Tag Archives: #JPY

No Plan of Action

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In England and Scotland and Wales
Kier Starmer has gone off the rails
A buffoon-like clown
He’s set to step down
As from the Brits eyes, fall their scales

But will his replacement gain traction
Or will Burnham be a distraction
From solving their woes
As Lord only knows
They’ve many, and no plan of action

It has been an eventful weekend for me so let me start by telling you that Marvel was Best of Breed in back-to-back shows last Thursday.  We are very proud and happy.

Second, Friday was a more difficult day for me as I wound up having emergency surgery, although everything is fine.  But I am still in recovery mode.  Sometimes, aging is harder than other times.

With that in mind, we can talk about the three things that matter, I believe, the change of PM in the UK, the on-again-off-again peace talks in Iran and the fact that the yen is now weaker than the level that got the MOF to intervene back in April.

Starting with the UK, PM Starmer has promised to step down now that his most likely successor, Andy Burnham, the former mayor of Manchester, is in Parliament and will now become PM sometime in the next several months depending on the actual timing of certain technicalities.  He is described as left-wing, even by the press, which tells you that he must be quite far to the left.  But the UK has serious problems with respect to their economy, slowing growth and high inflation, and the social structure due to massive immigration, both legal and illegal.  As well, the report that just dropped about the Pakistani grooming gangs that were systematically raping young English girls is so damning, it is hard to believe, yet it was all covered up.  The government doesn’t have to go to the national polls until 2029, so Burnham will have time to try to implement policies, but the nation has many troubles ahead.

As to UK markets, both the pound and FTSE 100 have been underperformers relative to their peer European counterparts over the past month or so as this process has heated up, but in truth, not by very much.  Much of the pound’s weakness can be attributed to dollar strength (see chart below), where the dollar has broken through key technical resistance in the DXY, while the FTSE is just drifting given the lack of positive news.  Certainly, this story didn’t help either one, as both are unchanged on the day.

Source: tradingeconomics.com

In Switzerland, talks are ongoing
As Trump and the Mullahs try showing
That they are the ones
Who have the most guns
But progress seems like it is growing

It cannot be a great surprise that there is a lot of bluster from both sides of this negotiation between the US and Iran as President Trump tries to end the conflict in Iran.  After all, both sides are famous for their bluster!  And you can read whatever you like from whatever source you want to get your spin, but I’m not smart enough to understand the intricacies of international diplomacy.  However, what I do understand is market price movement, and here we are this morning, with oil prices falling further, down -2.5%, and back to levels last seen in early March, right at the beginning of this conflict.

source tradingeconomics.com

Thus far, every story about tank bottoms being reached and an insufficient amount of oil for the pipeline infrastructure to be effective has proven not to be true.  There is still a large group of analysts who are calling for end of days, but the market signals just don’t agree.  I suspect that the only ones who really want to see oil prices remain high are the oil companies who sell the stuff, but for the rest of the world, lower is clearly better.  Obviously, anything can still happen, but by all appearances, it seems that more and more traffic is flowing through the Strait and we are going to see lower prices going forward.

In the end, from my vantage point thousands of miles away from the action, it appears that Iran was greatly weakened by this conflict on a military basis, but more importantly, every one of its Gulf neighbors realized that they needed alternative routes to get their oil to market, and we are going to see a lot more pipeline infrastructure built to do just that, so as time goes by, this choke point is going to lose its effectiveness.  And that is probably a bigger weakness for Iran, as that was something they held over the world, but now it seems it is not as impressive a strength as it had been made out to be in the past.

It’s no waterfall
But the yen keeps dripping down
Whence the BOJ?

Finally, the yen (-0.3%) is having a tough time right now as it has traded back to its lowest level vs. the dollar since 1986!  That’s right folks, it has been forty years since USDJPY traded above 162.00, and we are pushing that level right now as you can see in the chart below.

The last two times the yen reached these levels, back in April and in July 2024, the BOJ intervened in the markets aggressively.  But so far, crickets.  I think the issue for them is the dollar continues to be quite strong, especially as traders are now pricing in rate hikes by the Fed, and so intervening is going to be a waste of money.  And it’s true, if the dollar is rallying across the board, there is very little Ueda-san can do.  As I have repeatedly said, the only way for the yen to break this slide is for serious fiscal and monetary policy changes, and frankly, that doesn’t look like it is in the cards right now.  While I know there are many who think the dollar is heading to its graveyard, it apparently still has a bit of life left in it.

Which takes us to the overnight activity.  Equity markets have been mixed as all this new information gets digested.  In Asia, Tokyo (+1.6%) and China (+2.4%) both had strong sessions although HK (-0.7%) couldn’t keep up.  Elsewhere in the region, there was slightly more green than red led by Taiwan (+2.75%) while the Philippines (-1.65%) was the biggest laggard.  Uncertainty continues to reign although as the Iran situation slowly resolves, I expect to see things brighten here as Asia was the region hurt most by the entire conflict.

In Europe it is also a mixed picture with the UK (+0.3%) now rallying on the news that Starmer is leaving and Spain (+0.4%) has managed a gain as well while both Germany (-0.3%) and France (-0.7%) are lagging this morning, although there is no news of note in either place.  US futures are basically unchanged at this hour (7:15).

In the bond market, Treasury yields (+3bps) have edged higher this morning, I guess on this new belief in higher Fed funds, although I would have thought the bond market would appreciate a hawkish Fed fighting inflation.  European sovereign yields, though, are lower across the board down about -2bps everywhere.  Bonds remain less interesting now that they are back in their ranges and not breaking out as so many though was occurring back in May as per the below chart.

Source: tradingeconomics.com

With oil prices lower, it should be no surprise that gold (+1.35%) and silver (+2.4%) are both higher this morning.  Many have made the case that with the dollar strengthening, the precious metals complex will remain under pressure, and it is a valid case, but for some reason, I have a feeling it will not be as dramatic as they believe.

Finally, the dollar is firmer across the board this morning, albeit not by very much.  Wednesday and Thursday of last week were the big moving days in the wake of the FOMC meeting and the new hawkish read.  Since then, not much has happened, just a slow drift higher across the board.  FWIW, I don’t think that Chairman Warsh is going to be that hawkish, but I look forward to the structural changes that he makes.  However, for now, that is the market assessment.

On the data front, there is nothing today and really nothing of import until Thursday so I will go through it tomorrow.

That’s how things are shaping up, with the dollar gaining, oil sliding and stocks uncertain what to do next.  I am a fan of uncertainty as it will reduce systemic risk, and that is something we really need to see.

Good luck

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Leverage Doomsday

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Though oil continues to be
The lens through which most of us see
The current events
In dollars and cents
There’s more going on causing glee

For instance, as stock markets rise
It cannot be such a surprise
The narrative writers
Are pulling all-nighters
Adjusting their views to seem wise

But naysayers need to say nay
And here’s what they’re pushing today
The Bank of Japan
And their current plan
Will lead to a leverage doomsday

We might as well start off with oil this morning since it is still the top story in markets, and still the major catalyst.  It is lower again this morning, down a further -2.8%, and despite many questions as to whether the deal will hold, both sides appear to be moving toward a signing on Friday.  The below chart from tradingeconomics.com shows WTI prices for the last year.  As you can see, the current price is the lowest since March 10th, which was a reaction low after the spike high on March 9th when it touched its highs for the entire situation.

I eyeballed a line at about $65.00/bbl as an estimate of what prices were like prior to the Iran conflict.  Based on that, the current front month futures price remains about 20% above the pre-war price, certainly high, but it doesn’t seem crippling.  I believe it is very clear that the analysts who were calling for $150/bbl or $200/bbl are now working hard to determine what they got wrong.  Doomberg wrote an interesting piece this morning (it is paywalled, but their stuff is fantastic) describing two likely reasons for the fact that oil prices never rose that high.  First, the original estimates of how much oil was stuck behind the Strait were overstated as all the players there found ways to export some, whether through tankers going dark or via rail or truck or pipeline.  But the more interesting observation was that China was able to reduce its imports by between 3mm and 4mm bpd and things were just fine.  China has altered their energy mix such that oil, while still important, can be substituted out as necessary.  That is a very interesting outcome with respect to one of China’s greatest perceived weaknesses, its lack of natural energy capacity.  If they don’t need as much oil to run their economy (which by the way based on overnight data is struggling) then they have less geopolitical weakness.  

Enough on oil, but while I’m here, it is not surprising that as oil slides, metals prices rise so gold (+0.9%) and silver (+0.8%) are continuing to benefit as is copper (+0.1%) although the latter not so much today.

Turning to the other story that has tongues wagging, the BOJ raised their base rate to 1.00% last night as had been universally expected by markets.  Now, the interesting thing here is that there is a group of analysts who believe that this will lead to net position liquidation by leveraged fund managers (i.e. hedge funds) as their funding costs will have risen.  I disagree, and so far, markets are on my side.  This is evident by the fact that equity markets continue to perform well, and USDJPY has shown no inkling of reversing its multi-year trend of rising.  Below is a table of the base interest rates of the G20 nations.  While Switzerland does have a lower rate, and Singapore is the same, if you are thinking about borrowing in a currency to lever up positions, Japan, given the yen’s depth and liquidity, remains the currency of choice by a long shot.

Source: tradingeconomics.com

Ask yourself if your borrowing costs rose 0.25% but you were still earning a net 13.5% return on your BRL deposits, would you flee the trade?  And if you have been buying equities, you are even less likely to get out.  Japan’s problem is not specifically that their base rate is low, it is that they currently are fighting a terrible demographic position of a shrinking population and they have a massive debt/GDP ratio.  They cannot afford to raise rates enough to have a meaningful impact on the yen without bankrupting the country and decimating the yen.  It is not clear to me how they get out of their current situation, but despite concerns elsewhere in the world about the yen’s weakness being a competitive advantage, I think it has further to go.  Basically, there needs to be another Plaza Accord type agreement to change things, and that doesn’t seem likely right now.  After all, in Evian, it doesn’t sound like things are going smoothly.

So, how have markets behaved overnight?  Well, risk is still in vogue.  Following yesterday’s strong US performance, where the DJIA made another all-time high, there were far more gainers (Korea, India, Taiwan, Malaysia, New Zealand, Indonesia) than laggards (HK -1.4%, China -0.2%) while Tokyo was little changed.  As I mentioned above, the Chinese data was pretty lousy as per the below table:

So, the housing market continues to suffer, and the domestic economy along with it, although the export economy continues to grow.

In Europe, the decline in oil prices is clearly helping as all major indices are higher between 0.4% and 0.75%.  As to US futures, at this hour (7:20), they are pointing slightly higher, about 0.15% across the board.

In the bond market, yields continue to decline with Treasuries (-3bps) back below 4.5% which had been seen as a real problem just a few weeks ago.  European sovereigns are also lower by between -3bps and -4bps, duly following both Treasury yields and oil prices.  The outlier here is JGB yields (+6bps) which responded to the rate hike by rising, perhaps an indication that investors don’t believe the BOJ is doing enough.  However, my wager would be the BOJ is done.

Finally, the dollar is a touch softer, as one would expect given the movements in other markets, but there is very little excitement in the FX markets.  Using the DXY (-0.05%) as proxy, you can see things are little changed.  The biggest movers are BRL (+0.4%) and KRW (+0.4%) both of which are seeing capital inflows supporting the currency.  But otherwise, +/-0.2% defines the session in both G10 and EMG currencies.  Note that despite the BOJ rate hike, USDJPY sits at 160.32 showing no sign of heading lower, even in an environment where the dollar is modestly softer.

On the data front, this morning brings Housing Starts (exp 1.43M) and Building Permits (1.42M) and that’s really it.  With the FOMC tomorrow, and Iran ostensibly solved, Mr Warsh and his press conference will get a great deal of focus.  Until then, I don’t see any reason for recent trends to change absent a complete collapse of the Iran deal, which seems unlikely at this point.

Good luck

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One Sixty

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The asymptote nears
Will they act at One Sixty?
Can they afford to?

Yesterday saw the yen edge ever closer to the 160 level, the point at which the MOF/BOJ acted in April.  Frankly, looking at the chart, it reminds me of an asymptotic limit from calculus, but the one thing we know is there is no natural limit, only whatever artificial one is imposed (or tried to be imposed) by the Japanese government.

Source: tradingeconomics.com

The market continues to price a high probability, ~86% according to the OIS market, of a 25bp hike by the BOJ next week, and I’m confident they will do that.  But to me, the question is, will it matter to the FX markets?  Here’s the thing about FX, typically there are two separate, but related, drivers of the relative value of one currency vs. another.  The most common discussion is about short-term interest rate differentials, typically proxied by central bank base rates.  Below is a chart of the past ten years of data for Fed funds (grey line), BOJ base rate (blue line) and USDJPY (brown line).

Source: tradingeconomics.com

It is abundantly clear that there is a strong relationship here, as US rates shot higher in the post-Covid inflation bout and USDJPY shot higher as well.  Now, since the Fed started cutting rates back in September 2024, while Japanese rates have edged higher over the same time frame, it would be reasonable to assume that USDJPY should retreat somewhat.  However, as you can see in the first chart, that is just not happening.  In fact, the pressures are the other way, with far more weakness than strength.

Why, one might ask, is this the case?  This takes us to the other major factor in FX rates, relative capital flows.  Nations that see substantial inflows in capital will typically see their currencies appreciate.  Now, ask yourself, which nation sees the biggest inflows of capital in the world?  Yes, the US, as the capital account surplus is the mirror image of the massive current account deficit that we run.  In fact, if you look at the below chart, it shows the relative current accounts of Japan (grey bars) and the US (blue bars) in percentage of GDP which most recently showed -3.6% for the US and +4.7% for Japan.

Source: tradingeconomics.com

Now, let’s do the math.  US GDP is ~$28.8 trillion while Japanese GDP is ~$4.4 trillion.  3.6% of $28.8 trillion = ~$1.037 trillion of capital inflows.  4.7% of $4.4 trillion = $202 billion of capital outflows.  Of course, we know that everybody in the world is piling into US technology stocks, and that is where the capital is mostly flowing, but in order to do so, they are buying USD.  This is true of Japanese investors as well as others around the world.  

There is a narrative that is developing that claims as the Japanese raise interest rates, the massive, short yen positions that exist to fund many speculative trades will unwind, and with that, the yen will strengthen dramatically as well as we will see many other markets sell off sharply as those positions unwind.  But the NASDAQ is up 21% YTD and 40% in the past year.  If you are an investor and you are funding a speculative position at 0.75% annually that rises to 1.00% while you are returning 40% on the other side, do you really care?

To my eye, for the yen to change course, intervention is irrelevant, and so is a 25bp rate hike.  We need to see a wholesale change in the combination of Japanese fiscal and monetary policies as well as changes in those policies in the US.  Historically, a tight monetary and loose fiscal policy combination will strengthen a currency (something that the US currently has), but can Japan afford to tighten monetary policy that much?  My money is on no, and while 25bps seems pretty certain next week, I would not be looking for USDJPY fall very far, if at all.  And remember, the market is pricing a 50% chance of a Fed hike by the end of the year.  Don’t be taken in by this story in my view.

Away from this issue, it is difficult to find other critical news.  Yes, there was another skirmish in Iran straining the concept of a ceasefire, but all-out war has not resumed.  The elections in California and LA will take several weeks to determine who will be on the ballot in November, which, when you think about it, sums up the incompetence of California governance writ large.  

So, oil is higher along with the dollar and yields, but so are stocks, while metals slip.  Let’s look at the overnight activity.  Another set of equity records in the US was followed in Asia by broad based strength as Tokyo (+2.5%), China (+0.5%), Korea (+0.2%) and Taiwan (+2.0%) all continued to climb. Both HK (-1.6%) and India (-0.4%) were not as robust with the former seeing profit taking after a few strong sessions while the latter felt pressure from those rising oil prices.  One outlier here was Indonesia (-4.5%) which suffered after weaker than expected trade data, higher than expected inflation data, and a weakening rupiah which set another record low (dollar high), touching 18,000.

European bourses, meanwhile, are mostly under pressure after President Trump has devised a new way to impose tariffs on nations that allow “forced labor” which is defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.”  One must give the president props for his continuous efforts to impose tariffs, if nothing else.  At any rate, Germany (-0.9%) is leading the way lower, followed by Italy (-0.3%), France (-0.2%) and the UK (-0.2%) although Spain (+0.5%) is bucking that trend on the strength of the earnings for Inditex (Zara clothing parent) which is one of the largest companies in the nation.  US futures, at this hour (6:40) are mixed.

In the bond market, yields are rising again on the back of the oil price rise with Treasury yields (+4bps) gaining alongside the entire European sovereign market, all of which have risen a similar amount.  Last night, JGB yields also rose 6bps, as they respond to the oil market as well as pending rate hikes by the BOJ.

In the commodity market, if you think back to late May, you may recall an announcement that a deal with Iran was close which prompted a gap lower in oil prices as you can see in the chart below.  Well, that gap has now been filled.

Source: tradingeconomics.com

Just as nature abhors a vacuum, markets abhor a gap and seek to fill it whenever possible.  My take here, though, is now that the gap is filled, there is less reason to see oil rally much further and a consolidation before a slow decline is in the cards.  As to metals markets, gold (-0.8%), silver (-1.2%) and copper (-1.1%) are all softer on the day, with their negative correlation to oil intact.

Finally, the dollar is firmer this morning, keeping in line with its recent relationship with other markets.  However, the movement remains relatively muted with most G10 currencies softer by -0.2% or so as only SEK (-0.6%) and NOK (+0.1%) really buck that trend.  NOK is clearly benefitting from the oil price rise while SEK seems to be suffering from a slightly higher beta to the broad dollar move.  In the EMG bloc, KRW (-0.9%) is the laggard as it continues under pressure and trading to its lowest levels (highest dollar) since 2009.

Source: tradingeconomics.com

But otherwise, most of these currencies are slipping a similar amount to the G10 bloc, on the order of -0.2% or so.

On the data front, this morning brings ISM Services (exp 53.8) as well as Factory Orders (4.6%, 0.8% ex-Transport) and then the EIA crude oil inventories with another sizable draw anticipated.  At 2:00, the Fed’s Beige Book is released which should make for some interesting reading.  Yesterday’s JOLTs data was surprising in that it showed a significant jump in job openings, 700K more than expected which does not portray a weakening labor market.

Overall, equity markets seem to be disconnected from the impact of oil prices, something that very few analysts would have forecast in February.  But the dollar remains closely linked to those prices for now.  As we all sit here, waiting for the next headline, I cannot help but look at the US data and consider that the economy continues to tick over pretty well.  Ultimately, I believe that bodes well for the dollar over time, or at least until some other major economy shows it can perform well.

Good luck

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No Black Swan

Posted on by 
For all of the angst that Iran
Has ended the talks and moved on
The market for oil
Has come off the boil
As risk takers see no black swan

So, stocks keep on making new highs
And it cannot be a surprise
That bond yields have slipped
While in today’s script
Elections will garner all eyes

Once again, I am having a hard time reconciling the narrative and the price action.  Yesterday saw a sharp rally in oil as the talks between the US and whoever is representing Iran apparently collapsed.  Yet, as you can see from the below chart, while that was worth nearly $5/bbl early in yesterday’s session, those gains dissipated over time and this morning, oil (-1.2%) continues that slide.

Source: tradingeconomics.com

One thing I saw on X this morning claimed Iran was done talking, had received a nuclear bomb from a third party (Pakistan? North Korea?) and was going to detonate it somewhere.  Another was that the talks are still ongoing.  I do find it interesting that so many are willing to take statements from the Iranian news agency, TASNIM, a body that has lied repeatedly for 47 years, and assume their claims are gospel.  Propaganda is always an ongoing project on both sides (in truth from every government everywhere) and thus every claim must be seen for what it is, speaking to a specific audience to achieve a response, not an unbiased description of reality.  Thus, it seems many folks see what they want to see to confirm their prior beliefs.  I come back to the market as the most unbiased arbiter, and it continues to point to an end to the conflict on a relatively short timeline.

Which takes us to the other story today, US primary elections, notably in California where there is a gubernatorial primary and a mayoral one in LA that has garnered the most attention based on the seeming outstanding performance of former reality-TV star (?) Spencer Pratt running against the incumbent Karen Bass.  This race seems like it may be quite important nationally as it would offer the possibility that the deepest blue of cities may finally have had enough incompetence in the mayor’s office and wants to change directions, at least a little bit.  Of course, NY just elected an incompetent mayor, as did Seattle and Chicago before them, so maybe the people in these cities like the situation.  I’m hopeful that is not the case.

But otherwise, it is hard to get too excited about much this morning.  equity markets in the US made yet another set of new highs yesterday across the major indices as no matter the news, it appears there is a bullish spin.  So, let’s turn to markets this morning.  Asian equity markets were mixed overnight with Tokyo (-0.3%) slipping slightly although HK (+2.5%) and China (+1.5%) both rallied nicely on the back of the US tech rally.  Net, there were far more winners in the region (Korea, India, Taiwan, Philippines, Thailand, Singapore, Indonesia), than laggards (Australia, New Zealand, Malaysia) with the laggards barely slipping at all.  So, despite all the angst over Asian nations running out of oil and oil products, equity investors are all in there!

In Europe, it’s happy days as well as per the below Bloomberg screenshot.

This is despite Eurozone inflation rising to 3.2%, its highest level since September 2023, and, as per the below chart, certainly looking like it is beginning to trend higher on the back of 3+ months of higher oil prices feeding through the entire economy.

Source: tradingeconomics.com

Of course, given Eurozone GDP is indistinguishable from zero (see below chart), and has been for 3 years, it is fair to wonder if this is setting up to be a particularly egregious central banking error by Madame Lagarde.  

Source: tradingeconomics.com

Too, while short-term inflation expectations have unsurprisingly risen, a look at the 5-year result shows limited concern by consumers.  As an aside, there is good reason to believe that inflation expectations are irrelevant in future inflation readings, at least according to the academic literature, but it is a driving force in current central banking models, so needs to be considered.

In the end, though, the ECB is going to hike rates next week, on that you can depend, and if when economic activity declines, they will blame Putin or Trump or Elon or anything but their own failed policies.

As to US futures at this hour (7:10), they are modestly lower, maybe -0.2% or so across the board.

In the bond market, Treasury yields have fallen back -3bps this morning after round-tripping 5bps higher yesterday and finishing the day unchanged.  European sovereign yields are having a better day, with declines of -6bps to -7bps across the continent and JGB yields (-11bps) are really falling.  My conclusion is that investor concerns over runaway inflation simply do not exist despite the narrative pushing that story.  The ostensible crises in May apparently never arrived, at least not yet.

In the commodity market, it can be no surprise that metals prices (Au +1.0%, Ag +1.8%, Cu +1.0%) are higher this morning given the overall risk environment.  The negative correlation between metals and oil remains largely intact for now.  The interesting thing to note, though, is that despite the daily gyrations, in reality, neither oil nor the precious metals have gone anywhere in a while.  The same is not true for copper which is at new all-time highs.

Finally, the dollar is modestly softer this morning, on the order of 0.1% against its G10 counterparts with AUD (+0.3%) the best performer.  In the EMG bloc, ZAR (+0.6%) is responding to the combination of lower oil and higher gold prices and MXN (+0.4%) is also having a pretty good session, but that seems more like beta vs. the dollar than anything else.  I would be remiss if I didn’t spotlight JPY (0.0%) which continues to edge closer to the 160.00 level as per the below chart, but was also the subject of much discussion as FinMin Katayama was out explaining that, “As for foreign exchange, we continue to maintain our stance that we stand ready to take appropriate action at any time, as needed.”  However, while the market expects a 25bp rate hike in two weeks, that is already in the price.  In order to stop the yen’s slide, they will need to really change policy, something which I maintain is not in the cards for now.

Source: tradingeconomics.com

On the data front, this morning brings only the JOLTs Job Openings (exp 6.88M), essentially unchanged from last month.  Yesterday’s ISM Manufacturing data was quite solid across the board except for the employment subindex, which remains lackluster as companies expand with more automation.

I think it is fair to say nobody knows what will happen in the Iran conflict nor the timing.  While markets can be completely wrong, and forced to reprice suddenly, that is an extremely rare occurrence.  Too, the one thing on which we can count is if something hugely negative occurs, central banks around the world will step in, add liquidity and cut rates, to ameliorate the slide.  My point is, I will not bet against the market view that this will end sooner rather than later.

Good luck

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Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

Adf

Still on Hold

Posted on by 
Despite faster growth
The yen continues to sink
Are rate hikes anon?

It’s funny, in Japan, there is a great deal of angst amongst government officials that the economic situation is under significant duress, and they appear uncertain how to act.  Now, in fairness, the ongoing Iran conflict is clearly problematic for a country that imports essentially 100% of its oil, and most of it travels through the Strait of Hormuz.  But if we look at the data, Japan is holding up remarkably well.  For instance, below is a chart of annual GDP which was released last night showing 2.1% annualized growth in Q1.

Source: tradingeconomics.com

Granted, this is not a chart of an extraordinary expansion, but it is also, relative to its European counterparts, a chart to be envied.  For instance, the below chart of German GDP growth (and I use the term growth loosely) shows that after the Covid reopening, things have basically gone into stagnation.

Source: tradingeconomics.com

My point is that things in Japan seem to be moving along relatively well, with solid growth, especially when one considers that the population in Japan is shrinking, so given GDP = # people working x output/person, it is hard to grow the economy with a shrinking population.  Meanwhile, inflation in Japan remains sticky, although because of government subsidies to ameliorate the costs of electricity and fuel in the wake of the Iran conflict, it is below the 2% target for now.  However, apparently it remains a concern amongst the population there.

Source: tradingeconomics.com

Which brings me to the true market related question, what of the yen?  You may recall a few weeks ago when the BOJ intervened because the yen had traded through the 160 level vs. the dollar and then there seemed to be a few mini interventions in the days that followed.  Yet this morning, as you can see in the below chart, the yen is once again marching toward 160, although I have not seen any commentary from the BOJ or MOF on the subject.

Source: tradingeconomics.com

Bringing it all together, the question I would ask is, why is the BOJ even concerned about raising rates at their next meeting in a few weeks?  Ueda-san has been around a long time and understands the only way to address persistent currency weakness is via policy changes.  Especially now that markets have begun to price rate hikes as the next move in the US (I personally don’t believe that will be the case but that is a different story), the yen will continue to slide unless the BOJ moves.  Yet, with GDP growing decently, and underlying price pressures extant, a rate hike should be an easy call.  Currently, the probability appears to be about 75% that they will hike in June, but certainty they will hike by July, at least according to rateprobability.com as per the below table.  I’m not sure why it is even a question.

The war in Iran’s still on hold
As prices for crude stay controlled
But dollars are bid
And equities skid
While nobody wants any gold

As to the Iran situation, President Trump announced he was delaying, for two or three days, any renewed military action at the behest of the UAE and Qatar who claim that substantive negotiations are underway.  Once again, I make no claims of knowledge about what is actually happening there, although that admission is one that most of the punditocracy seems unwilling to make.  

But here’s a thought.  If you were Ahmad Vahidi, the ostensible leader of Iran, and you have spent the last 3 months in spider holes, caves and basements, moving every 8-12 hours lest someone leaks your location to the Israelis or Americans, how comfortable are you in your position?  After all, one of the reasons that people aspire to lead nations is for all the trappings that come with the job. Not only do you get a nice place to live, but you command respect from the people, at least a significant portion of them.  Is it impossible to believe that Vahidi is actually looking for a way out as well, perhaps willing to give up his nuclear ambitions for the removal of the price on his head?  I know that does not fit the narrative for many folks, and is pure speculation on my part, but is it really that far-fetched?

Ok, in the meantime, as we await the next news from Iran, let’s look at market activities.  Starting in the bond market, yields continue to climb higher pretty much all around the world as inflation concerns remain high and there is a growing concern that government bond issuance is going to grow even faster going forward as countries everywhere seek to rearm quickly.  So, Treasury yields (+3bps) are pushing back to the levels seen in January 2025, although remain 15bps below those levels as per the below Bloomberg chart.

And as has been the case for quite a while now, Treasury yields are leading the global yield market with European sovereign’s all higher by about 2bps and JGB yields jumping 6bps last night after the GDP data.  Certainly, JGB traders believe the BOJ is going to hike rates.

In the equity markets, though, risk appetite remains remarkably robust through all the complexities of the war and economic data.  Yesterday’s US session, which started off deeply in the red, rallied back so the DJIA actually closed higher while the other two major indices dramatically reduced their losses.  This morning, futures markets are pointing slightly lower with the NASDAQ (-0.8%) the laggard as questions continue to arise about how long AI will drive the thesis there.  As to the rest of the world, Asia was mixed with the Nikkei (-0.4%) slipping, although every other index in Tokyo rose, China (+0.4%), HK (+0.5%) and Australia (+1.2%) all gaining.  Korea (-3.25%) and Taiwan I-1.75%), though, had rough sessions as those two markets have been driven by semiconductor companies just like the NASDAQ.  The only other noteworthy move was in Indonesia (-3.5%) as investors are concerned about the central bank raising rates after their meeting concludes tonight.

Europe is in fine fettle this morning with gains across the board led by the DAX (+1.4%) and followed by the CAC (+0.8%), FTSE 100 (+0.7%) and Spain’s IBEX (+0.4%).  I keep reading that there is optimism that an agreement will be reached as the rationale for these moves, but I guess that is the way things go.  Never forget this perfect illustration of how market information is passed.

Turning to oil markets, this morning has seen that war ending optimism here as well with WTI (-0.4%) and Brent (-0.9%) both slipping a bit.  Interestingly, metals markets are not behaving as they have recently as they, too are lower; gold (-0.65%), silver (-2.1%), copper (-1.1%).  In the end, like every market, movement here is entirely dependent on the Iran situation, at least in the short run.

Finally, the dollar is flexing this morning rising against virtually all its major counterparts.  In the G10, AUD (-0.7%) is the laggard, but the euro (-0.3%) and pound (-0.2%) are both under continued pressure with both trading near recent lows as per the tradingeconomics.com chart below.

The rest of the block has not fallen as much but is uniformly lower.  In the EMG bloc, KRW (-1.3%) suffered after the sharp decline in the equity markets there and ZAR (-0.5%) continues to suffer on the back of weaker gold prices.  The one outlier is BRL (+0.3%) which is benefitting despite a weaker economic outlook after some soft data yesterday continues to encourage the potential for further rate cuts there.

And that’s really it for today.  There is no data today although there are 3 Fed speakers, including Governor Waller who many have come to believe is a critical voice for the FOMC.  Broader movement continues to be all about Iran and how things evolve there.  With renewed military engagement on hold, I suspect that the speculators are going to buy stocks again in hopes of a positive outcome.

Good luck

Adf

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

Ere Fears They Shed

Posted on by 
The status is still very quo
As ships still cannot come or go
However, Iran
Proposed a new plan
With nukes as a part of the show

But thus far, whatever they said
Has not moved discussions ahead
So, oil’s crept higher
As traders require
More certainty ere fears they shed

While President Trump has announced a new plan to help escort ships trapped in the Persian Gulf through the Strait of Hormuz, thus far, none have taken the chance.  Over the weekend, Iran ostensibly put forth another peace proposal, and this time their nuclear activities were part of the plan, a major change, although President Trump has rejected it overall.  To me, though, this is major progress as it demonstrates that there is a negotiation ongoing.  

My armchair analysis, FWIW, is that Ahmed Vahidi is watching his nation crumble and beginning to really feel the pinch of the US naval blockade as his revenues shrink rapidly.  While there are many estimates of how long Iran can withstand a lack of revenue, and I have no idea what that answer is, I feel it is reasonable to assume that if he doesn’t have enough to pay his soldiers, many of them will simply go home.  Already I have read reports that many of their payments to soldiers and proxies have been dramatically reduced as the US continues to tighten the financial screws via sanctions on banks and companies that have been acting as Iran’s middlemen.  I believe it is widely agreed on all sides of the conversation that the Iranian economy has been virtually collapsing with the rial having fallen 95% in value, access to basic staples limited and suffering widespread.  

The one thing of which I feel certain is that Vahidi wants to remain in power, and I would estimate as the pain increases, and the money stops flowing, his grip on power is slipping.  Staying in power without nuclear weapons is likely much preferred to being deposed.  

In the end, like every negotiation, the parties start far apart and get closer over time.  Now, my view is likely not worth all that much, but the oil market’s view is worth billions of dollars and if we look at how the price of oil has behaved, while uncertainty remains, (especially after a report this morning that Iran fired on and struck a US naval vessel, although that report has been denied), the market does not appear to believe that this is going to continue that much longer.  

Source: tradingeconomics.com

Several things continue to occur as at $100/bbl; there is some level of demand destruction; production elsewhere in the world continues to grow (I read that Venezuelan production rose to 1.25 mm bpd ,more than had been assumed prior to the Iran war); and the Saudi east-west pipeline is now pumping its capacity 7 million bpd, thus the amount of oil ‘missing’ has been reduced from the initial headline 20 mm bpd to somewhere along the lines of 12 mm bpd, still extremely painful to the global economy, but obviously not (yet) catastrophic.  However, since oil prices remain around $100/bbl, and have not risen to $150/bbl or $200/bbl as many pundits had forecast, there remains a great deal of confidence that this is going to end before too much more time has passed.  I certainly hope so for everyone’s sake.

Away from that, there is precious little other news to note as Asia is basically on holiday until Thursday and the UK is closed today, so market activity has been more muted.  But let’s take a look.  In the equity markets, weirdly HK (+1.2%) was open despite both China and the UK being closed and given HK’s history, I would have thought it would have responded to one of those situations.  But the big news was Korea (+5.1%) which was dramatically higher on rallies in Samsung and SK Hynix shares, both of which have been major beneficiaries of their semiconductor businesses booming alongside AI demand.  I guess we shouldn’t be surprised Taiwan (+4.6%) followed that path and in truth, there were more positive outcomes (India, Philippines, Malaysia, Singapore, New Zealand) than laggards (Australia).  Remarkably, everything I read is that Asia is the region most negatively affected by the Iran war, yet here we continue to see equity markets rising.

In Europe, things are less optimistic this morning with red across the screen led by Spain (-1.6%) and France (-1.0%) although both the UK and Germany are nigh on unchanged.  One of the weekend stories is that the US is now going to be raising tariffs on European auto imports to 25% from the 15% initially agreed as Trump claims the Europeans weren’t following the agreement.  As to US futures, this morning they are marginally lower as I type (7:30) but remain just ticks away from the all-time highs set last week.  Again, it is difficult to accept the idea that the world is about to end based on the market’s current behavior.  Look at the chart below and worry does not seem to be prevalent, nor has it been for any extended length of time in the past 5 years.

Source: tradingeconomics.com

In the bond market, yields are higher this morning with Treasuries (+4bps) leading the way and European sovereigns all higher by between 3bps and 4bps as well.  It’s interesting that this is the behavior but I suppose it has to do with the Keynesian view that higher economic activity leads to higher rates.  If we look at the PMI data from around the US and Europe, manufacturing has been doing quite well.  Look at the ISM Manufacturing chart below for the past 3 years and it is clear that investment is growing there.

Source: tradingeconomics.com

It is a similar tale in Europe with Manufacturing PMI data this morning all being released healthily above the 50 level and rising from last month.  The market response to lift yields seems anachronistic, but such is life.  However, it is worth highlighting that if we take a bit of a longer-term perspective on 10-year Treasury yields, while they are pushing toward the top of a 4.00% – 4.50% range, you can see that range has largely been intact for the past 3 years.  It is not clear to me that it is time to panic on yields yet.

Source: tradingeconomics.com

In the commodity space, with oil (+3.3%) having risen on the reports of a US ship being attacked, we cannot be surprised to see gold (-1.2%) and silver (-2.6%) both slipping along with copper (-1.6%). This is especially true with China and most of Asia on holiday as official buying of gold is probably on hold for now.  

Finally, the dollar is firmer this morning as risk is under pressure across the board.  US futures are lower, European stocks are lower and oil is higher.  So, gains of 0.25% for the dollar against most currencies are the norm.  There was a very sharp appreciation in the yen early in the overnight session and another one a few hours ago, as you can see in the chart below, with many believing the BOJ was in again during quiet markets, but it has completely reversed.  My take is the BOJ would not have spent reserves like this and would have been far more emphatic if they wanted to move the market again.

Source: tradingeconomics.com

But, as market in Asia were quite thin, any large sell order would have been able to force a move like these.  In addition, with the dollar now several percent below their level of concern, I suspect they will save their ammunition.  In the EMG bloc, ZAR (-0.5%) continues to feel most of the pressure from Iran as the combination of higher oil prices and lower gold prices are a double whammy.  As well, NOK (+0.35%) continues to respond positively to the oil price.   Net, the dollar remains in demand for now.

On the data front this week, it is a mixed week until Friday’s NFP data is released.

TodayFactory Orders0.5%
 -ex Transport0.7%
TuesdayTrade Balance-$60.5B
 ISM Services53.7
 JOLTs Job Openings6.83M
 New Home Sales668K
WednesdayADP Employment99K
ThursdayInitial Claims205K
 Continuing Claims1800K
 Nonfarm Productivity1.4%
 Unit Labor Costs2.6%
 Consumer Credit$11.0B
FridayNonfarm Payrolls60K
 Private Payrolls73K
 Manufacturing Payrolls5K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.8% y/Y)
 Average Weekly Hours34.2
 Participation Rate61.7%
 Michigan Sentiment49.5

Source: tradingeconomics.com

In addition, Fed speakers are back on the circuit (I sure hope Warsh shuts them all up) with 12 speeches from 9 different speakers.  The funny thing is, we already know their views, Miran wants to cut and everybody else is on hold, so what are they going to say?

The war remains the only thing that matters right now, so watch for headlines that an agreement is coming closer.  If that happens, oil will slide along with yields and the dollar while metals and stocks will rally.  (Of course, apparently, we don’t need anything else to get stocks to rally!)

Good luck

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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

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