Tag Archives: #nothingtosee

Up and Down

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The only things that really matter
Are stock prices frequently shatter
Their previous high
And rise to the sky
Like too much yeast got in the batter
 
And though prices move up and down
While traders both grin and they frown
The long term has shown
The ‘conomy’s grown
Though lately, tis gold’s worn the crown

As I wrote last week, markets have a difficult time maintaining excessively high levels of volatility for any extended period of time as traders simply get tired and effectively check out.  Now, we have had some impressive volatility lately, whether in stocks, silver or natural gas, to name three and as can be seen in the chart below.

Source: tradingeconomics.com

But a closer look at the chart tells an interesting story, despite a huge amount of movement in the past month, the net movement for the S&P 500, Silver, Natural Gas and the 10-year Treasury, has been essentially zero.  If you dig through this chart, the only net movement has been the dollar’s roughly 2% decline.

That is an interesting tale, I think.  Perhaps Macbeth said it best though, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”  What exactly is the significance of the remarkable volatility we have seen over the past month across numerous markets?

If we review the past month’s activities, the most notable market event was the announcement of Kevin Warsh as the next Fed chair, and the initial assumption that he is much more hawkish than market participants had previously anticipated.  It remains to be seen if that is the case, especially since we are still months away from any confirmation hearings and his eventual swearing in, but that was certainly the initial narrative.  It was blamed for a sharp decline in equities as well as precious metals, although both are essentially unchanged over the past 30 days. 

At least NatGas made sense given the significant cold and winter storms that hit much of the US and northern Europe, but those, too, have passed, and prices are back to where they were prior to the more extreme weather.

Maybe the most interesting thing is that bond yields are basically unchanged despite the Warsh announcement.  It would not have been surprising to see a significant move there given Warsh’s ostensible hawkishness, but that was not the case.

My point is that markets move for many reasons.  Occasionally, there is a clear catalyst (Japan’s Nikkei responding positively to PM Takaichi’s landslide victory comes to mind), but more often than not, the narrative writers seek to explain price action after the fact while covering up their previous forecasting mistakes.  I, too, am guilty of this at times, which is the reason I try to step back and take a broader, longer-term view of market movement to get underlying causes.  As I no longer sit on a trading desk, I am not privy to the day-to-day tick activity, and frankly, even then, unless it was happening at my bank, I would still be in the dark.

To conclude, the strongest trends, which remain the precious metals, continue, although prices are back closer to the long-term trend than the parabolic heights seen 10 days ago as you can see in the below chart.  In fact, I don’t think we have had any changes in the underlying story, but the extreme market volatility is likely to be done for a while going forward.

Source: tradingeconomics.com

Which takes us to overnight market behavior.  While Tokyo (+2.3%) is still ripping higher on the Takaichi election news, only Taiwan (+2.1%) and the Philippines (+2.0%) are keeping pace with the rest of the region much less impressed, (China +0.1%, HK +0.6%, Australia 0.0%).  To my point, nothing has changed.  In Europe, too, price activity is fairly muted (France +0.4%, Germany +0.1%, Spain +0.2%, UK -0.2%) as there has been no news of note either economically or politically.  The most interesting data point was Norwegian inflation which came in much hotter than expected at 3.6% and has traders thinking the Norgesbank may be set to tighten again.  This has helped NOK (+0.6%) which is the leading gainer in the FX markets this morning.  As to US futures, at this hour (7:20), they are very modestly higher, just 0.15% or so across the board.

In the bond market, yields are backing off everywhere, with Treasury yields lower by -3bps, and European sovereigns lower by -1bp to -2bps across the board.  The exception, of course, is Norway (+8bps).  Perhaps, more interestingly JGB yields (-5bps) are slipping despite (because of?) Takaichi’s landslide victory.  Recall, heading into the election, expectations were for aggressive fiscal expansion and borrowing to pay for it.  However, Katayama-san, the FinMin has been explicit that they were going to be borrowing at the short end of the market, 1yr to 5yrs, so perhaps it is no surprise that the 10yr yield is slipping.  With that in mind, though 5yr JGB yields also fell last night, down -3bps, although shorter dated paper was unchanged.  I have not read of any analysts complaining that Japan is turning into an emerging market because they are funding themselves with short-dated paper, although when the US does it, apparently it is the end of the world.

Turning to commodities, oil (0.0%) continues to get tossed around on the Iran story, with no certainty as to whether a deal will be done or the US will attack.  Apparently, Israeli PM Netanyahu is meeting with President Trump tomorrow to register his opinions on the subject.  The interesting thing in this market is that the ‘peak oil demand’ narrative, which has been pushed by the climate set as occurring in the next year or two, has been pushed back to 2050 by the IEA as they take reality into account.  That may encourage more drilling, but that’s just my guess and as I’m an FX guy, what do I really know?

As to the precious metals, after a couple of days rebounding, this morning, the sector is modestly softer (Au -0.3%, Ag -1.6%, Pt -1.2%) although as per the chart above, the trend remains higher across all these metals.

Finally, the dollar, which has fallen the past two days, has stabilized and is mostly higher (save for NOK mentioned above) with most currencies softer by about -0.15 or -0.2%.  The other exception of note here is JPY (+0.5%) as there has been a lot of jawboning by the MOF there to prevent a rash of weakness.  However, it is difficult for me to look at the JPY chart below and discern a major reversal is coming.  I believe that the MOF wants to keep that 160 level as a dollar ceiling without spending any money if they can, but the problem with jawboning is that it loses its efficacy fairly quickly.  However, if they drive yields higher on shorter dated paper, perhaps that will attract more inflows, although given how low they currently are (2yr 1.29%, 5yr 1.69%) I think they have a long way to go before they become attractive to international investors.

Source: tradingeconomics.com

On the data front, NFIB Small Business Optimism fell to 99.3, a bit disappointing, and now we await the following: Retail Sales (exp 0.4%, 0.3% -ex autos) and the Employment Cost Index (0.8%).  We also hear from two more Fed speakers, Logan and Hammack, but I don’t see the Fed, other than Warsh, being that critical right now.  

And that’s really it for today.  My take is we are unlikely to see dramatic movement in any market so hedgers should take advantage of the reduced price volatility.  But otherwise, sometimes, there is just not that much to do.

Good luck

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Flags at Half-Mast

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Twas just seven days in the past
When fears of recession forecast
Were rapidly rising
And folks analyzing
The data had flags at half-mast
 
But in a remarkable twist
Turns out that recession was missed
Instead, all is great
With not long to wait
Til worries no longer exist!

 

Until this week, I had always understood the Covid-linked recession to be the shortest on record, lasting just a few months.  But apparently, that is no longer the case.  You may recall that after last Friday’s weaker than expected NFP data and the increase in the Unemployment Rate to 4.3%, the commentariat was certain that the Fed had maintained their monetary policy too tight for too long.  The result was that the US had entered a recession, or at least was on the cusp of one.  Certainly, this appeared to be the market narrative as equity markets sold off aggressively on Friday and then again on Monday.  While there was much discussion of the impact of the BOJ’s policy adjustments and that as an additional catalyst, the key is panic was rampant.

However, it appears it was nothing more than a bad dream.  As of this morning, the S&P 500 is essentially unchanged from where it was at last Friday’s close as can be seen in the chart below.  

A graph on a white background Description automatically generated

Source: tradingeconomics.com

All of the angst that had been felt because of that NFP print (which was still positive at 114K) and all of the clutching of pearls and gnashing of teeth that analysts suffered was unnecessary as the Fed sensibly made no policy changes and the equity market absorbed some volatility and is back to flat on the week.  

Does this imply everything is fine with the world?  Absolutely not.  There are still numerous concerns for both the economy and the financial markets, notably the bond market, but the world has not ended, and equity markets are reflecting that fact.  

All joking aside, the economy continues to show a mixed picture and arguably the biggest medium-term concern should be the willingness of investors to continue to finance the US deficit.  This is a fundamental that cannot be ignored forever and one that revealed itself again this week as both the 10-year and 30-year auctions had tails* of more than 3 basis points.  The implication of those outcomes is that demand for US Treasury debt at current levels could be waning, and that is a genuine problem.  

Consider that, already, interest payments by the Treasury on its debt exceed $1 trillion annually.  If buyers in the market demand higher interest rates and there are no expenditure reductions (which seems likely regardless of the election outcome), either yields will rise, or other buyers will need to be found.  Who might those other buyers be?  Well, obviously, the Fed is the number one suspect, although if they were to restart QE with inflation running above target, I suspect it would be very difficult to hide and the impact on inflation would likely be to push it higher, clearly not their goal.  Therefore, as I have written before, be ready for regulatory changes that require banks and insurance companies to hold larger portfolios of Treasury securities as part of their capital buffers.  This process would be far more opaque politically but would create the price insensitive bid that the Treasury needs.

To recap, the recession has not yet arrived, investors are climbing out of their foxholes and there are potential concerns regarding the bond market and natural demand for the ongoing increases in issuance.  While next week’s CPI data will be closely scrutinized, my sense is the equity narrative is going to be far more focused on production and consumption than on prices. 

In the meantime, let’s review last night’s session and see how things are behaving as we head into the weekend.  After yesterday’s impressive rally in the US, where all Monday’s fears were erased because the Initial Claims number seemed to indicate the job market wasn’t collapsing, Asian markets had a pretty good session as well.  The Nikkei (+0.6%) and Hang Seng (+1.2%) both followed the US higher as did virtually every other market in Asia except mainland Chinese shares (CSI 300 -0.35%) after Chinese inflation figures printed a touch higher than forecast.  It does seem to feel like the Chinese market is decoupling from the rest of the world.  Meanwhile, European bourses are all firmer this morning led by Spain’s IBEX (+0.9%) and the CAC (+0.5%) in Paris.  Clearly, fears over Monday’s meltdown have abated everywhere.  Lastly, at this hour (7:30), US futures are pointing slightly higher as well.  As I said above, Monday was just a bad dream.

In the bond markets, yields are declining almost everywhere with 10-year Treasuries falling 4bps and all European sovereigns seeing yields decline by between -3bps and -5bps.  Whatever fears existed during the auctions seem to have abated somewhat, at least for now.  But the bigger picture concerns over Treasury supply remain in place, if in the background today.

In the commodity markets, oil (+0.4%) continues to creep higher and has now retraced all its losses from the week.  However, the big picture here remains that oil is rangebound between $70/bbl and $90/bbl.  While the Middle East situation continues to cause some concerns, the absence of a widely anticipated strike by Iran on Israel has left traders on edge, but not actively hedging the prospects.  As to the metals markets, both gold and silver, which had very strong rebounds yesterday, are little changed on the morning, consolidating those gains.  Interestingly, copper (+1.6%) is showing a bit of life, perhaps on the view that the recession has not yet arrived, or more likely because traders who had shorted the red metal are closing positions ahead of the weekend.

Finally, the dollar is mixed this morning with a variety of gainers and laggards across both the G10 and EMG blocs.  In the former, AUD (-0.3%) is lagging as it adjusts after yesterday’s strong gains based on a more hawkish RBA view.  At the same time, JPY (+0.5%) is higher this morning although it has been trading either side of 147.00 for the past three sessions with no obvious directional bias.  Given the importance of monetary policy decisions to this currency pair, the fact that the BOJ walked back their hawkishness and the Fed speakers we have heard this week have continued the mantra of the time is not yet right for a cut, although September may be good, it shouldn’t be that surprising that it has found a new short-term equilibrium.

In the emerging markets, the chart below showing the relative moves of ZAR, MXN and BRL, the three key risk proxies, shows that all have strengthened from their worst levels on Monday, an indication that traders are returning to the carry trade.

A graph of stock market Description automatically generated

Source: tradingeconomics.com

It is also worth noting that CNY (+0.2%) continues to track the yen at a slower pace.  The idea that the PBOC is willing to let the renminbi trade in a more volatile manner as long as it does not strengthen aggressively vs. the yen remains intact.

There is no data on the docket today and once again there are no Fed speakers scheduled either.  To my eyes, the market is exhausted after the wild moves at the beginning of the week.  I expect that there is limited appetite for aggressive price action in any market today and absent either an Iranian attack on Israel or a true black swan event, my best guess is it will be a quiet session heading into the weekend. 

Good luck and good weekend

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*A tail in a bond auction simply describes how much higher the actual results were than the market’s anticipation of those results prior to the auction’s completion as priced in the when-issued market.  Typically, for 10-year bonds, that tail is close to zero, and even 30-year bonds average about 1bp.  A 3bp tail is considered quite wide and concerning as it indicates a lack of buying interest by investors of all stripes.