Tag Archives: #natgas

No Death Knell

Posted on by 
While Friday, the world was on edge
And everyone wanted to hedge
This morning it seems
That Trump and his schemes
Have backed us away from the ledge

So, while Asian stocks mostly fell
In Europe, there’s been no death knell
And futures at home
Though not quite with foam
Are bubbling up, doing well

The bond market, though, is confused
With some analysts quite enthused
Recession is near
So, bond buys they cheer
Though holders, so far, have been bruised

The counter to this contestation
Is, soon we will feel more inflation
So, bonds are a sale
As Jay can’t curtail
That outcome, so short long-duration

Let me start by saying, we are still in a situation where nobody knows exactly what is happening in Iran and the Persian Gulf, although we continue to hear lots of propaganda from both sides.  It does appear that Iran’s military has absorbed a significant beating, but they continue to fire missiles in retaliation, albeit at a reduced pace.  It seems there are the beginnings of some discussions regarding ending the conflict, ostensibly with Pakistan taking the lead in speaking to both sides, but there have been no direct talks yet.  Time is still a critical issue as every day the Strait of Hormuz is closed, that adds further pressure to the global economy, especially in Asia and Europe which are the two areas most reliant on energy flowing through the Strait.

As I was considering the implications of oil prices at $100/bbl in the US, I realized that every fracking well in the US is going to be pumping at maximum capacity, and given how quickly DUC (drilled but uncompleted) wells can be brought on line, I expect that we will see US oil production rise from its recent 13.7 million bbls/day.  But alongside that, many, if not most, of these wells will be producing associated gas, i.e. natural gas that comes up with the oil, which is one reason, I believe, that Natural Gas prices in the US (-2.5% today) are essentially unchanged since the war began a month ago (green line).  Meanwhile, as you can see with the blue line on the chart, European Natural Gas prices have exploded higher.  In fact, this morning, US prices are just below $3.00/MMBtu while European prices are about $18.65/MMBtu.  (European gas is quoted in EUR/MWh, which is why the price looks so different.). Europe needs this war to end a lot sooner than the US from a pure economic perspective.

Source: tradingeconomics.com

Away from that stray thought, if we look at equity markets, you can see there has been a real turn.  Friday felt dreadful with every index falling and closing on its lows.  And Asia followed through with that thesis as virtually all bourses there were under real pressure.  Japan (-2.8%), Korea (-3.0%), India (-2.2%) and Taiwan (-1.8%) all fell sharply following the US lower.  Both China (-0.25%) and HK (-0.8%) also slipped, but not quite as aggressively.  The issue here is all these nations rely on energy transiting the Strait and are suffering accordingly.  My take is that not only will these equity markets have issues, but so, too, will their currencies until things in the Gulf are settled.

As to European equities, the story there is less dramatic this morning with a mixed picture as the UK (+0.5%) is higher along with Spain (+0.3%) and Italy (+0.3%), although Germany (-0.2%) and France (-0.1%) are slipping.  The big winner here, not surprisingly, is Norway (+2.0%).  We also saw the first March inflation data from anywhere in the world this morning from Germany, and not surprisingly, it was higher.  While the nationwide number has not yet been released, the individual Landers all show something between 2.5% and 2.9%, generally higher by 0.7% or more.  The market is looking for a 2.7% national reading, up from 1.9% February print.  US futures, meanwhile, are higher by 0.6% across the board at this hour (7:15).

In the bond market, though, inflation fears, which were all the rage on Friday, have abated somewhat with Treasuries (-4bps) seeing demand and European sovereign yields all softer by between -1bps and -3bps.  Even JGB yields (-2bps) have slipped, although the latter appears to be on the back of stories the BOJ is getting ready to hike rates in April and the question is how much, not if.  So, despite oil prices continuing to rise, and adding inflation pressure around the world, bond investors are relatively sanguine this morning.

In the FX markets, the story has been more mixed this morning with the dollar broadly firmer, but not universally so.  In the G10, the yen (+0.5%) is the outlier as having traded above the 160.00 level Friday, we heard more from Japanese authorities, specifically, the current Mr Yen, Mimura-san, that they did not welcome speculative trading and would address it if they believed that was driving the yen weaker than it should be.  Given the dollar is firmer vs. all its other G10 counterparts over the past month, it is surprising that is the case they are trying to make, but I guess they need to say something.  Otherwise, this bloc is mostly softer by about -0.2% or so across the board.  In the EMG bloc, INR had a little hiccup last night as per the chart below.

Source: tradingeconomics.com

It seems that the RBI reduced the size of positions that Indian banks are allowed to hold regarding short rupees every day, which forced a serious appreciation of the currency.  However, as you can see, it was relatively short lived and compared to Friday’s close, the rupee is weaker by -0.2% despite the new regulations.  Otherwise, ZAR (-0.3%) and KRW (-0.6%) are the weakest in the bloc with one outlier, MXN (+0.3%) rallying back from its close on Friday as it closed then at its lowest level since December.  In fact, this morning’s price action seems more like a trading reaction than a fundamental shift.

Finishing with commodities, oil (+1.1%) is back above $100/bbl in the US (above $115/bbl in Brent) although it is not really running away.  Traders are clearly uncertain what to believe with respect to the potential opening of the Strait.  We do get a lot of conflicting news from both sides, I must admit, and I find that reading either all the headlines or none of the headlines leaves you in exactly the same place, no idea what is reality.  The biggest change in the commodity space is in gold (+1.7%) and silver (+2.6%) as the past two days they have both risen alongside oil, rather than their behavior during the first month of the conflict.  It is easy to believe that the major downdraft in the precious metals was a result of liquidation during stress rather than gold’s loss of its haven status and I tend toward that view.  While I am no market technician, the little I do know is that the blow-off low last Monday at $4100/oz may well have defined the bottom of this move.

Source: tradingeconomics.com

Again, 5000 years of history tell me that people will still want to hold the stuff in times of crisis as a way to retain the value of their assets.

Turning to the data this week, while we start slow today (although Chairman Powell speaks at 10:30), we finish the week, on Good Friday, with NFP.

TuesdayCase Shiller Home Prices1.3%
 Chicago PMI55.8
 JOLTs Job Openings6.897M
 Consumer Confidence88
WednesdayADP Employment40K
 Retail Sales0.4%
 -ex autos0.2%
 ISM Manufacturing52.3
 ISM Prices Paid73.5
ThursdayTrade Balance-$59.2B
 Initial Claims212K
 Continuing Claims1825K
FridayNonfarm Payrolls55K
 Private Payrolls55K
 Manufacturing Payrolls0K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%

Source: tradingeconomics.com

So, plenty of information this week, but with a holiday weekend coming up next weekend as US equity markets will be closed Friday and European ones on Monday as well, it remains unclear just how important the data is these days.  We are still headline driven although as the Marines make their way to the Persian Gulf, it has the potential to be a relatively quiet week ahead of any increase in military activity, maybe next weekend.  We shall see.  For now, the dollar continues to hold its own, and risk appetite is not collapsing in any meaningful way, yet.  We have to see how long that can last if the war continues to drag on.

Good luck

Adf

Bonds are a Flop

Posted on by

The war has now widened in scope
And though all of us truly hope
It won’t last too long
We could, there, be wrong
As such we must all learn to cope
 
So, oil, right now, knows no top
While havens like bonds are a flop
There’s no place to hide
Thus, you must decide
If trading makes sense or should stop

Carl von Clausewitz, the 19th century Prussian military strategist, is credited with describing the fog of war in his 1832 book, On War.  “…three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”  This is quite an apt description of things, even now with cameras literally everywhere in the world.  Context remains difficult to understand, and, of course, there is an enormous amount of propaganda from both sides of any conflict as the protagonists attempt to sway both their own populations and those of their opponents.

I highlight this because I continue to be amazed at the certitude with which some analysts proclaim to “know” how things will turn out.  As I have written elsewhere, nobody knows nuthin right now.  With that in mind, I would highlight the IMF’s statement yesterday which added exactly zero to the conversation, “It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict.”  Now, don’t you feel educated after that pronouncement?

At any rate, with more than a full day’s trading in financial markets, perhaps we can try to assess how things are going.  The first thing to note is that many alleged haven assets are not performing up to snuff, notably Treasury bonds, Japanese yen, Swiss francs and gold.  In fact, as of this morning, the only traditional haven that is performing as expected is the dollar.

It was just over a month ago when the cognoscenti were explaining that the euro above 1.20 was indicative of the dollar’s long decline into the depths of history.  I recall someone in my LinkedIn feed asking how soon the euro would trade through 1.25 and beyond.  I would argue that timeline has been extended somewhat, if you still believe that is likely to be the case.  Rather, as you can see in the below chart, the single currency (-0.8%) is now back below 1.1600.

Source: tradingeconomics.com

There are several things weighing on the euro right now.  First is the fact that they are energy price takers for every form of energy, so not only are higher oil prices hurting the continent, but NatGas there has exploded higher as per the below chart, rising 37% today and nearly 95% since the weekend.

Source: tradingeconomics.com

Recall, Europe has been trying to wean themselves off Russian gas, have been huge buyers of US LNG but also huge buyers of Qatari LNG, and with the Strait of Hormuz effectively closed (shipowners cannot get insurance so nobody transits the Strait), this is a problem.  Adding to the European problem is the fact that their storage levels of NatGas are extremely low for this time of year, about 30%, when typical levels in early March are near 50%.  We cannot be surprised at this price action.  So, while US NatGas (+6.3% this morning, 10% this week) has risen, it is currently trading at $3.14/MMBtu.  The comparable Eurozone price is $20.28/MMBtu.  Perhaps a weaker euro is not that surprising after all.  (As an aside, one of the reasons I find it difficult to accept the weak dollar story is that the US controls its own energy destiny and given energy is life and the economy, we are fundamentally in better position to perform going forward.)

But the dollar is strong against all comers again today as per the below table from 7:10 this morning.  Will this continue?  While nobody knows, my take is there is still ample room for further strength in the buck, probably another 3%-5% before it starts to impact other things significantly.

Source: tradingeconomics.com

I think the biggest surprise for most of us is the incredibly poor performance of the bond market, which has always been seen as a safe haven.  However, this morning, that is not the case at all as you can see from the Bloomberg table below.

My take is that there is only one thing we truly know about war, it is inflationary.  While the early signs are for energy prices to rise, war is a major consumer of resources that will never be recycled and therefore will require new baseline production.  As well, governments don’t fight war on an austerity budget, so you can be sure that there will be plenty of money around.  All that leads to higher prices and that is why bond markets are feeling pain around the world this morning.  If, as President Trump has indicated, this war ends in the next 4 weeks or so, we will be able to re-evaluate the inflationary and other impacts, but while I had thought bonds were going to perform well, clearly that is not the case right now.

Turning to commodities, oil (+6.75%) continues to rise and I expect will remain well bid until the fighting stops.  The prospects for higher prices from here remain dependent on whether Iran tries to destroy other Middle East production facilities and if they are successful.  Meanwhile, in the Western hemisphere, the US, Canada, and all of Latin America are going to be pumping at full strength for now.  So, while prices may tick higher, it is unlikely we will see any supply issues here.

Metals are another surprising trade this morning with gold (-2.65), silver (-7.8%) and copper (-2.3%) all sharply lower.  Given the sharp decline in equity prices I will discuss below and given the amount of leverage that is rampant in the equity markets, I think gold is a victim of ‘sell what you can, not what you want to.’  Arguably, there is some of that with bonds as well.  In a way, though, I am more surprised about silver and copper given their criticality in fighting the war.  Both are being consumed rapidly via weapons being deployed so this is more baffling to me.  However, I do not believe the longer-term thesis in either of these metals has changed, there is a supply shortage relative to industrial usage for both with no new supply on the horizon.  As such, I do see prices here rallying over time.

Finally, the equity markets are sharply lower almost everywhere.  The below Bloomberg table shows how major markets in Asia performed overnight and how Europe stacks up at 7:30 this morning.

What it doesn’t show is that the KOSPI in Korea fell -7.25%, nor that there were sharp declines in India (-1.3%), Taiwan (-2.2%) and Thailand (-4.0%).  You will also not be surprised that US futures are pointing much lower this morning, -1.5% across the board.  Yesterday’s performance was quite the surprise, I think, but today is much more in line with what we expected.

And that’s where things stand this morning.  obviously, the war is the only story that matters, so data releases are going to be secondary for now, even Friday’s payroll report.  At some point, I expect that traditional havens will play their role, but as leveraged positions continue to get unwound, it may take a few more sessions before we see that.  If you’re trading, smaller sizes make sense.  If you’re hedging, stick to longer term fundamentals I think.

Good luck

Adf

Changing Fast

Posted on by

At this point most traders are thrilled
It’s Friday, ‘cause throughout that guild
Exhaustion is rife
From bulls’ and bears’ strife
O’er whether their dreams be fulfilled
 
As well, all the narrative writers
Are stuck pulling college all-nighters
With facts changing fast
Their latest forecasts
Do naught but encourage backbiters

It has certainly been an interesting week in financial markets, at least most of them, with significant moves throughout the commodity, equity and cryptocurrency spaces.  We even saw a jump in bond prices yesterday after a really lousy JOLTS Jobs number (6.54M compared to 7.2M expected) and a higher-than-expected Initial Claims number of 231K.  Suddenly, questions about the labor market are front of mind, and prospects for a March Fed Funds cut rose to 23% for a time, although have slipped back to 17% as of this morning.  But one need only look at a few charts (all from tradingeconomics.com) showing the daily movement in some popular trading vehicles to understand why traders are thankful the week is ending.  For instance, 

Silver (+4.75%), which had a 34% range last Friday and has fallen 39% since its high 8 days ago:

Gold (+2.1%), which showed the same pattern, albeit not quite as dramatically:

Natural Gas (+3.4%), which rose $2.65 and reversed $2.00 on a $3.00 base over the past two weeks:

And Bitcoin (+5.8%), which has fallen nearly 50% since its highs in early October and 22% in the past week:

Now, it must be remembered that Bitcoin has a long history of massive drawdowns, with a 50% drawdown in spring of 2021 and a 75% drawdown from November 2021 through October 2022. We shouldn’t be surprised as Bitcoin is essentially a pure risk asset, so is completely narrative driven.  And as the narrative writers try to keep up with the facts on the ground, they are trying to figure out how to sell the story that Bitcoin, which was ostensibly designed to be an alternative to the fiat currency system, has become so tightly linked to the fiat financial system.

In the end, though, the commodity markets are beholden to the marginal demand/supply of the last molecule available.  I have not seen anything change with respect to demand for power to drive the economy, the demand for silver to build out electronics or the demand for gold by central banks.  To me, while prices for these commodities can whipsaw aggressively as the global regime changes, ultimately, I remain confident demand will continue to be the story.  (Bitcoin is an entirely different beast and one I will not discuss in depth other than to highlight its volatility along with the rest of these markets.)

Anyway, you can understand why traders are exhausted.  In fact, my forecast for next week is that we are highly unlikely to see the same size movements, although choppiness will still be the rule.

You may have noticed I missed oil (-0.4%) which has also seen some volatility as per the below chart, but not quite at the same level as the others.  Part of that is the oil market is much larger and more liquid and part of that is that the whole Iran/US discussions question has provided fodder for both bulls and bears in short intervals resulting in no net movement over the past week.

From what I can piece together, the situation in Iran is coming to a head regarding the regime there.  The talks today are ongoing, but there is other information that appears to indicate preparations are being made for a transitional government, and the State Department just warned all US citizens to leave Iran.  Something is up which will certainly drive more oil volatility.

If we look at bonds, Treasury yields fell -8bps yesterday and have rebounded by 2bps this morning.  That was the largest single day move we’ve seen since October, and basically took the market right back to that 4.20% level that had been home for weeks.

There continues to be a lot of confusing data and information regarding the economy as yesterday’s weak jobs data conflict with the broader idea that the hyperscalers are spending 2% of GDP on capex this year and forecasts for the budget deficit continue to run around 2%.  It seems like it will be difficult for a recession to come about with that much new spending in the economy, but as we have seen over the past decades, the beneficiaries of that spending are not necessarily the population cohort that is currently upset.  I guess the question is, is economic growth real if the population doesn’t feel it?  That will certainly be the political question come November.

As to European yields, they all followed Treasuries lower, especially after the BOE 5-4 vote to leave rates on hold offered a much more dovish signal than anticipated, and the ECB harped on the strength of the euro and how that could bring down their inflation forecasts, hinting at lower rates going forward.

In the equity markets, yesterday saw a tough day in the US as the tech/AI story continues to get beaten up right now, and that was more than enough to offset strength in things like defensives and staples.  But this morning, US futures are higher by about 0.5% as I type (8:00).  In Asia, Japan (+0.8%) bucked the US trend on the back of excitement about the upcoming election where Takaichi-san is expected to gain a mandate.  However, China (-0.6%), HK (-1.2%), Korea (-1.4%) and Australia (-2.0%) all had the same fate as the US.  Given the weight of technology companies in Asian indices, I suspect we are going to see more volatility here as different narratives come about on AI and investment and the social/political impacts.  As to Europe, modest gains are the story with the DAX (+0.5%) and IBEX (+0.9%) leading the way higher with the former benefitting from yesterday’s surge in Factory orders as well as a better-than-expected trade balance today.  As to Spain, it has been trending higher and nothing has come out to change that view for now.

Finally, the dollar is giving back some of yesterday’s gains but remains within that longer term trading range.  Using the dollar index (DXY) as our proxy, you can see just how little things have changed.  All the talk last week of the breakdown in the dollar has been forgotten for now, although I continue to read about China building a digital currency backed by gold.  I discussed that earlier this week and why I continue to believe that is unrealistic at this time.

But the weird thing about the DXY is it doesn’t seem to reflect what is happening in individual currencies.  For instance, AUD (+0.85%), GBP (+0.45%) and NOK (+0.9%) are all much stronger although the euro (+0.15%) and JPY (0.0%) not so much.  In the EMG bloc, MXN (+0.8%), ZAR (+1.1%), HUF (+0.8%) and KRW (+0.3%) are all having a very good session despite no specific news that would seem to drive that.  Historically, I never paid attention to the DXY because nobody who actually trades FX pays it any mind.  However, as a trading vehicle, it has gained many adherents which is why I mention it.  So, as we look across the currency universe, the dollar is having a tough day.

On the data front, we only see Michigan Sentiment (exp 55.0) and Consumer Credit ($8.0B).  We also hear from Governor Jefferson, but nobody seems to be listening to any Fed speakers right now, Secretary Bessent is a far more important voice for the markets.

We have seen massive moves across many markets lately, with excessive moves correcting, but I remain stubbornly of the view that while things got ahead of themselves, the underlying trends are still in place, at least in commodities.  As to the dollar, it’s not dead yet, but its future will depend on the administration’s ability to achieve their goals regarding the economic adjustments and inward investment.  

Good luck and good weekend

Adf

Totally Wrecked

Posted on by

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

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

Headlines – 

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

Currencies – 

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

Source: tradingeconomics.com

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

Source: finance.yahoo.com

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

Source: tradingeconomics.com

Precious Metals – 

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

Good luck (we all need that right now!)

Adf

What We’ve Learned

Posted on by

It wasn’t but three weeks ago
That pundits who felt in the know
Were sure the attack
On Vene would crack
The world, and more chaos bestow
 
But that news, so quickly, has faded
While Greenland fears have been upgraded
The pundits were sure
That war was the cure
And Europe would soon be invaded
 
Now as it turns out, what we’ve learned
Is NATO, which had been concerned
Has ‘greed to a deal
Which stopped Denmark’s squeal
As Trump, to the US, returned

 

It is certainly difficult to keep up with current events these days, especially for the punditry who feel it is critical they demonstrate expertise on every issue, given the speed with which the issues change.  All that effort to understand the geopolitics behind ousting Nicholas Maduro has been forgotten in less than 2 weeks as they needed to pontificate on Greenland and its importance.  If, as the president’s TruthSocial post below is the current lay of the land, by Monday, Greenland will return to its historic obscurity as President Trump will move on to the next issue of his choosing.  In fact, this morning, the WSJ is claiming Cuba is next on the list, which, while it wouldn’t be that surprising, has to date only been mentioned in passing by Mr Trump.

Here’s the thing about all the pontification regarding President Trump, nearly, if not all of it, is simply that, pontification by outsiders who have no idea about what is really happening.  These folks are not sitting in the Oval Office when the President is meeting with his advisors discussing strategy and are generally wishcasting their views and creating a narrative around that.  As I am also an outsider, all I can do is observe and try to ascertain how things might impact markets, but if you are not hearing it from the president or Secretary Rubio or someone like that, it is all speculation.  However, one must admit, it is entertaining!

As I don’t know what the next ‘global crisis’ is going to be ahead of time, let’s turn our attention to markets and how they responded to the president’s speech in Davos as well as the news of the deal framework.

Equities were quite happy.  After the sharp decline seen Sunday night, when the tariff threats were made, the S&P 500 has recouped nearly all of the losses as per the below chart.  Yesterday saw US market gains of 1.2% across the board and futures, this morning, continue to rally, up about 0.5% across the board.

Source: tradingeconomics.com

It should be no surprise that things were bright in Asia as well, with Tokyo (+1.75%) leading the way as almost every exchange in the region was higher by a decent amount (Korea +0.9%, India +0.5%, Taiwan +1.6%, Australia +0.75%) but interestingly, China (0.0%) and HK (+0.2%) were the laggards.  Perhaps good news for the West is not seen that positively there, although the story of regulators in China cracking down on possible stock manipulation by social media influencers has raised some concerns.  After all, one of the biggest issues with investing in China by outsiders is the capriciousness of President Xi and the CCP as they decide what they don’t like that particular day.  

As to Europe, it should be no surprise that there has been a collective sigh of relief from investors there given the removal of the threat of more tariffs and the promises of more defense spending by European nations.  So, gains across the board with the DAX (+1.2%) leading the way although the CAC (+1.1%) is right there as well with most of the rest of the nations seeing gains on the order of 0.5% to 0.75%.

In the bond markets, apparently the end of the world has also been postponed.  Yields declined yesterday and this morning, Treasury yields are unchanged at 4.24%.  In Europe, yields have slipped -2bps to -4bps on the continent although UK gilts (+2bps) are bucking the trend, which appears to be an ongoing impact from yesterday’s higher than expected inflation data which continues to point toward stagflation in the UK.  Interestingly, JGB yields (-4bps) have also fallen again, although they certainly remain near recent highs.  PM Takaichi is going to formally dissolve the Diet tonight and the election is slated for February 8th (wouldn’t it be wonderful if US election campaigns were just 2 weeks long!).  While nothing has changed in her fiscal planning, it seems that investors are awaiting the BOJ announcement tonight (no change expected) and have been modestly appeased by a substantial increase in exports although the trade surplus declined slightly.  

I think it is worth looking at the trade balance relative to the yen (-0.2%) as per the below chart.  Recall, historically, Japan ran major trade surpluses, which was always one of the tensions between the US and Japan dating back to President Reagan.  But as you can see below, the blue bars are the monthly trade numbers and since Covid, that situation changed dramatically.

Source: tradingeconomics.com

However, once the yen started to weaken substantially, the lagged effect showed up in trade data as can readily be seen above.  In fact, this is the real tension in Japan, I believe, that the weak yen helps exports significantly, but has become an inflation problem and the government is caught between the two issues.  This is why I believe we will see a weaker yen over time, especially if Takaichi-san comes out of the election with a solid majority.

As I’m on currencies, if we look elsewhere, the dollar, although we have been constantly assured it was collapsing, remains in its trading range.  This morning, the DXY (-0.1%) has edged lower after yesterday’s rebound.  As it happens, yen weakness has been offset by modest euro strength, but the real strength is in the commodity space with NOK (+0.8%), SEK (+0.36%), AUD (+0.6%) and NZD (+0.6%) all having solid sessions.  Now, my take is that the first two are more likely responses to the Greenland issue’s apparent resolution as NOK is rallying despite oil’s (-1.7%) sharp decline.  Remember, both those nations were in the crosshairs of Trump’s mooted tariffs.  On the other hand, last night, the employment situation in Australia perked up nicely which has helped raise market pricing for a rate hike by the RBA and given the strength in commodity prices and the apparent end of another global crisis, has helped support the currency.  Ironically, as I scan the EMG space, movements there have been much smaller overall.

Finally, turning to the rest of the commodity space, for the first time in a week, gold is not higher this morning, but rather essentially unchanged.  Silver (+0.25%) has bounced a tiny bit after selling off somewhat yesterday in NY.  I have maintained that trees don’t grow to the sky, and frankly, the price action here appears tired regarding ever larger gains.  I believe the fundamental story remains in place, but that doesn’t mean silver won’t chop around for a few weeks or months before starting higher again.   Copper (-0.6%) is also under modest pressure this morning and has retreated much further, about -6.3%, from its recent highs at $6.10/lb than the precious metals.  However, the red metal remains much in demand given the underlying electrification story. 

And lastly, a quick look at NatGas (+12%) shows what happens to commodity markets when there is the perception of insufficient supply for the current demand.  This is higher by 75% this week!  And while today in NJ, the temperature is a relatively balmy 34°, the forecast for the coming weekend is much colder and a huge snowfall.  It’s not often you see a movement of this magnitude so here is the chart for the past month.

Source: tradingeconomics.com

On the data front, today brings the final look at Q3 GDP (exp 4.3%) as well as Initial (212K) and Continuing (1880K) Claims.  Too, we get Personal Income (0.4%) and Spending (0.5%) for November and PCE (0.2%, 2.8% Y/Y) for both headline and core.  The EIA releases its weekly oil inventory data today, a day later than usual because of the holiday Monday, with a modest build expected.

Market participants in all markets appear to have found a comfort zone and are taking risk positions again, at least for now.  All the apocalyptic stories about the world rejecting the dollar and the rise of the BRICS will have to wait for another day.  While I don’t know what the next situation is going to be, I am highly confident we are going to have another geopolitical scenario that is going to result in more screaming, teeth gnashing and pearl clutching by those who continue to believe the rules-based order is the way things should be.  Alas for them, economic power and statecraft is the new world order, and my take is ultimately, the dollar benefits from this pivot.

Good luck

Adf

Most Enthralling

Posted on by

Some fractures are starting to show
In markets, as Trump’s blow by blow
Attack on the Danes
And friends, really strains
The view ‘Twenty-Six will lack woe
 
So, equities worldwide are falling
While bond yields, much higher, are crawling
The buck’s in a rut
While oil’s a glut
Thus, gold is the thing, most enthralling

 

“Something is rotten in the state of Denmark.”  So said Marcellus, when Shakespeare introduced him to the world in 1603(ish) in one of his most brilliant works, Hamlet, and it seems true today, 423 years later.  By now, you are likely aware that President Trump has imposed 10% tariffs, to begin on February 1st, on Denmark, Norway, Sweden, France, Germany, Finland, the Netherlands and the UK as he presses his case for US ownership of Greenland.  This is not the venue to discuss the relative merits or pitfalls of the strategy, so I won’t bore you with my views on the subject.  

Rather, this is a venue to discuss the market impacts and how they may evolve, in one poet’s eyes, going forward given the new starting condition.  As I type this morning, investors around the world are extremely unhappy, at least holding paper claims on either assets or governments.  However, holding real assets, notably gold (+1.15% and at new all-time highs), silver (+0.9% and at new all-time highs) and platinum (+1.45%, not quite at new highs yet) are feeling much better.

It is interesting to me that the WEF is meeting this week, and likely no coincidence that President Trump escalated things ahead of the meeting where he is scheduled to speak tomorrow.  It seems that the protagonists in this latest drama are set to meet while in Davos as well, so all these views are subject to change at a moment’s notice.  But for now, since there really is no other story that matters, let’s look at how markets have (mis)behaved since we last saw them here in the US on Friday.

As you can see from the chart below combining the Nikkei 225, the DAX and the S&P 500 futures, the move has been consistent since the close in NY on Friday, with all three main indices lower by between -1.75% (Japan) and -3.1% (Germany), with the US (-2.1%) in the middle.  

Source: tradingeconomics.com

In fact, that price action has been widespread across the rest of the G10 markets and many EMG markets as well. Only China (-0.2% since Friday) has bucked the trend and remains little changed.  Of course, that makes sense given this spat has nothing to do with China, on the surface.  At this point, I expect that all equity markets are going to remain under pressure until there is some resolution.  While Europe has threatened to invoke its Anti-Coercion Instrument on the US if those tariffs come into being, one must wonder will that do more damage to the US or Europe?  FWIW, I expect some type of resolution to be achieved before the Feb 1 deadline but could easily be wrong about that.  One last thing about tariffs; remember last week when expectations were high that the Supreme Court was going to rule on the legality of the ones already imposed?  That has suddenly gone very quiet.  My take there is the longer we don’t hear anything, the more likely they are not going to stop them.

Perhaps, though, the bond market is the more interesting place to look this morning with government bonds around the world getting sold aggressively.  While all eyes have been focused on the US (+6bps and well above the top of the previous range) and Europe (Germany +5bps, UK +7bps, France +6bps) perhaps the real activity is happening in Japan (+9bps).  In fact, Japanese 30yr yields have exploded higher by 40 basis points since Friday’s close, and I’m confident that has nothing to do with Greenland!

Source: tradingeconomics.com

In fact, it appears that JGB holders are getting increasingly concerned that PM Takaichi is going to really run it hot, with more unfunded fiscal stimulus and are responding accordingly.  The latest Takaichi proposal for the upcoming election is that they are going to remove the GST (VAT tax) on food for 2 years to help alleviate inflation problems.  I certainly like that better than capping prices, but fiscally, it’s a tough road to follow.  

One other bond market story that is making the rounds is the idea that Europeans would attack the US by simultaneously unloading their US Treasury holdings.  We have heard this story before with respect to China, and if you look across all of Europe, between central banks and private investors, there are likely upwards of $2 trillion held there.  But the question I ask every time I hear something of this nature is…what will they do with the proceeds if they were somehow able to coordinate the sales?  First, in the worst case, the Fed would buy them to prevent the market from collapsing.  And second, now they would have a whole lot of dollars that need to be invested elsewhere.  Which markets can absorb that amount of flow?  US equities?  Sure, but would that achieve their goals?  I think not.  If they converted them into euros, a one-way flow of $2 trillion into euros in short order would pretty much render all European manufacturing uncompetitive right away as the euro rose to 1.50 or 1.60 or higher.  Gold?  Think $10k/oz or higher.  Ain’t gonna happen.

Let’s hit the dollar next, which is under pressure across the board.  As I type (7:20), the DXY has fallen -1.0% this morning, a very large move for that index, but remains within the trading range that we have seen since October.

Source: tradingeconomics.com

The sell-off in the dollar is almost universal, although interestingly, ZAR (-0.5%), MXN (-0.3%) and CLP (-0.3%) are all bucking that trend.  I understand the nervousness, but it strikes me that none of this conversation is a positive for Europe, excepting the idea they sell all their Treasuries and convert the dollars into euros and pounds, an idea I tried to squash above.  

Finally, let’s look at commodities where the metals, as discussed above are soaring while oil (+0.8%) is picking back up off its end of week lows and currently sits just below $60/bbl.  The Iran situation remains murky, at best, and my sense is we have not heard the last of the situation there, although from what I have seen on X, the rioting has been quelled to some extent.  However, I think there is still enormous pressure on the government there and would not be surprised to see some type of US intrusion. 

But I’m confident the one thing almost all of you are feeling this morning is the bitter cold that has enveloped most of the US as per the weather.com map below.

Given natural gas is the most common fuel for heating homes, we cannot be surprised that its price has skyrocketed today, jumping 24% in the session so far, although it is now simply back to where it was this time last year.  however, a key issue in this market is Europe, which since they virtually shut off Russian gas, is now highly reliant on US LNG to heat their homes.  It turns out that their storage has fallen to slightly less than 50% of capacity, well below their average storage level for this date of 60% – 65%.  European TTF gas, on a like for like basis, currently costs ~$12.25/MMBtu compared to $3.85/MMBtu in the US, even after the massive jump.  Again, Europe has some issues going forward.

On the data front, there is really nothing today or tomorrow of note although Thursday brings GDP amongst other things.  I will review them tomorrow because, after all, markets right now are far more beholden to President Trump and Europe than to data.

Fear is growing more widespread and will likely continue to do so until there is some type of resolution over Greenland.  But then, it will dissipate quickly as consider, two weeks ago we were all Venezuela experts and today, nobody even cares about that nation anymore!

As to the dollar, I expect that when the resolution arrives, the dollar will make up lost ground, but given we are in the midst of a White House bingo game, one needs to play things close to the vest.  Hedges are crucial here.

Good luck

Adf

Like a Fable

Posted on by

It seems there’s a deal on the table
To end the shut down and enable
The chattering classes
To force feed the masses
A story that’s quite like a fable
 
Both sides will claim they have achieved
Their goals, though they were ill-conceived
But markets will love
The outcome above
All else, and we’ll all be relieved

 

While the shutdown is not technically over as the House of Representatives need to reconvene (they have been out of session since September 19th when they passed the continuing resolution) and adjust the bill so that it matches the one the Senate agreed last night and can be voted on in the House, it certainly appears that the momentum, plus President Trump’s imprimatur, is going to get it completed sometime this week. 

The nature of the deal is unimportant for our purposes here and both sides will continue to claim that they were in the right side of history, but the essence is that there appeared to be some movement on health care funding so, hurray!

As you can see in the chart below, while the story broke late yesterday afternoon and futures responded on the open in the evening session, the reality is the market sniffed out something was coming around noon on Friday.  In fact, the S&P 500 has rallied 2.4% since noon Friday.

Source: tradingeconomics.com

So, everything is now right with the world, right?  After all, this has been the major topic of conversation, not just by the talking heads on TV, but also in markets as analysts were trying to determine how much damage the shutdown was doing to the economy.  While I have no doubt that there were many people who felt the impact, my take is there were many, many more who felt nothing.  After all, the two main features were air travel and then SNAP benefits.  Let’s face it, on average (according to Grok) about 2.9 million people board airplanes in the US, well less than 1% of the population, although SNAP benefits, remarkably, go to 42 million people.  However, those have only been impacted for the past week, not the entire shutdown.

I’m not trying to make light of the inconveniences that occurred, just point out that from a macroeconomic perspective, despite the fact that the shutdown lasted 6 weeks, it probably didn’t have much of an impact on the statistics as all the money that wasn’t spent last month will be spent next month.  Different analyst estimates claim it will reduce Q4 GDP by between 0.2% and 0.5% with a concurrent impact on the annual result.  I am willing to wager it is much less.  However, it appears it will have ended by the end of the week and so markets are back to focusing on other things like AI, unemployment and QE.

Now, those three things are clearly important to markets, but I don’t think there is anything new to discuss there today.  Rather, I would like to focus on two other issues, one more immediate and one down the road, which may impact the way things evolve going forward.

In the near term, as winter approaches, meteorologists are forecasting a much colder winter in the Northern Hemisphere across both North America and Europe, something that is going to have a direct impact on NatGas.  Bloomberg had a long article on the topic this morning with the upshot being that the Polar Vortex may break further south early this year and bring a lot of cold weather along for the ride.  This is clearly not new news to the NatGas market, as evidenced by the fact that its price has exploded (no pun intended) higher by 43% in the past month!

Source: tradingeconomics.com

While oil prices have remained stuck in a narrow range, trading either side of $60/bbl for the past 6 weeks amid a longer-term drift lower as you can see in the below chart, oil is only utilized by ~4% of homeowners for heating with 46% using NatGas.

Source: tradingeconomics.com

Ultimately, I suspect that we are going to see this feed through to inflation as not only are there the direct costs of heating homes, but NatGas is also the major source of generating electricity, with 43% of the nation’s electricity using that as its source.  We have already seen electricity prices rise pretty sharply over the past months (I’m sure you have all felt that pain) and if NatGas prices continue to climb, that will continue.  Remember, the current price ~$4.45/MMBtu is nowhere near significant highs like those seen just 3 years ago when it traded as high as $10/MMBtu.  With all this price pressure, will the Fed continue down their path of rate cuts?  Alas, I believe they will, but that doesn’t make our lives any better.

Which takes me to the second, longer term issue I wanted to mention, European legislation that is seeking to effectively outlaw the utilization of cash euros.  This substack article regarding recent Eurozone legislation is eye-opening as the ECB and Europe try to combat the coming irrelevance of the euro.  For everyone who either lives in Europe or does business there, I cannot recommend reading this highly enough.  There are many changes occurring in financial architecture, and by extension financial markets.  Keep informed!

Ok, enough of that, let’s see how markets have responded to the Senate deal.  Apparently, US politics matters to the entire global equity market.  Green is today’s color with Japan (+1.25%), HK (+1.55%) and China (+0.35%) all performing well, although not as well as Korea (+3.0%) which really had a good session.  Pretty much all the other regional markets were also higher.  In Europe, the deal has everyone excited as well with gains across the board (Germany +1.8%, France +1.4%, Spain +1.4%, UK +1.0%).  As to US futures, at this hour (7:45) they are higher by about 1% across the board.

I guess with that much excitement about more government spending, we cannot be surprised the yields have edged higher.  This morning Treasury yields are up by 3bps, which is what we saw from JGB markets last night as well, although European sovereign yields are little changed on the day.  I suspect, though, if equities continue to rally, we will see yields there edge higher.

In the commodity space, oil (+0.5%) continues to trade in its recent range.  The most interesting thing I saw here was that the IEA is set to come out with their latest annual assessment of the oil market and for the first time in more than a decade they are not going to claim that peak fossil fuel demand is here or coming soon.  The climate grift is truly breaking down.  But the commodity story of the day is precious metals which are massively higher (Au +2.5%, Ag +3.3%, Pt +2.6%) with copper (+1.6%) coming along for the ride.  The narrative here is that with the government shutdown due to end soon, President Trump talking about $2000 tariff rebate checks and the Fed likely to cut rates in December (65% probability), debasement is with us and metals is the place to be!

Interestingly, the dollar is not suffering much at all despite the precious metals story.  While AUD (+0.6%), ZAR (+0.6%) and NOK (+0.6%) are all stronger on the commodity story, the euro is unchanged, JPY (-0.4%) continues to decline and the rest of the G10 is not doing enough to matter.  In truth, if I look across the board, there are more currencies strengthening than weakening vs. the greenback, but overall, at least per the DXY, the dollar is little changed.

There is still no data at this point, although it will start up again when the government gets back to work.  Actually, there has been much talk of the weakness in Consumer sentiment based on Friday’s Michigan Index which fell to 50.3, the second lowest in the history of the series with several subindices weakening substantially.  However, that was before the news about the end of the shutdown, so my take is people will regain confidence soon.  As well, we hear from 9 Fed speakers this week, with 5 of them on Wednesday!  Both dissenters from the October meeting will speak, so perhaps things have changed in their eyes, but I doubt it.

At this point, all is right with the world as investors anticipate the US government getting back to work while the Fed will continue to support markets by easing policy further.  In truth, the dollar should not benefit here, but I have a feeling that any weakness will be short-lived at best.  Longer term, I continue to believe the dollar is the place to be.

Good luck

Adf

Woes and Scraps

Posted on by

The PMI data is in
And so far, it’s not really been
A sign of great strength
When viewed from arm’s length
No matter the punditry’s spin
 
That said, we are not near collapse
Despite many trade woes and scraps
And stocks keep on rising
So, t’will be surprising
For all when we see downside gaps

 

It was a quieter weekend than we have seen recently in the global arena with no new wars, no mega protests and no progress made on any of the major issues outstanding around the world.  Thus, the US government remains shut down, the war in Ukraine remains apace and the AI buzz continues to suck up most of the oxygen when discussing markets.

With this as background, arguably the most interesting market related news has been the manufacturing PMI data released last night and this morning.  starting in Asia, the story was some weakness as Chinese, Korean and Australian data all fell compared to last month, although India and Indonesia continued along well.  Meanwhile, in Europe, the data improved compared to last month, but the problem is it remains at or below 50 virtually across the board, so hardly indicative of strong economic activity.

                                                                                                      Current         Previous               Forecast

Source: tradingeconomics.com

I don’t know about you, but when I look at the releases this morning, I don’t see a European revival quite yet, not even if I squint.

I guess the other thing that has tongues wagging is Election Day tomorrow with three races garnering the focus, gubernatorial contests in New Jersey and Virginia and the mayoral race in New York City.  The first two are often described as harbingers of a president’s first year in office and I think this time will be no different.  But will they impact market behavior?  This I doubt.

So, let’s get right into markets this morning.  Friday’s further new record highs in the US were followed by strength through much of Asia (Tokyo was closed for Culture Day) with China (+0.3%), HK (+1.0%), Korea (+2.8%) and Taiwan (+0.4%) leading the way with only the Philippines (-1.7%) bucking the regional trend as earnings growth in the country continues to disappoint relative to its peers around the region.  Europe, too, has seen broad based gains with the DAX (+1.2%) leading the way higher and gains in the IBEX (+0.45%) and CAC (+0.3%) as well.  I guess the PMI data was sufficient to excite folks and despite Europe’s status as a global afterthought, at least in terms of geopolitical issues, their equity markets have been rising alongside the rest of the world’s all year.  And you needn’t worry, US futures are all higher at this hour (6:50), with the NASDAQ (+0.7%) leading the way.

Perhaps more interesting than equities though is the fact that government bond markets are doing so little.  Treasury yields jumped ~10bps in the wake of the FOMC meeting and, more accurately, Chairman Powell’s ostensible hawkishness.  However, as you can see in the below tradingeconomics.com chart, since then, nothing has happened. 

Recall, the probability of a December rate cut by the FOMC also fell from virtual certainty to 69% now.  In fact, if you think about it, that 30% probability decline translates into about 7.5bps, approximately the same amount as 10-year yield’s rose.  It appears that the market is consistent in its pricing at this point, and when (if?) data starts coming back into the picture, we will see both these interest rates rise and fall in sync.  As to European sovereigns, they continue to track the movement in the US and this morning, this morning, the entire bloc has seen yields edge higher by 1bp, exactly like the US.

Commodities remain the most interesting place, although the dollar is starting to perk up a bit.  Oil (-0.3%) slipped overnight after OPEC+ indicated they were increasing production by another 137K bbl/day, although there would be no more increases for at least three months given the seasonality of reduced oil demand at this point on the calendar.  Something I have not touched on lately is NatGas, which traded through $4.00/MMBtu late last Thursday, and is now up to $4.25.  in fact, in the past month it has risen nearly 27%, which given it is massively underpriced compared to oil (on a per unit of energy basis) should not be that surprising.  Nonetheless, sharp movements are always noteworthy, and this is no different.

Source: tradingeconomics.com

Certainly, part of this is the fact that winter is coming and seasonal demand is rising in the US. 

Combine that with the European needs for LNG, of which the US is the largest provider, and you have the makings of a rally.  (I wonder though, did the fact that Bill Gates changed his tune on global warming no longer being an existential threat signal it is now OK to burn more fossil fuels?)

Turning to the metals markets, the ongoing fight between the gold bugs and the powers that be continues as early in the overnight session, gold was lower by nearly -1% but as I type, just past 7:00am, it is slightly higher (+0.1%) compared to Friday’s closing levels.  Silver (+0.1%) has seen similar price action although copper (-0.5%) appears more focused on the economic story than the inflation story.  

Which takes us to the dollar and its continued rally. Using the DXY (+0.1%) as our proxy, it is higher again this morning and pushing back to the psychological 100.00 level.  Now, I have made the case several times that the dollar has done essentially nothing for the past six months, and the chart below, I believe, bears that out.  We have basically traded between 96.5 and 100 since May.

Source: tradingeconomics.com

You will also recall that there is a narrative around about the end of the dollar’s hegemony and how nations around the world are trying to exit the USD financial system that has been in place since Bretton Woods, or at least since the fiat currency world took off when President Nixon closed the gold window.  And there is no doubt that China is seeking to become the global hegemon and thus wants a renminbi-based system to use to their advantage.  However, let’s run a little thought experiment. 

The Trump administration has embraced the cryptocurrency space, and especially the use of stablecoins.  Legislation has been passed (GENIUS Act) to help clarify the legal framework and the SEC has been solicitous in its willingness to ensure that these creations are not securities, thus placing them outside the SEC’s oversight.  When looking at the world of stablecoins, their current total value is approximately $311 billion (according to Grok) of which only ~$1.2 billion are non-USD.  

Now, if stablecoins represent the payment rails of the future, an idea that is readily believable, and the stablecoin market is virtually entirely USD, with massive first mover advantage, is it not possible that economies around the world are going to find it much easier to dollarize than to maintain their own native currency?  While there are calls for Argentina to dollarize, what would the world look like if the EU fell apart (an entirely possible outcome given the inconsistencies in their current energy and immigration policies and the stress within the bloc) and the euro with it?  Would smaller nations opt for their own currency, or would they see the value of having a dollarized economy given the many efficiencies it would present, especially for their export industries?

While I have no doubt that China will never accept that outcome for themselves, is the future a world where there are two currency blocs, USD and CNY, and everything else simply disappears?  Remember, we are merely spit balling here, but if that is the outcome, demand for dollars will continue to rise, and the value of other currencies will continue to decline until such time as they succumb.

Again, this is a thought experiment, but one that offers intriguing possibilities for the future.  And one where the foreign exchange market may ultimately meet its demise.  After all, if there are only two currencies, that doesn’t make much of a market.

One other thing I must note, in the stablecoin realm, there is a remarkable product, USDi (usdicoin.com), which tracks US CPI exactly, yet can fit within those same payment rails.  If you are looking into this space, USDI is worth a peek.

Ok, back to the markets, looking across the FX space, +/-0.2% is today’s theme virtually across the board, with the more important currencies slipping against the dollar (EUR, GBP, JPY, CHF, CAD) than rising vs the greenback (MXN, CLP, NOK, CZK), although the magnitudes are similar.

With the government still closed, there is no official data, but we do get ISM Manufacturing (exp 49.5) with the Prices Paid subindex (61.7) released at the same time.  There are two Fed speakers today, Daly and Cook, and then 9 more speeches throughout the week.  We also get the ADP Employment data on Wednesday (exp 24K), but I imagine that will get more press after the election results are learned Tuesday evening.

It is hard to get excited about things today, but nothing points to a weaker dollar right now.

Good luck

Adf

Lickspittle

Posted on by

The Fed has a banker named Jay
Who last week was quick to betray
His fervent belief
He can’t come to grief
If Trump wants to force him away
 
This morning his Journal lickspittle
Wrote glowingly ‘bout Jay’s committal
To stand strong and firm
And finish his term
No matter how much he’s belittled

 

First, on this Veteran’s Day holiday, let us all pause a minute and remember those veterans who gave their lives for our nation.

The reverberations of Donald Trump’s re-election last week continue to be felt around the world with comments from virtually every walk of life explaining their joy/distress at the outcome and trying to prognosticate what will play out in the future.  I will tell you that I have no idea how things will evolve, although I am hopeful that his administration will be able to reduce the size of the federal government as that can only be a benefit.

But one of the things that we learn about people during times of change, especially people who believe they are crucially important to the world, is just how much they believe they are crucially important to the world.  Nothing highlights this quite like the lead article in this morning’s WSJ titled, If Trump Tries to Fire Powell, Fed Chair Is Ready for a Legal Fight.  This is not to say that Powell doesn’t have an important role, he certainly does.  But this pre-emption of the entire question is a testimony of just how important he thinks he is.  

My one observation on this is that despite all the discussion that the Fed isn’t political, it is clearly a very political institution.  Nothing highlights that better than this Tweet from Joseph Wang (aka @FedGuy12), a commentator who spent a dozen years at the Fed and understands its inner workings quite well.  Under the rubric that a picture is worth 1000 words, take a look at Federal Reserve political contributions below and then ask yourself if the Fed is not only political, but partisan.  

Source: X @FedGuy12

It is important to recognize this as it also may help explain why the Fed is cutting interest rates despite GDP (currently 2.8%) and Core PCE (currently 2.7%) running far above their long-term expectations and Unemployment (currently 4.1%) running below their long-term expectations as per the below SEP from the September FOMC meeting.  If anything, I might argue they should be raising interest rates!

Source: fedreserve.gov

At any rate, the ramifications of this election outcome are likely to drive the market narrative for a while yet.

But overnight, there just wasn’t that much of interest, at least not that much new.  So, let’s take a look at overnight market activity.  After Friday’s latest record high closes in the US, the picture in Asia was less robust with Japanese equities basically unchanged on the day after Shigeru Ishiba was elected PM to run a minority government, while Hong Kong (-1.5%) and mainland Chinese (+0.7%) shares went in opposite directions.  Chinese financing data was released that was mildly disappointing, but there are several stories about how the government is going to reacquire land that is currently in private hands but not being used and repurpose it for benefit.  The rest of the region had many more laggards than gainers, perhaps on concerns that Trump will be imposing tariffs throughout the region.  As to Europe, despite all the pearl clutching by the leadership there, equity investors are excited with gains seen across the board (DAX +1.3%, CAC +1.2%, FTSE 100 +0.8%).  US futures at this hour (7:30) are continuing their ride higher, up 0.4%.

In the bond market, Treasuries aren’t really trading today with banks closed.  In Europe, sovereign yields have edged down between 1bp and 2bps, perhaps feeling a little of that equity euphoria, as there was precious little in the way of news or commentary to drive things.

In the commodity space, oil (-1.7%) is under further pressure as broadly slower global growth undermines demand while prospects of the Trump administration fostering significant additional drilling opportunities helps build the supply side.  However, NatGas (+7.0%) is soaring this morning as Europe, notably Germany, is suffering from dunkelflaute (maybe the best word I have ever heard) which means ‘a period of low wind and solar power generation because it is cloudy, foggy and still’, and so they need to buy a lot more NatGas to power the economy.  In fact, NatGas is higher by nearly 15% in the past month although remains substantially cheaper in the US than in Europe and Asia.  My take is this discrepancy cannot last forever.  As to the metals markets, they are under pressure again this morning with both precious (Au -0.9%, Ag -0.3%) and industrial (Cu -0.5%, Al-1.4%) feeling the pain.  

A key driver in the metals space is the dollar, which is rallying against all its counterparts this morning quite robustly.  The euro (-0.6%) is back to levels last briefly touched in April, but where it spent more time a year ago, as it seems to be heading to 1.05 and below.  Meanwhile, JPY (-0.8%) is also feeling the heat while NOK (-0.7%) is pressured by both the dollar’s general strength and the oil weakness.  In the EMG bloc, MXN (-1.3%) is having a rough go as the tariff talk heats up, but we have also seen weakness in EEMEA with ZAR (-1.4%), PLN (-1.0%) and HUF (-1.2%) all under pressure this morning.  Not to be outdone, Asian currencies, too, are selling off with CNY (-0.3%) back above 7.20 for the first time since August while THB (-0.9%), MYR (-0.7%) and SGD (-0.6%) demonstrate the breadth of the move.

With the holiday, there is no data to be released today, but this week brings CPI amongst other things.

TuesdayNFIB Small Biz Optimism91.9
WednesdayCPI0.2% (2.6% Y/Y)
 Ex food & energy0.3% (3.3% Y/Y)
ThursdayPPI0.2% (2.3% Y/Y)
 Ex food & energy0.3% (2.9% Y/Y)
 Initial Claims224K
 Continuing Claims1895K
FridayRetail Sales0.3%
 -ex autos0.3%
 Empire State Mfg-1.4
 IP-0.3%
 Capacity Utilization77.2%

Source: tradingeconomics.com

In addition to this data, we hear from 11 different Fed speakers this week, including Chairman Powell again at 3:00pm on Thursday afternoon.  It is difficult to believe that the message from last week is going to change, but you never know.  However, I expect that every one of them is going to be explaining that things are good, but they are cutting rates to ensure things remain that way as they consistently congratulate themselves on having slain inflation.  I hope they are right…I fear they are not.

For now, though, the US economy remains the strongest in the world (7% budget deficits will help prop up growth after all) and capital continues to flow in this direction.  I see no reason for the dollar to fall anytime soon.  Whatever problems lie ahead, I believe they are over the metaphorical horizon and other than a few doomporn purveyors, not in the market’s view.

Good luck

Adf

Narrative Drift

Posted on by

Today it is more of the same
As energy traders proclaim
No price is too high
For NatGas, to buy
With policy blunders to blame

As such it is not too surprising
Inflation concerns keep on rising
Prepare for a shift
In narrative drift
Which right now CB’s are devising

Perhaps the most interesting feature of markets since the onset of the Covid-19 pandemic is the realization that prices for different things, be they equities, bonds, commodities, or currencies, can move so much faster and so much further than previously understood.  The simple truth is that markets as a price discovery mechanism are unparalleled in their brilliance.  Recall, for instance, back in April 2020, when crude oil traded at a negative price.  The implication was that crude oil holders were willing to pay someone to take it off their hands, something never before seen in a physical commodity market.  (Of course, in the interest rate markets, that had become old hat by then.)  Well, today European natural gas markets have gone the other way, rising 40% in both Amsterdam and London and taking prices to levels previously unseen.  Now, much to the chagrin of European policymakers, there is no upper limit on prices.  As winter approaches, with NatGas inventories currently just 74% of their long-term average, and with most of the EU reliant on Russia for its gas supplies, it is not hard to foresee that these prices will go higher still.

The first issue (a consequence of policy decisions) is that deciding to allow a geopolitical adversary to control your energy supply is looking to be a worse and worse decision every day.  Gazprom’s own data shows that they have reduced the flow of gas to Europe via Belarus and Poland by 70% and via Ukraine by 20% in the past week.  It cannot be surprising that prices in Europe continue to rise.  And the knock-on effects are growing.  You may recall two weeks ago when a fertilizer company in the UK shuttered two plants because the NatGas feedstock became so expensive it no longer made economic sense to produce fertilizer.  One consequence of that was there was a huge reduction in a byproduct of fertilizer production, pure CO2, which is used for refrigeration and has impaired the ability of food processors to ship food to supermarkets and stores.  Empty shelves are a result.  Just today, a major ammonia producer shuttered its plants as the feedstock is too expensive for profitable production as well.  The point is that NatGas is used as more than a heating fuel, it is a critical input for many industrial processes.  Shuttering these processes will have an immediate negative impact on economic activity as well as push prices higher.  If you are wondering why there are concerns over stagflation returning, look no further.

The bigger problem is that there is no reason to believe these prices will sell off anytime soon.  Arguably, we are witnessing the purest expression of supply and demand working itself out.  As a consequence of these earlier decisions, the EU will now be forced to respond by spending more money and reducing tax income in order to support their citizens and businesses who find themselves in more difficult financial straits due to the sharp rise in the price of NatGas.

Now, a trading truth is that nothing goes up (or down) in a straight line, so there will certainly be some type of pullback in prices in the short run.  However, the underlying supply-demand dynamic certainly appears to point to a supply shortage and consistently higher prices for a critical power source in Europe.  Slower economic growth and higher prices are very likely to follow, a combination that the ECB has never before had to address.  It is not clear that they will be very effective at doing so, quite frankly, so beware the euro as further weakness seems to be the base case.

The other main story of note
Concerns a new debt ceiling vote
Majority wailing
The other side’s failing
May yet, a default, soon promote

Alas, we cannot avoid a quick mention of the debt ceiling issue as the clock is certainly winding down toward a point where a technical default has become possible.  Political bickering continues and shows no sign of stopping as neither side wants to take responsibility for allowing more spending, but neither do they want to be responsible for a default.  (Perhaps that sums up politicians perfectly, they don’t want to take responsibility for anything!)  This is more than a technical issue though as financial markets are failing to see the humor in the situation and starting to respond.  Hence, today has seen a broad sell-off in virtually every asset, with equities down worldwide, bonds down worldwide and most commodities lower (NatGas excepted).  In fact, the only thing that has risen is the dollar, versus every one of its main counterparts.

The rundown in equities shows Asia (Nikkei -1.05%, Hang Seng -0.6%, Shanghai closed) failing to take heart from yesterday’s US price action.  European investors are very unhappy about the NatGas situation with the DAX (-2.2%), CAC (-2.15%) and FTSE 100 (-1.8%) all sharply lower.  It certainly hasn’t helped that German Factory Orders fell a much worse than expected -7.7% in August either.  US futures are currently lower by about 1.25% as risk is clearly not today’s flavor.

Funnily enough, bond markets are also under pressure today, with Treasuries (+1.6bps), Bunds (+1.6bps), OATs (+2.2bps) and Gilts (+3.0bps) all seeing heavy selling.  It seems that inflation concerns are a more important determinant than risk concerns as the evidence of rising prices being persistent continues to grow.

In the commodity space, pretty much everything, except NatGas (+0.6% to $6.33/mmBTU) is lower as well, although this appears to be consolidation rather than the beginning of a new trend.  So, oil (-0.6%), gold (-0.5%), copper (-1.0%) and aluminum (-0.85%) are all under pressure.  Given the dollar’s strength, this should not be that surprising, although overall, I continue to expect a rising dollar and rising commodity prices.

As to the dollar, it is king today, rising 1.1% vs NZD, despite a 0.25% interest rate increase by the RBNZ last night, 1.0% vs. NOK and 0.85% vs SEK with the latter seeing a negative monthly GDP outcome in a huge surprise, thus marking down growth expectations significantly for the year.  But the rest of the G10 is much softer save JPY, which is essentially unchanged on the day.  Meanwhile, the euro has fallen a further 0.5% and is now approaching modest support at 1.1500.  Look for further declines there.

As to emerging market currencies, all that were open last night or today are lower with MXN (-1.2%) leading the way on a combination of lower oil and higher inflation, but HUF (-0.9%), ZAR (-0.8%) and CZK (-0.8%) all suffering on either weaker commodity prices are concerns over insufficient monetary tightening in an inflationary economy.  Even INR (-0.7%) is feeling the heat from rising inflationary pressures.  It is universal.

On the data front, only ADP Employment (exp 430K) is due this morning and there are no Fed speakers scheduled.  Right now, it feels like the dollar is primed to continue to move higher regardless of the data, or anything else.  Fear is growing among investors and they are searching for the safest vehicles they can find.  The steepening of the yield curve indicates the demand is in the 2yr, not the 10yr space, which makes sense, as in an inflationary environment, you want to hold the shortest duration possible.  Beware the FAANG stocks as they are very long duration equivalents.  Instead, it feels like the dollar is a good place to hang out.

Good luck and stay safe
Adf