolled as they usually do, but if not, beware a major spike higher on Friday!

Finally, the dollar continues to be the least interesting space there is with today’s JPY (-0.8%) move the exception that proves the rule.  Having already touched on that situation, there is literally nothing else to describe in either G10 or EMG currencies as +/-0.15% describes the entire session.

As to data this week, here’s what we have coming:

TodayCase Shiller Home Prices1.4%
 Consumer Confidence87.0
ThursdayInitial Claims216K
 Continuing Claims1872K
FridayPPI0.3% (2.6% Y/Y)
 -ex food & energy0.3% (3.0% Y/Y)
 Chicago PMI52.5

Source: tradingeconomics.com

In addition to this bit, we hear from seven more Fed speakers across nine venues, but I still don’t think anybody cares.  The market has priced out any rate cuts before Powell leaves, although there is still one cut priced for the year, expected in October.  

Frankly, it is not surprising that markets have calmed down so much given how much activity we saw in January.  As I wrote then, markets have a great deal of difficulty maintaining high volatility as traders and investors simply get tired and tune out.  We will need a new catalyst to get things going, either an attack on Iran or some new China news in my view.  Tariffs are no longer interesting, and frankly I think Iran and AI have both lost some pizzazz.  Maybe the UFO releases will get things going again!

Good luck

Adf

Havoc He’s Wreaking

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The focus has turned to the data
And whether it’s good or it’s bad-a
We all want to see
Today’s NFP
Then listen to punditry chat-a
 
It’s funny, cause generally speaking
Most pundits are strongly critiquing
The numbers released
Declaring they’re greased
To help Trump and havoc he’s wreaking

It’s NFP day today, which given it is Wednesday is a bit odd, but that’s what happens when the government shuts down for a few days.  At any rate, this is the biggest data week we’ve had in a while as not only did we see Retail Sales yesterday, which disappointed at 0.0% despite showing the largest actual jump, $80 billion, ever between November and December, although that was completely removed by the largest seasonal adjustment ever, (Read about it here at WolfStreet.com) we also get CPI on Friday.  For good order’s sake, here are the current consensus forecasts for NFP:

Nonfarm Payrolls70K
Private Payrolls70K
Manufacturing Payrolls-5K
Unemployment Rate4.4%
Average Hourly Earnings0.3% (3.6% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%

Source: tradingeconmomics.com

As the market continues to adjust to the recent gyrations, there is hope that the data will lead to unequivocal conclusions about the economy, which could drive Fed decisions and then coalesce around a clear direction of travel.  I’m not holding my breath.  

The first thing to remember is that the data is revised virtually every month, and when the economy is at an inflection point, or even when it is showing more pronounced activity in one sector than another, those revisions can tell a very different story than the original print.  But even beyond that, while the algorithms are clearly programmed to respond to the data, longer term investors have a much tougher time discerning what is happening.  All that is a long way of saying, nobody still has any idea where things are headed!

While I dismiss the FOMC speaking circuit, yesterday’s two speakers, Logan and Hammack, who are both voting members this year, said that they felt the current rate is at neutral.  Remember, right now Fed funds are 3.75%, which is a far cry from the Longer run neutral rate they have been feeding us in the Dot Plot!

In fact, their median expectation is 3.0%, so the fact that two voting members think 3.75% is neutral is somewhat confusing especially as both indicated they expected inflation to continue to decline and exhibited concern over the employment situation.  My views of where things are headed don’t matter nearly as much as theirs do, but there seems to be a little inconsistency involved here.  As it happens, the current Fed funds futures market pricing shows that there is a 22% probability of a rate cut in March and then it’s 50:50 in April as per the below chart fromcmegroup.com.

At this point, I suspect we will need to see negative NFP numbers along with continuing declines in CPI/PCE for the Fed to cut as I think Chairman Powell is so miffed at President Trump, he doesn’t want to do anything that Trump wants.  It would also not surprise me if that attitude has suffused the bulk of the FOMC.  The irony remains that Governors Cook and Jefferson are raging doves but would rather keep policy tight to stymy Trump rather than act as they otherwise would.  At least that’s my take.

Anyway, that’s what we have to look forward to this morning.  So, how have things behaved overnight?  Let’s look.  Tokyo (+2.3%) continues to be the star of the show, continuing to rally on excitement and optimism that PM Takaichi is going to solve Japan’s problems.  Maybe she will, but they have a lot of them, so it will take time.  But the tech story is strong there and it appears that foreign buying is picking up, which has been one of the drivers of the JPY (+0.5%) lately.  In fact, this week, the yen is leading all currencies having gained more than 2.3% so far.

Source: tradingeconomics.com

As to the rest of Asia, China (-0.2%) and HK (+0.3%) did little although the tech-based Korean (+1.0%) and Taiwanese (+1.6%) exchanges did well, as did Australia (+1.6%) on the back of stronger metals prices.  One other interesting note is Indonesia (+2.0%) where the government just restricted mining of Nickel (+1.7%) in order to raise the price of their largest export!

Europe is a lot less interesting with the continent under some pressure (France -0.2%, Spain -0.3%, Germany -0.2%) although the UK (+0.7%) is performing well on the back of strength in mining and natural resource shares.  US futures at this hour (7:35) are pointing slightly higher, about 0.15%.

In the bond market, things have gone back to sleep with 10-year yields lower by -1bp pretty much throughout the US and Europe.  JGB yields also did nothing last night, and it appears that despite the massive debt that continues to grow around the world, bond investors are comfortable right now.  Perhaps they see deflation in our future, but that doesn’t feel right to me.

Turning to the markets that continue to show the most volatility, commodities, let’s start with oil (+2.1%) which is demonstrating concern over re-escalating tensions regarding Iran, the negotiations and the potential for military activity there.  There are reports that the US may intercept Iranian tankers and if you look at the chart below, a pretty good uptrend has developed over the past two months.  You won’t be surprised that NOK (+0.6%) has benefitted from today’s move either.

Source: tradingeconomics.com

As to the precious metals, after yesterday’s modest decline, we are back on the rise with gold (+0.85%), silver (+5.5%), copper (+2.1%) and platinum (+3.3%) all nicely higher.  The silver story is about declining inventories in Shanghai, which was the last place that can afford it since both the COMEX and London are already light on available ounces.  While we saw a dramatic decline nearly two weeks ago, I have to say things appear to be shaping up to recoup all those losses and then some!

Finally, the dollar is back under pressure this morning across the board.  I’ve already mentioned the two biggest movers and AUD (+0.5%) joins the list on the back of commodity strength.  Otherwise, the movements are not terribly large here, with the euro (+0.1%), pound (+0.3%), KRW (+0.3%), and ZAR (+0.2%) indicative of the situation.  I expect that the dollar will be responsive to today’s NFP data with a strong print helping the dollar and a weak one pushing it down a bit further.  However, remember that it remains within its trading range, albeit nearer the bottom than the top of that range as per the below.

Source: tradingeconomics.com

And that’s really it for today.  The NFP should drive the first movement and after that, there is still White House bingo for fun and surprises.  While the dollar is soft, I don’t see a collapse coming, and in the end, the more I read about EU energy policy, I can only expect that any collapse will be that of the euro, not the dollar.  But that is a ways into the future I think.

Good luck

Adf

Dissension

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It seems that there’s still quite some tension
As metals and stocks show dissension
Though Friday both puked
Of late, metals juked
Much higher, to stocks contravention
 
So, what can we learn from this split?
That tech stocks all now trade like sh*t
While silver and gold
Are what folks will hold
And bonds? No one just gives a whit

It seems the government shutdown has ended, just as quickly as it began and the only people impacted are traders who were looking forward to the NFP data on Friday.  Given the shutdown was only for a few days, and that apparently, all the data was already collected, it was the compilation that was being delayed, I presume we will get the numbers next week.  Of course, this is a government bureaucracy, so it may take a bit longer.  Nonetheless, this morning we see the ADP Employment number (exp 48K) and analysts will have to work from that, plus the reports like the ISM hiring data, to give their views of the economy.  It really all does seem like theater, I must admit.

Anyway, away from that, the only other news of note that is impacting markets has been an increase in tensions in Iran after the US shot down an Iranian drone heading toward the US aircraft carrier, Abraham Lincoln.  However, it appears that talks are still scheduled for Friday, so oil (+0.2% today, +1.4% since yesterday morning) is creeping back higher, although remains well below the levels seen last week when concerns over a US attack there were mounting.

Source: tradingeconomics.com

Which takes us to markets and what appear to be the key internal drivers.  Starting today with stocks, the narrative revolves around concern that AI is going to destroy software companies and SaaS models since their user base will no longer need those companies.  As well, there are the lingering concerns about the AI investment bubble and the circular dealing between Nvidia and its customers being an indication of the end of the era.  This is akin to what happened during the tech bubble in 2000-01 and has been highlighted by numerous analysts for several months, although is gaining more traction of late.  Finally, the Business Development Companies (BDC’s) and PE firms are under increasing pressure as their portfolio of loans and positions, many of which are being hurt by AI, are starting to hemorrhage cash.  This trifecta has been weighing on the NASDAQ, preventing any significant strength, although other sectors, notably energy and materials, have been doing pretty well.

The funny thing is, while the NASDAQ (-1.4%) fell yesterday amid widespread US equity weakness, if I look at the chart (below from tradingeconomics.com) it doesn’t seem that negative, rather it seems to be consolidating ahead of another leg higher.  But then, I am no technician, so don’t pay attention to me.

However, the narrative is strong here that the world is about to end because Nvidia hasn’t made a new high in the past three months.  I am no tech stock expert, but my take from the cheap seats is that future equity market outcomes are going to continue to be reliant on the success of the Trump administration’s plans regarding reshoring and changing the nature of trade.  It is likely to be bumpy, especially if the Fed does not cut rates to support equity markets, especially since that has been the MO for the past 40 years.  But I remain positive overall.

Looking around the rest of the world, last night saw a mixed picture, although definitely more green than red.  While Tokyo (-0.8%) slid along with Malaysia and the Philippines, the rest of the region had a nice session led by Korea (+1.6%), China (+0.8%) and Australia (+0.8%).  It appears the tech fears were less concerning there, either that or PE and BDC companies aren’t yet so prevalent.  In Europe, meanwhile, despite mixed PMI Services data, there are more gainers than laggards led by the UK (+1.0%), which does have miners, benefitting from the rebound in metals prices.  But France (+0.9%) and Spain (+0.15%) are also higher although Germany (-0.2%) is lagging after a modest miss in the PMI data. As to US futures, at this hour (7:15), they are pointing higher by about 0.25%.

Back to metals, which continue to be THE story these days, gold (+2.0%) has reclaimed the $5000/oz level and while it is lower in the past week, remains nearly 17% higher YTD.  Silver (+6.0%) is also rebounding nicely along with platinum (+3.8%) as more and more discussions have ascribed last Friday’s rout to month end delivery and position issues amongst a few very large players who were able to prevent some major damage to their own balance sheets.  However, as I have maintained all along, the fundamentals are unchanged; there is a shortage of silver for industrial use and has been for several years.  As to gold, there is no indication that central banks have stopped buying.  These continue to be long-term plays and will likely drag the entire metals sector along for the ride.

What about bonds, you may ask?  Well actually, nobody is asking about bonds!  They remain mired in a tight range with dueling narratives about the long-term view.  On the one hand, there are those who continue to look at the US debt load, and the expectation of fiscal deficits as far as the eye (or the CBO) can see, and expect supply issues to dominate, forcing the government to seek inflation to create the soft default necessary to pay back the debt.  They will point to the long-term trend, which saw yields decline for 40 years and then reverse back in 2020 (see chart below from finance.yahoo.com) as evidence that yields are going to trend higher for the next decades.

On the other side, you have those who believe the future is deflationary, with AI driving massive increases in productivity and driving down prices, while focusing on Truflation’s recent readings of 1.0% and claiming that is the way.  Personally, I have more sympathy for the former view than the latter, as it is increasingly difficult for me to understand the view that AI will be able to achieve all its currently stated desires without sufficient energy and materials, whose increasing prices are going to limit any downside in inflation.  As well, while a Warsh Fed chairmanship may strive to change the current central bank model of QE whenever needed, there is zero evidence any other central banks are going to follow suit.  

In the meantime, the tension between those two views has kept yields in a very tight range for a while, and we need an exogenous catalyst to break that range.  Peace in Ukraine?  War in Iran?  I’m not sure.

Finally, the dollar is a touch firmer this morning, notably against the yen (-0.6%), which continues to give back its gains from two Friday’s ago when the Fed ‘checked rates’ in the NY session as seen in the chart below.

Source: tradingeconomics.com

However, the point was made this morning, and it is a good one, that while Japanese 10-year yields are at 2.24%, 10-year yields, 10-years forward are about 4.10%, which would be a devastating yield for the Japanese government given its debt/GDP ratio remains above 230%.  It is difficult to get excited about owning the yen with that backdrop, especially given the demographic implosion of population that is ongoing there.  As to the rest of the currency market, Zzzzz.  Aside from the narrative of the dollar is dead, which gets recycled by somebody every day, it is very hard to look at recent price action and think something remarkable is going to happen.  We will need major monetary and fiscal policy changes, which while they may arrive, are going to take quite some time to get here.

And that’s really it this morning.  Aside from ADP, we get the ISM Services (exp 53.5) and we get the Quarterly Treasury refunding announcement, which will garner a great deal of attention only if Secretary Bessent explains he is going to issue more bonds and less bills, which seems unlikely.  Monday’s ISM data was quite strong.  Strength today could well portend that the US economy has a bright future ahead, in the near term, and that should support stocks and the dollar, while commodities will benefit from the increased demand.  Bonds?  Well, we’ll see which side of that argument is correct.  And what happens if the deficits are smaller than expected?  That is the question nobody is asking because the ‘smart’ folks don’t believe it is possible.  Remember, the dollar is still king.

Good luck

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Quite Gory

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While yesterday, there was one story
‘Bout silver and gold and their glory
By end of the session
The dollar’s depression
Was headlining comments quite gory
 
The narrative now speaks of trends
Which lead to a dollar that ends
The problem they’ve got
Is history’s taught
That cycles and dollars are friends

The dollar is clearly under pressure lately as discussed here yesterday morning.  Using the DXY as our proxy, it has traded and closed through the recent double bottom (see chart below), and the doomsayers are licking their chops that their views of the demise of the dollar are finally coming to fruition. 

Source: tradingeconomics.com

And I am not here to say the dollar is about to reverse course higher.  While I remain medium and long-term bullish on the buck, it doesn’t feel like the time to get long.  However, look at the chart below, to get a longer-term perspective on the dollar’s history.  This chart starts back in 1985, which is just before the Plaza Accord where it was agreed the dollar was too strong and central banks around the world intervened and altered policy to change it.  But here we are at 96ish in a market that has spent no little time below 80 with several drops below 75.  My point is, the dollar tends towards long cycles.  It is entirely possible that we peaked in late 2022 for this cycle and are now heading lower from there.  But I remain highly confident that it will reverse course and rebound. Not tomorrow, but this is not the end.  Just remember that when you read the eulogies for the buck.

Source: finance.yahoo.com

One other thing that seems to be getting headlines is that the president was asked his views on the dollar’s recent weakness and was (rightly) nonplussed over the issue as described here.  After all, this is a man who constantly rails against the artificial weakness of the yen and the yuan, and who is seeking to rebalance the trade account.  All that points to a weaker dollar, so it beggar’s belief that this is a surprise to the market.

One last thing while I’m on my high horse.  I couldn’t help but notice this article about Banque de France chief Villeroy explaining that the weakening dollar may impact ECB policy-making with a throwaway line about diminishing confidence in the dollar stemming from the unpredictability of US economic policy.  First off, US policy is very clear, run it hot!  And second, it is remarkable that when the euro was tumbling, we never saw this same introspection about Eurozone/EU economic policy and their self-destructive energy policies.  My point is, nothing we are currently witnessing is new in any way at all, but rather part of the longer-term cycle of FX markets.

OK, how has this dollar move impacted other markets?  Well, yesterday’s US equity session was marked by a rotation back to tech as the NASDAQ (+0.9%) had a fine day while the DJIA (-0.8%) fell hard.  This led to a mixed session in Asia with the Nikkei little changed (although other indices there were under steady pressure), while HK (+2.6%) exploded higher on news that China has licensed its first Nvidia H200 chips to Alibaba and someone threw money at China Vanke, one of the collapsing Chinese real estate firms.  The mainland was modestly higher (+0.25%) but there was strength in Korea (+1.7%), Taiwan (+1.5%) and India (+0.6%).  On the downside, Indonesia (-7.3%) tumbled after MSCI indicated they may downgrade the market there to frontier status due to lack of liquidity.

In Europe, red is today’s color led by Spain (-1.1%) and France (-1.0%) with the latter seeing weakness in luxury stocks while the former appears to be unwinding some of its recent strength with no particular catalyst, merely a negative view overall in Europe.  Germany (-0.2%) and the UK (-0.4%) are also softer without anything specific.  As to US futures, at this hour (6:40) they are pointing higher with NASDAQ (+1.1%) leading the way again.  As an aside, the S&P 500 futures are above 7000 now, and the cash market looks set to break that big round number this morning.

In the bond market, as we await the FOMC policy decision (no change expected) and the subsequent press conference, Treasury yields are unchanged this morning after having edged higher by 2bps yesterday.  European sovereign yields are all basically softer by -2bps, perhaps on the back of the euro’s strength.  After all, Villeroy hinted that if the euro remains strong, they may need to cut rates again.  Interestingly, JGB yields (-5bps) fell after BOJ Minutes from the December meeting (remember, they already met again last week) indicated that some members were concerned over the weaker yen driving inflation higher.  Talk about stale news.  My sense here is this is much more about the election and JGB’s will track Takaichi-san’s support level with lower yields coincident with weakening support, potentially preventing her Liz Truss moment.

In the commodity space, oil (0.0%) is unchanged this morning but has rallied more than 7% in the past month after a solid session yesterday.  Looking at the chart, the trend clearly remains lower, but the short-term reversal is also quite clear.

Source: tradingeconomics.com

The dollar’s recent weakness is supporting all commodities (given they are generally priced in USD, other nations can afford more with the dollar’s slide), but the bigger picture remains that there is an extraordinarily large amount of the stuff around and much of the angst over its recovery is political (look at Europe) rather than geologic.  Nat Gas (-4.5%) is backing off its extended levels as temperatures are forecast to rebound early next week (cannot happen soon enough for me, where’s global warming when you need it?), but the long-term story here remains positive as it continues to be the energy source of choice for timely access with the least environmental impact.

Turning to metals, gold (+1.6%) continues to trade to new highs on the ‘all of the above’ thesis (weak dollar, debasement trade, geopolitical risk, central bank buying) and shows no signs of slowing down.  Silver (-0.1%), however, has been so incredibly volatile it is starting to become a concern for all involved.  It is not normal for 10%-12% daily moves in any product, let alone one with so much involvement from both retail and institutional players.

Source: tradingeconomics.com

The silver market has gone into backwardation which means that there is significant demand for the actual metal.  And prices in Shanghai trade at a significant premium to the COMEX.  Shanghai is a delivery market.  We will need to watch deliveries at futures expirations closely going forward.

Finally, the dollar today is bouncing off yesterday’s session lows but remain under pressure overall.  After trading through 1.20 yesterday, the euro (-0.6%) has backed off a bit and we have seen similar moves through much of the rest of the G10 (GBP -0.6%, SEK -0.7%, NOK -0.7%, CHF -0.9%).  The yen (-0.3%) continues to be caught between potential intervention fears and fears of unfunded spending.  In the EMG bloc, we have seen CE4 currencies all suffer on the order of -0.7% or so, although APAC currencies are little changed this morning.  The one currency bucking the trend is CLP (+0.2%) which remains closely connected to copper (+1.0%).

On the data front, yesterday’s Consumer Confidence Index fell sharply, a further indication that there is a split between most of the economic numbers and people’s beliefs.  Today, aside from the Fed, we hear from the BOC (no change expected) and we get EIA oil inventories with a small draw forecast after several weeks of large builds.  Too, later in the day the Banco do Brazil will announce their policy (no change expected).

The thing that makes me happy is the Fed is an afterthought today.  While the cacophony of noise that comes from media is extremely difficult to parse given the biases underlying almost all one reads or hears, to me, the question will be whether people start to believe things are getting better, and that is more political than economic in my view.  In the meantime, the dollar appears to be set for a bit of further weakness, but do not mistake this for the end of the dollar or the dollar’s role in the global economy.

Good luck

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Totally Wrecked

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The chaos is starting to spread
As traders, when they look ahead
Have come to the view
More debt will accrue
And fear that the dollar is dead
 
So, gold and its ilk rise unchecked
While fiat is totally wrecked
Most bonds have a pox
But hope lives for stocks
And crypto? They’re still circumspect

I cannot possibly cover all the things ongoing in the markets right now as it would take a 5000 word note to do so adequately.  As such, I will try to give a high level take in far fewer words.

Headlines – 

  • Minneapolis continues to consume most of the domestic press, but is only tangentially, if at all, related to markets.  Perhaps it questions President Trump’s authority and that is a negative for US assets and the dollar.  
  • Xi Jinping purges his most senior military leader, accused of spying and selling state nuclear secrets to the US. Xi has removed virtually his entire military leadership, probably reducing near term risk of a Taiwan invasion, but ignores economic issues

Currencies – 

  • JPY (+1.2%) remains the top story as speculation remains rife that the BOJ stepped into markets on Friday (I don’t think so) and questions arise as to how soon they will do so. 

Source: tradingeconomics.com

 There is a great deal of talk of joint intervention with the US, but I remain skeptical there.  It is critical to understand exactly what joint intervention is and what it represents.  Joint intervention means that the US Treasury is selling its own dollars alongside those of Japan.  That is very different than the Fed, acting on behalf of the Treasury-MOF-BOJ connection executing sales for the MOF.  The former implies a US effort to change the dollar; the latter is simply assisting an ally in our time zone.  I can only think of two times the US intervened, 1985 and 1998.  In the second chart, I highlighted the shape of the move from 1998, which was obviously far sharper than anything we have seen so far. 

Source: finance.yahoo.com

  • DXY (-0.5%) is falling as well, obviously dragged lower by the dollar’s decline vs. the yen, but the dollar’s weakness is universal today.  As you can see from the chart, the DXY has fallen through the bottom of the trading range at 98.00 and the bears are celebrating the end of the dollar.  But just looking at the chart below, we need to see a more substantial extension, in my view, before concluding the dollar is dead.

Source: tradingeconomics.com

Precious Metals – 

MetalPriceDay%WeeklyMonthlyYTDYoY
Gold5090.47101.85+2.0%8.9%17.6%17.95%85.85%
Silver110.347.38+7.2%16.7%53.15%55.05%266.2%
Copper5.99420.048+0.8%1.6%8.4%5.45%42.2%
Platinum2867.20128.8+4.65%21.75%35.2%39.7%205.3%

Source: tradingeconomics.com

I think this table tells the entire story eloquently.  The combination of supply shortages in trading venues, as well as for industrial users, and fears over the collapse of fiat currencies as every government in the world runs it hot and issues massive amounts of debt, has an increasing number of both individuals and institutions looking for someplace to maintain their purchasing power.  Precious metals earned their name and reputation for this very reason.  If anything, the fear is that the speed of the move has been so extraordinary that it must slow down at some point, but so far, that has not been the case.  As you can see in the chart below, the moves in all three have become parabolic, or certainly in silver and platinum.  Historically, prices like this do not continue in this vein, but that doesn’t mean they cannot continue to rise further for a while yet.

Source: tradingeconomics.com

As to energy, oil (-0.2%) is trading above $60/bbl, but doesn’t show a great deal of interest in breaking in either direction right now.  I imagine a US action in Iran would push prices higher, but do not discount a breakthrough on the Russia/Ukraine war that could have the opposite effect.  However, NatGas (+14.6%) continues to be in massive demand as the 15° temperature outside my window this morning is indicative of what is happening across most of the country.  As well, it seems Germany, which is now hugely reliant on US LNG exports, has run their storage down to a dangerously low 40% or so, far below normal for this time of year.  Until this cold-snap ends, demand will remain exceedingly high.

Stocks – the biggest mover overnight was Tokyo (-1.8%) as the much stronger yen weighed heavily on Japanese exporters like Toyota.  Too, both South Korea (-0.8%) and India (-0.9%) slipped with the former showing concern that there would be intervention in the KRW market and negatively impact Korean exporters while the latter continues to see international capital outflows, with another $3 billion coming out so far this month (which has undermined the INR as well).  But otherwise, not much price action in China, HK or elsewhere in the region.  In Europe, most major bourses are little changed, although there have been modest gains in Spain (+0.5%) and Italy (+0.4%).  The only data of note was German Ifo Business Climate (87.6) which remained unchanged, falling below expectations for a modest gain.   And at this hour (7:45), US futures are virtually unchanged.

Bonds – yields have slipped modestly this morning with Treasuries (-1bps) not really showing signs of serious degradation.  European sovereign yields have fallen further between -3bps (Germany) and -5bps (France) with the latter benefitting from the idea that France would actually pass a budget soon.  JGB yields (-2bps) also slipped as polls show Takaichi-san’s approval ratings are slipping and some are assuming she won’t be able to run it quite as hot if she wins the election in two weeks.

Data this week is dominated by the Fed meeting on Wednesday, although as I have said from the beginning of the year, I think the Fed’s importance has waned relative to the market overall.

TodayDurable Goods3.7%
 -ex Transport0.3%
TuesdayCase Shiller Home Prices1.2%
 Consumer Confidence90.9
WednesdayFOMC Rate Decision3.75% (unchanged)
ThursdayInitial Claims205K
 Continuing Claims1860K
 Trade Balance-$42.1B
 Nonfarm Productivity4.9%
 Unit Labor Costs-1.9%
 Factory Orders1.7%
 -ex Transport0.3%
FridayDec PPI0.2% (2.8% Y/Y)
 -ex food & energy0.3% (2.9% Y/Y)
 Chicago PMI43.8

Source: tradingeconomics.com

And that’s pretty much what we have right now.  Clearly, the biggest signal comes from the precious metals space and indicates, to me at least, that there is huge concern over the way of the world right now.  I guess this is what the 4thTurning looks like.  As I said, if the Treasury is actually going to intervene of their own accord, working alongside the Japanese, that is a distinct negative for the dollar against all currencies and needs to be carefully assessed.  However, if the Fed sells dollars on the BOJ’s behalf, that is likely to have just a temporary impact on the FX markets.  Keep that in mind as we go forward.

Good luck (we all need that right now!)

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Yen Reprobates

Posted on by

On Friday we questioned what stage
The BOJ reached for to gauge
If yen intervention
Would soon get a mention
And could Katayama assuage
 
The markets, without spending dough
Since Friday, we’re now in the know
That Bessent checked rates
With yen reprobates
Now anxious to deal a deathblow

On Friday, I asked the question whether the movement seen in Tokyo after the BOJ meeting was finished consisted of step six, rate checks, or step seven, intervention.  Of course, my comments preceded the NY session and then in the afternoon, as you can see from the below chart, something much more substantial occurred.

Source: tradingeconomics.com

At this point on Sunday evening, it appears that about 11:00 Friday morning in NY, as Europe was heading home for the weekend, the Fed rang into major dealers around the Street and asked for prices where they could buy yen / sell dollars.  This is the very definition of ‘rate checks’ and the market response was exactly what you would expect.  The sequence of events was almost certainly that the Japanese MOF reached out to the Treasury department who then rang up the Fed and asked them to act. (Remember, currency policy is a Treasury function, not a Fed one). As you can see from the chart above, the initial move when Asia opened was a continuation of the yen’s strength, and in truth dollar weakness against most currencies, but we have already seen the initial bounce (the green bars to the right.)

Here’s the thing about rate checks, and in truth, every monetary policy, the law of diminishing returns is in effect here, so the next time they try it, and I would not be surprised to see something again tonight or tomorrow in NY, it will have a smaller impact.  Now, perhaps they are comfortable at 155 instead of pressing 160 and if USDJPY stabilizes here, things will go on much as before.  But I doubt that without further efforts, including direct intervention, things are going to change.  And even then, as history has shown time and again, intervention’s impact typically wears off after a few months.  The only way to truly change this trajectory is to change policy in Japan, and by all accounts, as the country heads into an election where PM Takichi’s platform is ‘run it hot’ that seems unlikely.  

It may not be a fade today, but at 150 or so, I expect that the risk/reward of selling yen is going to be extremely attractive again.

Have a good evening

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Six or Seven?

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History has shown
It takes seven steps before
The BOJ acts
 
Inquiring minds ask
Was last night six or seven?
FinMin’s lips are sealed

 

I must admit, when I went to bad last night, I thought this morning’s lead discussion would be about gold as it crested $5000/oz given it was trading at $4967 and nothing seemed likely to stop it.  But something did, probably some profit taking into the weekend, given it has rallied more than 7% this week.  

Thus, since there are no new geopolitical stories of note, with everyone still trying to figure out what the past several days means, we look toward the East this morning and start with Japan.  The BOJ left policy rates on hold, as widely expected, but Ueda-san also raised the BOJ’s forecasts for inflation (see below from BOJ policy statement).  

The latter move has been interpreted as offering more flexibility for the BOJ to hike rates further with expectations for a hike next month rising above 60%.  But of more interest was the price action seen in the immediate wake of the Ueda comments as seen in the below chart.

Source: tradingeconomics.com

While some have asked if the BOJ intervened last night, I would categorically answer, No.  The fact that the dollar’s decline was so short lived indicates that something else was likely the catalyst.  On the 7-step road to intervention, step 6 is checking rates.  This occurs when the BOJ calls the FX trading desks at banks in Tokyo and asks for prices where they could buy yen, but don’t actually execute the transaction.  However, it is a powerful signal that the BOJ, on behalf of the MOF, is growing concerned.  The thing is, historically when this happens, it is widely circulated within the market that the BOJ is checking rates.

Thus far, we have not heard that at all from either the banks or the MOF.  Rather, FinMin Katayama once more explained, “We’re always watching with a sense of urgency.”  (As an aside, I assume this comment is a result of a translation of Japanese that doesn’t fit the English language well as I do not understand how one can watch something ‘urgently’).  But that urgency is classic step 5, not step 6, so it is not clear that we are closer to intervention at this point.  After all, the dollar’s high last night was not as high as we had seen just 9 days ago, when they first took step 5, and historically, a new high is needed before the next step is taken.

But, getting away from the minutiae of their intervention process, I believe last night’s activities tell us that there is growing concern about the yen’s level and its impact on rising inflation.  If Governor Ueda is priming markets for a rate hike sooner than previously anticipated, it tells me that inflation data coming up is going to be higher than previously forecast, and he wants to be prepared.  Interestingly, JGB markets did not see the same type of price behavior as you can see below.

Source: tradingeconomics.com

My conclusion is there was no rate checking, but FinMin Katayama’s comments were sufficient to convince some that it was coming soon to a screen near you.  Remember, last month, Japanese CPI slipped to 2.1%, its lowest level since March 2022.  Given the next release is still nearly a month away, there is no clear consensus as to its reading, but I suspect a rebound is in order.   If forecasts start indicating a substantial rise, I expect the yen to initially weaken, and perhaps that will be sufficient for the BOJ to take the 6th step.

But other than that, there seems very little new news to discuss.  WEF is over and while there are still numerous analyses about what happened, and how things will evolve from here, consensus conclusions are few and far between.  So, let’s see how the rest of the financial markets fared overnight.

Yesterday’s solid US equity performance was followed by a generally solid one in Asia as well.  Tokyo (+0.3%) was nonplussed by the intervention discussion, while HK (+0.45%), Korea (+0.8%) and Taiwan (+0.7%) all followed the US higher.  However, there were some laggards with China (-0.45%) and India (-0.9%) suffering on what appeared to be some profit taking on the previous day’s gains.  Overall, there were more gainers than laggards here.  In Europe, the picture is also mixed as the IBEX (-0.4%) and CAC (-0.3%) both suffer after weaker than expected Flash PMI data was released while Germany (+0.1%) and the UK (+0.2%) are benefitting from modestly better numbers there.  We continue to hear German Chancellor Merz explain all the things that Germany is going to do to make things better going forward, but the nation has so totally hamstrung itself with its energy policy of the past decade, it is not clear to me they have any opportunity to be successful in the short run.  As to US futures, at this hour (7:40), they are pointing slightly lower, -0.15% or so.

In the bond market, yields around the world are within 1 to 2 basis points of yesterday’s closing levels with France (-4bps) the outlier after the weak data and the news that PM LeCornu has survived the first of two no-confidence votes and appears set to get a budget passed, albeit with a 5% deficit forecast.  Otherwise, not much here with yesterday’s PCE data unable to move the needle given it was right on forecasts.

In the commodity market, oil (+1.9%) is rallying after President Trump hinted at further Iranian activities when he indicated an armada of US naval vessels is heading there.  That has traders nervous, but, of course, with President Trump, it is always difficult to determine his strategy, even if we know the end game is to remove the theocracy if possible.  NatGas (-1.6%) is giving back some of its recent gains but given the forecast for a massive arctic blast this weekend, with single digit temperatures and up to two feet of snow on the East coast, I suspect it will maintain its recent gains for a few more days.

In the metals markets, gold is unchanged on the session, although continues to sit tantalizingly close to $5000/oz.  Just as remarkable is that silver (+3.1%) is now trading above $99/oz and certainly seems like it is going to crest $100/oz in the very near future.  This has helped all metals with both copper (+2.5%) and platinum (+5.2%) to rally with the latter now trading at an all-time high as well.

Finally, the dollar is…doing nothing.  While the DXY has sipped -0.07%, we are seeing a mixed picture with the euro slightly softer while the pound (+0.2%) has rallied on the stronger PMI data.  In fact, scanning my screens, nothing has moved more than 0.3% (NOK, AUD on the plus side, PLN, INR on the minus side), but indicative that FX remains an afterthought for now (except for the yen).

On the data front, we see the Flash PMI data (exp 52.0 Mfg, 52.8 Services) and Michigan Sentiment (54.0) and that’s it.  Given all the excitement from the president’s WEF visit, I think most traders and investors will be happy if we have a quiet session to head into the weekend.  As well, if the weather forecasts prove correct, I expect that Monday will be very quiet as many traders will be unable to get into the office.

I don’t know about you, but it is certainly exhausting trying to keep up with the world these days.  Hedging remains an important strategy regardless of your asset class, but right now, both equity and metals trends do not appear to be breaking while the dollar and bonds remain trendless.

Good luck and good weekend

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The Specter

Posted on by

On the horizon
The specter of BOJ
Intervention climbs

 

For those of you who don’t know, the genesis of this note was a daily update during my time covering US corporates for their FX hedging needs.  The poetry was episodic… until it wasn’t.  At any rate, this is the reason I sometimes harp on particular currencies rather than markets more generally.  And right now, while the dollar, writ large, is not that interesting, as I have been explaining for months, the yen (+0.3%) is becoming interesting in its own right as its recent spate of weakness has opened the door to intervention.  Last night, I would say we took a half-step forward on this journey as, while the BOJ did not check rates, FinMin Katayama was more explicit in her discussion about the yen’s weakness, even discussing the fact that the ‘agreement’ that her predecessor made with Treasury Secretary Bessent has no restrictions on intervention if deemed appropriate.

Following are her remarks from last evening, “We can take decisive measures against sudden movements that do not reflect fundamentals. This refers to intervention, and there are no constraints or restrictions on this.  I have repeatedly stated that we will take bold action including all the different measures available.  We shared the view that recent moves have been excessive and do not reflect fundamentals.” Then, she followed that up by referring back to her discussions with Bessent in Washington on Monday. “For many years before I took office, the Treasury secretary has held the personal view that monetary policy has been behind the curve.”

The chart below shows that for now, jawboning is the preferred measure to prevent further yen weakness, but as jawboning is only ever a temporary solution, it seems clear to me that there will be intervention at some point.  In fact, given Monday is a bank holiday in the US, implying less liquidity as banks run skeleton staffs, that may be an ideal time to get the most bang for their buck.

Source: tradingeconomics.com

But remember, even if/when they intervene, the impact will only be temporary.  Perhaps keeping a floor underneath the currency for a month or two.  Ultimately, though, it will follow the fundamentals, and if those are such that the US continues to grow rapidly and receive investment flows, unless the BOJ raises rates dramatically to moderate those flows, the yen will ultimately weaken further.   Now, ask yourself if you think the BOJ can raise rates aggressively given the combination of Japan’s 250% debt/GDP ratio and the fact that Takaichi-san’s policy mix is to borrow more and run things as hot as possible.

Away from the mess in Japan
A story of note is Iran
But tensions have waned
And thus, it’s explained
The oil complex can, down, stand

Looking elsewhere for news of note, there continues to be an enormous amount of energy focused on Minneapolis, which has no market impact.  Remarkably, Venezuela has become an afterthought to the markets as the new narrative is their natural resources are not economically retrievable at current prices.  Iran remains a hot topic in the oil market, but the concerns registered by traders early in the week have ebbed overall, although this morning, Texas tea is higher by 1.5% and back over $60/bbl. 

Looking at other markets, bonds remain somnolent, with yields up 1bp this morning, reversing yesterday’s decline of -1bp but still firmly within the 4.00% – 4.20% range.  European sovereign yields have edged higher by 2bps this morning and overnight JGB yields rose 3bps.  However, it remains difficult to see any significant pattern over the past month as evidenced by the chart below of French and German 10-year yields.  Net movement has been a handful of basis points overall.

Source: tradingeconomics.com

Even the metals markets, which have been THE story for the past months, have calmed down a bit as they consolidate their recent remarkable gains.  This morning, gold (-0.25%), silver (-2.1%), copper (-1.5%) and platinum (-3.2%) are all softer, but all remain higher on the week and over the past month, with silver having gained 37% since this time in December, and sitting above $90/oz.

Equity markets in the US rebounded yesterday, seemingly on some decent earnings data, but overnight, there was little love with Japan (-0.3%), China (-0.4%) and HK (-0.3%) all slipping from recent highs.  Elsewhere in the region, though, there was much more positivity as Korea (+0.9%), India (+0.25%), and Taiwan (+1.9%) all rallied with the latter benefitting from the agreement of a trade deal with the US that cut tariffs on Taiwanese exports in exchange for a $250 billion commitment of investment into the US.

In Europe, France (-0.8%) is the laggard du jour as ongoing budget negotiations in the government are no closer to completion and showing signs of breaking down.  As to the rest of the continent, modest declines are the order of the day while the UK is unchanged.  US futures at this hour (7:40) are pointing higher, however, led by the NASDAQ at +0.7%.

While overall, the dollar remains dull, an underreported story is the CNY (0.0% today) which has been appreciating steadily for the past year and is now at its strongest level since May 2023.  In the beginning of the year my view was if Xi actually got Chinese consumers to raise their spending and back away from the mercantilism that has been the driver of the Chinese economy since the beginning, we would see CNY strength, calling for 6.50 by the end of the year.  Well, a look at the chart below helps keep things in perspective as while CNY has appreciated about 5% in the past year, it remains far below (dollar higher) levels seen post pandemic.  However, I need to see the data indicate Chinese domestic demand is growing before I become a true believer!  Note, too, that the pace of this move is hardly remarkable.

Source: finance.yahoo.com

And that’s all I got today.  Today’s data brings IP (exp 0.2%) and Capacity Utilization (76.0%) with a few more Fed speakers as well.  Remarkably, despite the Fed trotting out virtually every member this week, nothing of note has been said given the current focus on defending Chairman Powell regarding the renovations at the Eccles Building.  

One other thing I have been wondering, and this has been for a long time, is the meaning of the Capacity Utilization reading.  On its surface, it tells us that only three-quarters of the US currently available manufacturing, mining and drilling capacity is being utilized.  But that seems like a low count based on the economy and the narrative.  I wonder, how much of what is considered available capacity is actually obsolete?  Undoubtedly, as you can see from the chart below from the FRED database, the trend is falling.  

But do companies really build so much capacity they don’t use and it sits idle?  Seems a tough way to make a living in a highly competitive world.  I understand that globalization undermined US manufacturing ever since China entered the WTO in 2001.  And maybe that is all this reflects.  But given the dramatic buildout in AI infrastructure, as well as growth in LNG and power production of late, if nothing else, I have to believe this trend is set to reverse in the near future.  After all, isn’t that Trump’s goal?

Meanwhile, I feel like we are all awaiting the next headline to determine the next move.  The underlying trend in commodities remains in place, and mostly, bonds and the dollar have no reason to go anywhere.

Good luck and good long weekend

Adf