Tag Archives: #longtermyields

Never Sold

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

 

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

Source: Bloomberg.com

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

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

The one-year history:

Compared to the one-month history:

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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Naught But Dismay

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Ishiba’s fallen
Who’ll grab the poisoned chalice
For the next go round?

 

Well, it was inevitable after the LDP lost the Upper House election a few weeks ago, but now it is official, Japanese PM Shigeru Ishiba has resigned effective today and will only stay on until a new LDP leader is chosen.  You must admit, for a politician he was exceptionally ineffective.  He managed to lead the LDP to two major election losses in the span of 10 months, quite impressive if you think about it.  However, now that he has agreed a trade deal with the US, where ostensibly US tariffs on Japanese autos will be reduced from 25% to 15%, he felt he had done enough damage and is getting out of the way.  Frankly, I wouldn’t want to be the next man up here as the situation there remains fraught given still high inflation and a central bank that is so far behind the curve, it makes the Fed seem like it is Nostradamus!

The intricacies of Japanese politics are outside the bounds of this note, but the initial market response is a weaker yen (-0.7% as of 7:30pm Sunday night) and 1% gain in the Nikkei.  JGB yields have barely moved at all as it seems Japanese investors are not yet abandoning ship in hopes of a stronger PM.  However, my take is they have further to climb going forward as the BOJ’s ongoing unwillingness to tackle inflation will undermine their value.  Japan has a world of hurt and lacking an effective government is not going to help them address their problems.  It is hard to like Japanese assets or the yen in my view, at least until something or someone demonstrates competence in government.

The jobs report basically sucked
As companies smoothly conduct
More layoffs each week
While they try to tweak
Their staffing ere management’s f*cked

By now, I’m sure you’re all aware that the payroll report was pretty weak across the board.  NFP rose only 22K, well below expectations and although there was a marginal increase in last month’s results, just 6K, the overall picture was not bright.  The Unemployment Rate ticked up 0.1%, as expected with the labor force growing >400K, but only 288K of them getting jobs.  However, layoffs are down, and the real positive is that government jobs continue to fall, having declined 56K in the past three months with private hiring making up the slack.  In fact, if you look at the past three months, private job creation has been 144K or 48K/month.  That is the best news of the entire process.  Eliminating government employees will eventually result in lower government expenditures and let’s face it, if the government employees who leave become baristas at Starbucks, they are likely adding more value to the economy than their government roles!  The chart below from Wolfstreet.com does a great job of highlighting private sector jobs growth, which is slowing but still positive.  Maybe it is not yet the end of the world.

As to my efforts to prognosticate on the market behavior based on a range of outcomes, I mostly got the direction right, although some of the movement was a bit more aggressive than I anticipated.  The one place I missed was equities, which started higher, but ultimately fell on the day.  Nostradamus I’m not.

The last thing to mention today
Is France, where a vote’s underway
When finally completed
And Bayrou’s unseated
Macron will have naught but dismay

The last key story to discuss is the vote today in France’s parliament where another snap election has been called by a minority government (see Japan for previous results) and in all likelihood will result in the government falling.  The problem here, as it is pretty much everywhere in the Western world is that the government’s budget deficit is exploding higher and legislators cannot agree to cut spending.  The result is rising bond yields (see below chart as I discussed this last week here), and growing concern as to how things will ultimately play out.  The prognosis is not positive.  

Source: tradingeconomics.com

While the US is in a similar situation, we have substantially more tools available and more runway given our status as the global hegemon and owning the global reserve currency.  But France, and the UK or Japan for that matter, have no such backstop and investors are growing leery of the increasing risk of a more substantial meltdown.  Apparently, the results of this vote ought to be known by 3:00pm Eastern time this afternoon.

The question is, if/when he loses, what happens next?  The choice is President Macron appoints a different PM to head another minority government, which will almost certainly be unable to achieve anything else, or there is another parliamentary election, which at least could result in a majority government with the ability to enact whatever fiscal policies they believe.  Remember, France is the second largest economy in the Eurozone, so if it remains under pressure, it is difficult to make the case that the euro will rally very much, especially given Germany’s many issues.

And that feels like enough for one day.  Let me recap the overnight session but since there is no data of note today and the Fed is in its quiet period, I will list data tomorrow.  While US equity markets sold off a bit at the end of the day, that was not the vibe this morning anywhere else in the world as green is the predominant color on screens.  In Japan, no PM is no problem as the Nikkei (+1.45%) rallied after much stronger than expected GDP data (2.2% in Q2) helped convince investors things would be fine.  Hong Kong (+0.85%) and China (+0.2%) also managed gains as hopes for a Fed rate cut spring eternal.  In fact, the bulk of Asia saw gains on that basis.

Europe, too, has embraced the weaker US payroll data and prospective Fed rate cut to rally this morning, although in fairness, German IP rose 1.4% for its first gain in four months, so that helped the cause.  But even French stocks are higher despite the imminent collapse of the government.  I am beginning to notice a pattern of equity investors embracing the removal of ineffective governments, but perhaps I am looking too hard.  US futures are also modestly higher at this hour (7:15) this morning, rising about 0.25%.

In the bond markets, after Friday’s rally, Treasury yields have edged higher by 1bp while European sovereign yields are largely unchanged, perhaps +/- 1bp on the day.  Surprisingly, even JGB yields have not risen despite the lack of fiscal rectitude there.  It certainly appears that bond investors are ignoring a lot of potential bad news.  Either that or someone is buying a lot of bonds on the sly.

In the commodity markets, oil (+2.0%) after a down day Friday ahead of expectations that OPEC+ would be increasing production again, has rallied back as those increases were less than feared by the market.  But net, oil is just not going anywhere these days, trading between $62/bbl and $66/bbl for the past month.  It feels like we will need a major demand story to change this narrative, either up or down.  As to metals, they continue to rally sharply (Au +0.7%, Ag +0.7%, Cu +0.5%, Pt +1.9%) as no matter the bond markets’ collective ennui over global fiscal profligacy, this segment of the market is paying attention.  If this week’s CPI data is cooler than expected, I suspect that 50bps is going to be the default expectation and metals will climb further.

Finally, the dollar is under modest pressure this morning, with the euro and pound both rising 0.2% although AUD (+0.6%) and NZD (+0.8%) are having far better sessions on the back of commodity price strength.  JPY (-0.3%) has recouped some of its early losses from the overnight session, though my money is still on weakness there.  In the EMG bloc, it is hard to get excited about much with ZAR (+0.25%) appreciating the rally in gold and platinum, but only just, while the rest of the bloc hasn’t even moved that much.  

And that’s really all for today.  The discussion will continue around the Fed and whether 50bps is coming with Thursday’s CPI the last big piece of data that may sway that conversation.  Personally, I am surprised that the government upheavals in Japan and France (with the UK also having major fiscal problems) have not had a bigger impact on markets.  My sense is that there is an opportunity for more fireworks in those places in the near future.  But apparently not today.  As investors whistle past those particular graveyards, I imagine we will see a risk-on session continue with the dollar remaining under modest pressure.

Good luck

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