Tag Archives: #oil

Feeling the Blues

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Last night we saw two things of note
The first was exciting, not rote
The Artemis II
Launched higher and flew
Just like Jackie Gleason would quote

The other was Trump’s broad address
Regarding the Middle East mess
He said that the war
Was closing the door
So, Mullahs have no nuke access

For markets, though, this latter news
Was clearly at odds with their views
So, rallies we’ve seen
Have all been wiped clean
And bulls are now feeling the blues

I will start with the highlight of the evening, the successful Artemis II space launch, where NASA’s latest mission to send four astronauts to orbit the moon and come home began.  As a child of the Sixties, I well remember being at Camp Mah-Kee-Nac, in Lenox Mass, with the entire camp gathered around a small black and white TV to watch Neil Armstrong step on the moon.  A remarkable time and achievement that portends a great future.

The other story, though, was less optimistic, at least for markets in the short term.  The President’s address did not signal an end was near, at least not to the market’s collective ear.  Instead, Mr Trump made a series of statements and claims, many of which we have heard before, but here they were all gathered in one place.

  • *TRUMP: IRAN’S NAVY IS GONE, AIR FORCE IN RUINS
  • *TRUMP: MOST OF IRAN’S LEADERS ARE DEAD
  • *TRUMP: IRAN’S ABILITY TO LAUNCH MISSILES AND DRONES CURTAILED
  • *TRUMP: DON’T NEED OIL FROM MIDDLE EAST
  • *TRUMP: WILL NEVER LET IRAN HAVE NUCLEAR WEAPON
  • *TRUMP: CORE STRATEGIC OBJECTIVES IN IRAN NEARING COMPLETION
  • *TRUMP: THESE STRATEGIC OBJECTIVES NEARING COMPLETION
  • *TRUMP: MUST COMPLETE MISSION IN IRAN
  • *TRUMP: WE WILL FINISH THE JOB VERY FAST
  • *TRUMP: GETTING VERY CLOSE TO FINISHING JOB IN IRAN
  • *TRUMP: WE ARE ON TRACK TO COMPLETE ALL MILITARY OBJECTIVES
  • *TRUMP: WE WILL NOT LET MID EAST ALLIES GET HURT OR FAIL
  • *TRUMP: WILL HIT IRAN EXTREMELY HARD OVER NEXT 2-3 WEEKS
  • *TRUMP: WILL BRING IRAN BACK TO STONE AGE WHERE THEY BELONG
  • *TRUMP: NEW LEADERS IN IRAN LESS RADICAL, MORE REASONABLE
  • *TRUMP: IF THERE IS NO DEAL, WILL HIT IRAN’S ELECTRIC PLANTS
  • *TRUMP: WE HAVE NOT HIT THEIR OIL EVEN THOUGH EASIEST TARGET
  • *TRUMP: WILL HIT IRAN WITH MISSILES IF WE SEE THEM MAKE A MOVE
  • *TRUMP: WE HAVE ALL THE CARDS THEY HAVE NONE
  • *TRUMP: ON THE CUSP OF ENDING IRAN’S THREAT TO AMERICA

He also explained that the rising gasoline prices were a result of Iranian attacks on tankers but that the US was well supplied and would weather any storm in the short run with no problems.  However, this is not what markets were looking for, that is very clear.  So, the past two days of rainbows and unicorns are a distant memory this morning.  A look at the chart of the S&P 500 below shows the end of last week’s concerns grew into optimism right up until 9:00pm EDT last night when Mr Trump took to the podium.

Source: tradingeconomics.com

While futures are only lower by -1.0% at this hour (6:30), the response in both Asia and Europe was quite negative overall.  For instance, in Asia, Tokyo (-2.4%) led the way lower although weakness was virtually universal (China -1.0%, HK -0.7%, Australia -1.1%, Taiwan -1.8%) while the biggest loser was Korea (-4.5%) which has been in the process of unwinding what appears to have been a massive bubble there as per the below chart.

Source: google.com

European bourses are also lower across the board with the UK (-0.1%) the clear winner (least bad?), while the continental exchanges (Germany -1.85%, Spain -1.3%, Italy -1.2% and France -0.9%) are all faring poorly this morning.  It is very clear that the idea the war would be ending soon has been pushed back.  I have to say, that given the ongoing buildup in military assets in the Gulf region by the US, that always struck me as an odd belief.  I guess we will need to wait a few more days/weeks to see.

In the bond market, too, price action from the beginning of the week has reversed.  Treasury yields have rebounded 5bps this morning, although remain well below the recent peak of late last week, and you can see how Europe and Asia behaved in the Bloomberg screen shot below.

I expect that we will continue to unwind the price action from the early part of this week as the situation appears far closer to the market beliefs of last Friday than yesterday.

Turning to commodities, oil (+7.8%) has rebounded sharply as you can see in the below chart, actually trading now at its highest level since the initial spike move the evening the attacks began.

Source: tradingeconomics.com

Brent crude rose a similar amount and interestingly, the spread between Brent and WTI has collapsed to just $0.52, it’s narrowest level since May 2022.  That leads me to believe the market is pricing in a great deal more interest in US exports as oil supply will be curtailed for a while going forward.  In keeping with the unwinding theme, precious metals were sold off aggressively with gold (-3.4%) and silver (-5.5%) retracing much of their recent gains.  Both are still well above the spike lows seen two weeks ago, but I imagine that there is further to decline based on the current vibe.

Finally, the dollar has rebounded sharply against all comers this morning with the DXY (+0.6%) back above the 100 level as the euro (-0.7%) probes 1.15 again and the yen (-0.5%) trades back toward 160.00.  Nothing in the G10 has been spared, although CAD (-0.4%) and NOK (-0.4%) are the best performers as clearly oil’s rise is helping them both.  In the EMG bloc, it should be no surprise that ZAR (-1.1%) is the laggard given the move in gold and platinum (-3.4%).  But even CNY (-0.4%) has seen substantial selling while INR (-0.5%) and KRW (-0.2%) also continue to slide.  The CE4 are all weaker by -0.7% and CLP (-0.9%) is feeling the weight of copper’s decline.  The only outlier really, today, is Brazil (0.0%) which is unchanged as remember, they are a major oil producer and far away from the current problems.

On the data front, this morning brings Initial (exp 212K) and Continuing (1840K) Claims as well as the Trade Balance (-$59.2B), none of which seem likely to matter to markets.  Yesterday saw generally stronger than expected data with ISM Manufacturing ticking up to 52.7 while Retail Sales surprised a tick higher as well at 0.6%, 0.5% ex autos.  ADP Employment was also modestly better than expected.  As such, it continues to be difficult to call for a significantly weaker US economy, at least based on the data we continue to see.  However, the Atlanta Fed’s GDPNow reading was revised to 1.9% for Q1 yesterday, down a tick from the previous estimate.  Still, that is not a collapse.

Pulling it all together, the war in Iran is going to continue for at least 2-3 more weeks and there is no clarity on whether the US is going to attempt to take Kharg Island.  It still seems to be part of the discussion, but as I wrote yesterday, strategic ambiguity is a key part of President Trump’s method.  In the meantime, my take is we are much more likely to behave like the end of last week going forward, than the beginning of this week.  That means risk will be reduced and the dollar will benefit.

Good luck

Adf

Simply No Need

Posted on by 
Said Powell, there’s simply no need
To hike rates, we all have agreed
But likewise, no case
To cut, lest we face
An outcome where, jobs, we impede

Said Trump ‘bout the Strait of Hormuz
Be careful and do not confuse
Our aims in this war
As more than before
Which has been, Iran, to defuse

Just like every other day, this morning shows we really have no idea what to believe regarding the war anymore.  The headline in the WSJ is that President Trump may consider the job finished even if the Strait of Hormuz remains closed.  That has certainly gotten the Europeans up in arms as they are the ones relying on its reopening to source much of their oil and LNG.  But consider it from the US perspective, where we source only about 2.5% of our oil related products from nations on the wrong side of the Strait, which means virtually none of our overall import roster (source Grok). 

Now, the one thing I will say about President Trump is that strategic ambiguity is one of his strengths, as he continues to make so many seemingly contradictory statements, nobody knows what he is working to achieve.  Based on the framework that Secretary Rubio laid out again yesterday:

  1. Destruction of Iran’s Navy
  2. Destruction of Iran’s Air Force
  3. Severe diminishment of their missile launching capability
  4. Destruction of their armaments factories

It is not hard to believe the US and Israel are close to their goals.  However, none of this discusses Iran’s nuclear weapons program, which has clearly been a goal, nor the 440Kg of 60% enriched U308 that they retain.  

Again, I wouldn’t dare claim to have any idea when this will end, but the political calculus indicates it is unlikely to go on for very much longer.  However, it is not just the political calculus that implies that, but also market pricing of certain things.  For instance, one of the things that initially surprised me was that Brent crude (+0.6% today) did not initially rise more rapidly than WTI (+2.0% today).  After all, zero WTI transits the Strait and it is not a pricing benchmark for anything that happens over there, while Brent is the basis for all Middle Eastern oil.  As the Strait of Hormuz has been effectively closed since March 4th, a look at the below chart shows that Brent did not separate itself from WTI until 2 weeks later.  But last night, that spread collapsed back to its current $3/bbl, similar to the levels that preceded the onset of the war.

Source: tradingeconomics.com

One interpretation of that price action is that there is a growing belief that the Strait will reopen for transit soon.  Of course, it could simply be that neither Brent nor WTI are representative of the oil grades that are impacted, and thus the large premium no longer makes sense, but given the totality of the news, I’m inclined to lean toward the former idea.  Of course, both benchmarks are currently solidly above $100/bbl so still causing great pain.

However, on this topic, as most of us live and think in a nominal world, we consider $100/bbl as extremely expensive.  But if we take a moment to consider the real (inflation adjusted) price of oil, we can see in the chart below that energy remains pretty cheap, and well below levels seen ahead of the GFC or even in the wake of the Russian invasion of Ukraine.

Source: data FRED, calculations and chart, @fx_poet

My point is that over time, energy has become less of a cost in the economy, and even with the current situation, my take is the US, and frankly global, economy is quite resilient and will get through this.  I’m not suggesting there won’t be some pain, just that this is not going to lead to economic Armageddon.

The other interesting story from yesterday came from Chairman Powell, who in a speech at Harvard explained there was a great deal of uncertainty currently, while admitting that the tariffs were likely a one-off modest inflation pressure.  He indicated rate cuts were likely over, although hikes were possible, and then the man who printed $5 trillion to pay for every one of President Biden’s Covid and ESG bills, explained that debt is growing too fast and could be a problem going forward.   And you wonder why there are those who are skeptical of his concerns over politicization of the Fed.

Ok, let’s turn to markets.  Yesterday’s morning positivity faded all day and both the NASDAQ and S&P 500 closed lower on the session.  That mostly followed in Asia with Tokyo (-1.6%), China (-0.9%), Korea (-4.3%) and Taiwan (-2.5%) all under real pressure, although HK (+0.2%) and Australia (+0.25%) managed some gains.  Other regional exchanges were mixed as investors around the world are trying to figure out the next steps.  At this hour (7:00), US futures are pointing solidly higher, +0.8% or so.  Turnaround Tuesday?  Certainly, that is the case in Europe where despite widely expected higher Flash inflation data for March, green is today’s color with gains ranging from 0.2% (CAC) to 0.5% (FTSE 100) with others somewhere in between.

Bond investors have seemingly turned their views from inflation concerns to growth concerns, at least based on the fact that yields around the world are lower this morning than yesterday.  In fact, since Friday morning, 10-year Treasury yields have fallen -14bps, including -2bps this morning.  in Europe, yields did slide somewhat yesterday, about half that in the US, and this morning they are little changed throughout the continent.  But we did see JGB yields slip -2bps overnight as well.

On the growth side, the Atlanta Fed’s GDPNow is running at 2.0% for Q1, well below its first readings from before the Iran activity, although still in decent shape.  The next update comes tomorrow, so will be interesting to see.  And, of course, the payroll report on Friday will be critical for that reading.  It is, though, still well above the Blue Chip Consensus readings.

We’ve discussed oil, but a quick peek at precious metals shows they are regaining their luster, with gold (+0.8%) and silver (+3.6%) both nicely higher this morning.  As this price action continues, with the current price more than 10% above the spike low from March 23rd, I believe whatever was driving things during the first part of the war, may now have passed.

Finally, the dollar is little changed this morning, but sitting on its recent highs with the DXY at 100.53 as I type.  Here’s the thing about the current level.  As you can see from the long-term chart below, while during the first 4 months of 2025, the dollar did decline sharply, about 10%, the longer history shows that the current level has acted as support for a very long time.  As well, if you take the really long view, we are within spitting distance of the DXY’s average since the 1970’s.

Source: tradingeconomics.com

All I’m saying is the dollar is neither strong nor weak right now, it just is.  It is, though, worth looking at the yen (0.0%) which pushed back to just below 160 during yesterday’s session and got more jawboning from Mimura-san, the Vice Finance Minister for International Affairs (aka Mr Yen) who explained they are ready to take “decisive action” against speculative moves.  But otherwise, this morning’s session is unremarkable with only KRW (-0.6%) continuing to suffer from the energy issues there.

On the data front, we get Case Shiller Home Prices (exp +1.3%) and then Chicago PMI (55.0) and perhaps most importantly, the JOLTs Job Openings (6.92M) report at 10:00.  There are two more Fed speakers, Goolsbee and Barr, but with Powell just having confirmed no moves are coming soon, what can they possibly add to the story?

The war and its headlines remain the key drivers and I don’t see anything changing that dynamic for now.  I wonder if markets are prepared for an announcement that it is ending and Iran has come to terms.  I’m not suggesting that is the likely outcome, just that it would be the biggest surprise, I believe.  In the meantime, there are precious few reasons to sell the dollar outright, that’s for sure.

Good luck

Adf

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

No Longer Benign

Posted on by 
The war in the Gulf shows no sign
Of ending by any deadline
Some victims now bleeding
Are bonds, with yields speeding
To levels no longer benign

Already we’ve seen, efforts, great
By nations, impacts, to abate
So, price caps on gas
Worldwide came to pass
But will central banks raise their rate(s)?

Nothing of note has changed in the Iran war as the US continues to refrain from further attacks while negotiations to end the conflict ostensibly continue.  Both sides have made their demands, but from what I have read about them, neither side can accept the others wishes.  If pressed, my take is the ongoing US pause is simply allowing the Marines and 82ndAirborne to get into place for their attempt to take over and control Kharg Island and the other small islands in the Strait.  Frankly, I would not bet against their tactical success in that endeavor.  However, it is not clear how Iran will respond in that situation.  After all, if the US does control Kharg Island, that means Iran no longer controls their own revenue stream, and that is truly existential for the regime.  However, I could be completely wrong about this, which is why I am not a military strategist.

But I think it is worthwhile taking a peek at the bond market this morning.  For the first few weeks of the war, while yields edged higher, there was no indication that investors were getting terribly nervous about the longer-term impacts of the war.  However, that no longer seems to be the case.  I have several charts below showing US, UK and German 10-year yields over the past six months, and then a longer-term perspective showing those same yields over the past 20 years. 

Six months of yields

Source: tradingeconomics.com

Long-term charts (source marketwatch.com)

UK Gilts

German bunds

US Treasuries

As you can see from the first chart, yields across all three of these nations have risen sharply now in the past month.  In fact, the numbers are US (+52bps), UK (+83bps) and Germany (+47bps).  It is very clear that fixed income investors are getting worried, and reasonably so given the idea that inflation readings, at least in the short-term, are going to be much higher.  As to the longer-term view, though there is certainly a similarity amongst the movement of yields of all three nations, UK yields are currently at their highest level since the GFC, July 2008; German yields are at their highest level since the Eurozone bond crisis in 2011, but Treasury yields were higher at the beginning of this year, and 25bps higher in late 2023.  

This is not to dismiss the potential problems that may arise if government bond yields continue to rise, especially given the already extraordinarily high debt/GDP ratios that exist throughout the G10.  However, I am not prepared to concede that the US is going to collapse because 10-year yields are back at 4.50%.

What we have seen, though, almost everywhere in the world, is government attempts to cap prices on energy, whether gasoline, diesel or even electricity, to help moderate some of the obvious pain that higher energy prices are inflicting on their populations.  We have also heard a great deal from central bankers about needing to tighten monetary policy to combat the rising inflation, despite the fact that inflation is coming from a supply shock in energy rather than either excess demand or money supply.  I fear that will not work out that well if they do so, but as is often the case, central banks (and governments in general) feel they must “do something” when an exogenous event, out of their control, occurs.  Ultimately, history has shown that is when policy mistakes are made.  Here’s hoping the hostilities end quickly enough so nations don’t make those mistakes.

Away from bonds, with yields higher this morning across the board (US +5bps, Germany +5bps, UK +11bps, Japan +11bps) and the rest of the European sovereigns somewhere in between, if we turn to oil (+2.7%), WTI is pushing back up to $100/bbl this morning, which I take as an indication market participants are getting nervous things will last longer than they thought a few days ago.  You can see the chart below that oil has rallied steadily all week since the Tweet that things were going to be ending soon back on Monday.

Source: tradingeconomics.com

The more interesting price action to me, this morning, is that gold (+0.7%) is also higher this morning, which may be the first session since the first day of the attacks, where both have risen in sync.  There is a story around that Turkey sold 58 tons of gold right when things began, but even at $5000/oz, that is only about $9 billion of gold compared to average daily trading volumes of between $200 billon and $300 billion (according to Grok).  My point is that would not be enough to move markets like we have seen in gold, but it could well be a harbinger of what other nations did as well.  Again, there is no sense that the long history of gold’s role is changing here.

As to equity markets, yesterday’s weakness in the US has been followed across Europe (DAX -1.6%, CAC -1.1%, FTSE 100 -0.75%, IBEX -1.4%) but the picture in Asia was more nuanced.  While the Nikkei (-0.4%) slipped a bit, both China (+0.6%) and HK (+0.4%) managed to rally as did Malaysia, Singapore and Thailand albeit not very much.  On the downside, though, India (-2.2%) made up for the fact it was closed on Thursday, while Korea (-0.4%) and Taiwan (-0.7%) both slipped and the rest of the region edged lower by lesser amounts.  As to US futures, at this hour (7:30) they are lower by about -0.35%.

Finally, the dollar continues to be a major beneficiary of the war as the DXY is back above 100 this morning with several EMG currencies coming under greater pressure today.  We see CLP (-1.1%) feeling the pain of copper’s inability to rally at all, as well as INR (-0.6%) and MXN (-0.5%) suffering this morning.  NOK (+0.2%) continues to benefit from oil’s recent strength, and CAD (+0.1%) is holding its own on the same basis, but both the euro (-0.15%) and pound (-0.2%) are struggling as the energy problem there is a major detriment to their economies.

The only US data this morning is Michigan Sentiment (exp 54.0) while yesterday’s Jobs data continues to show that layoffs are not increasing in any meaningful way, which I believe is a result of the dramatic change in immigration policy as well as deportations.  Like so much of what is ongoing these days, old models regarding the labor market are no longer representative of the new reality on the ground.  I suspect this is true across large segments of the economy which just means that relying on econometric models will be a fraught exercise going forward.  Here is a reason to pity the central bank community as they are truly flying blind now.

And that’s all there is today.  To me, we are biding our time until the Marines land on Kharg Island and then we will see a new phase of the war.  It is a high risk, high reward venture as success would certainly reopen the Strait of Hormuz and oil prices would plummet quickly.  Failure, however, would leave Iran with greater control over that key chokepoint and potentially cause greater difficulties elsewhere in the world, not least because it would call into question the US ability to project power.  War is not only hell, but also incredibly risky.

Good luck and good weekend

Adf

The Beating War Drum

Posted on by 
Each day it gets tougher and tougher
To figure out things that can buffer
Portfolios from
The beating war drum
And so, we are all set to suffer

Remember, too, I’m just a poet
And I do my best not to show it
But my Spidey sense
Says come some days hence
The end will be nigh and we’ll know it

Basically, as Herbert Stein explained back in 1986, “If it can’t go on forever, it will stop.”  The pressures on the global economy are increasing dramatically as not only markets in oil and natural gas, but also fertilizer and helium (critical for semiconductor manufacturing) markets are being significantly impacted.  And frankly, the world as we know it now cannot exist without a healthy supply, and supply chain, in all those things.  It is this pressure, which is building up on both sides of this war, that will ultimately push both sides to some resolution.  Iran cannot live without the oil and its revenues, but it can certainly destroy a lot of other nations in its death throes.  That is not the outcome we want to see.

And frankly, it appears to me that markets are pricing an off-ramp, because otherwise, I would expect the inelasticity of demand for oil would have driven oil prices much higher than we have seen.  But, while that may be the medium term (next several weeks) view, on a day-to-day basis, one never knows what’s going to happen.  Yesterday, there was a sense that things were going to deescalate.  But overnight, that sentiment changed and now risk is under pressure as oil heads higher once again.

Here’s the problem, if you read all the headlines about the situation in the Persian Gulf, you are no more well-informed than if you ignore them all.  We continue to be bathed in opinions and propaganda from both sides, and it is certainly not within my ability to determine what is truth, assuming any of it is.  Which takes us back to markets as our best indicator, because as it has been said, opinions are like a$$holes, everybody has one and they all stink.

So, let’s go to the tape.  Yesterday saw a positive outcome, but as you look at the chart of the S&P 500 below, you can count that from the beginning of March, when this all began, there have been 19 trading sessions including today.  Nine of those sessions saw green candles (higher) and 10 saw red candles (lower).  This does not strike me as a market where investors have capitulated in any serious manner.  As I mentioned earlier in the week, despite all the angst, right now the S&P 500 is lower by just 6.5% from its all-time high from late January.  That’s not even a correction by most definitions, let alone a war footing.

Source: tradingeconomics.com

As it happens, today is a down day, with US futures sitting lower by about -0.5% across the board as of 7:00.  And that is consistent with what we observed overnight with both major Asian (Tokyo -0.3%, HK -1.9%, China -1.3%) and minor Asian (Korea -3.2%, Taiwan -0.3%, Indonesia -1.9%, Australia -0.2%) markets all lower in the session.  Clearly, rising oil prices continue to weigh heavily on every nation in Asia as they are the primary recipient of Middle East oil and, as oil prices rise once again, it hurts all those nations.  I assure you that as much as we dislike rising gasoline prices, it is nothing compared to what those nations are feeling.

Europe, too, is lower across the board this morning led by Germany (-1.4%) which is not only suffering from general risk-off sentiment but has the added disincentive of declining consumer confidence as measured by the GfK indicator falling to -28.0, its lowest level in two years.  a quick peak at the chart of this indicator shows that while things have rebounded since the darkest days of the 2022 inflation problems, the downward trend is strengthening again.

Source: tradingeconomics.com

But the rest of European bourses are also under pressure with the UK (-1.1%), France (-0.9%), Spain (-0.9%) and Italy (-1.1%) all falling sharply.

As has been the case on days like this, bond prices are under pressure as well, with yields correspondingly rising.  So, after a 6bps decline in the 10-year Treasury yield yesterday this morning it has backed up by 4bps.  As to European sovereign yields, the picture is quite ugly as you can see in the below Bloomberg screenshot.

‘Nuff said.

Which takes us to the driving force in all markets these days, oil (+2.6%) which is rebounding with WTI back above $90/bbl and Brent above $100/bbl.  The one consistent thing I have seen on X this morning is that the propagandists on both sides seem to be preparing for a final outcome soon.  Whether it is the idea that the US is going to run away with its tail between its legs, or the Iranians are going to collapse, the timeline definitely seems to be shortening.  Hence my view that this will not be ongoing very much longer.

Turning to precious metals, as has been the case for the entire war, with oil rising, both gold (-2.0%) and silver (-4.2%) are under pressure.  I must admit the consistency with which this price action holds; oil up, gold down, is somewhat baffling to me.  My initial thesis was that we were seeing central banks liquidate gold to help pay bills, but why would they only do that on days when oil rose?  Something else is going on here and I have not yet been able to figure it out.  I do not believe that gold, after 5000 years as the safest of moneys, has suddenly lost that mojo.  I also know that the premium for physical metal in Shanghai remains substantial.  With this in mind, it is not hard to conclude that the futures market, where the price action is most visible, has seen a great deal of manipulation by someone trying to keep prices low, although to what end I cannot tell.  We need to watch closely.

Finally, the dollar, as has been its wont, is higher this morning alongside oil, albeit not dramatically so.  There are still numerous analysts who are calling for the dollar to decline sharply going forward, once the war premium is gone, but then they have been expecting that for a year and have not been able to explain its stability since early last year.  

Like the CME’s futures page, the ECB publishes its own market-implied probabilities for the deposit rate there as per the below from ecb-watch.eu

Now, I grant that if I look at the table at the bottom of the screenshot and compare it to the CME futures probabilities below, the market is pricing in more rate hikes in Europe than the US.

But I can never get over the actual interest rate involved as an important part of the interest rate parity decision process and mechanics.  Sure, if the ECB hikes 50bps over the next three months and the Fed only hikes 25bps, that is a marginal advantage to the euro but owning euros after that is still a negative carry trade.  Ultimately, the question is exactly how aggressively will central banks around the world address the initial bout of higher inflation that is coming alongside the higher oil prices.  In truth, I think the US has far more leeway to raise rates as the underlying economy is in far better shape than that of the Eurozone, but as we heard yesterday, Madame Lagarde will not be “paralyzed” by events, i.e. she will hike rates if someone whispers in her ear to do so.  I sincerely hope none of the central banks go down that road.

Elsewhere in the FX world, it is worth noting that USDJPY is pushing back toward the 160 level, although is unchanged this morning.  As to today’s trading, NOK (+0.5%) is the big winner on oil’s strength, with BRL (+0.2%) the only other currency showing strength vs. the greenback.  Otherwise, modest weakness (GBP -0.1%, AUD -0.2%, CNY -0.25, MXN -0.2%, ZAR -0.4%) is the order of the day.

On the data front, yesterday had some surprising outcomes with the Current Account ($-190.7B) falling to its lowest deficit in five years.  meanwhile, oil inventories showed a much large build of crude and even distillates, while only gasoline saw an inventory draw.  Perhaps that helped yesterday’s oil price decline.  This morning, Initial (exp 210K) and Continuing (1850K) Claims are on the docket and that’s really it.  There was an interesting article in the WSJ this morning describing how many cities are actually shrinking because of the change in immigration patterns we have seen since the border was closed.  The importance of this is that old expectations of how much job growth defines economic strength need to adjust to the new population realities and frankly, nobody knows the adjustments yet.  But the old idea that we need to see 200K new jobs each month seems to way overstate how to stabilize the Unemployment Rate.

And that’s really it.  Today is a risk-off session and likely to remain so unless we get a new headline about a potential end to the conflict.  But based on the recent pattern, tomorrow seems just as likely to be a risk-on session, although with the weekend coming, and the propensity for military action to start on the weekend, perhaps not.  As to the dollar, it ain’t dead yet!

Good luck

Adf

The End of the Scare?

Posted on by 
Though words from both sides are confusing
The markets are clearly enthusing
The war will soon end
Which may well portend
The bears are all in for a bruising

With stocks round the world on a tear
And yields falling down everywhere
Plus, oil is lower
And gold’s a fast grower
Have we seen the end of the scare?

Will there be peace talks soon?  President Trump claims things are happening in that direction.  Comments from some in Iran say that is not the case.  Clearly, both sides are incented to make those claims regardless of the reality.  At the same time, US Marines and the 82nd Airborne division are on their way to the Gulf.  It is easy to conclude that this is the prelude to a US intensification and effort at physical control of the Strait of Hormuz.  Word is that the Saudis and Emiratis are also pleading with President Trump to finish the job and remove the Iranian theocracy to enable a more peaceful Middle East in the long run.  But as always, sitting here in the US, and frankly if you are sitting in Europe or China or Japan or Australia, or pretty much anywhere but the Middle East or the White House, we don’t really know the facts on the ground, and we certainly don’t know the next steps.  We are just guessing.

However, the best clues we have come from the markets, which admittedly respond to the same news flows we do, although I’m certain that large institutions have better insight than reading Bloomberg or the WSJ or listening to al-Jazeera.   But, if we look at the markets this morning, the future is a lot brighter than it was on Monday.

While equity markets in the US were lower yesterday, it was certainly not a rout.  Rather, after a weak opening, they rallied back to positive territory as this new dialog appeared, although closed off the highs.  This morning, though, as you can see from the screen shot from tradingeconomics.com of equity futures markets, green remains the dominant color.  In this table, only Toronto (TSX), Mexico (IPC) and Brazil (IBOVESPA) are not open right now, but otherwise, risk is back in vogue.

As we have seen over the past weeks, economic data has lost its importance, as have the words of central bankers around the world with the only words that matter coming from President Trump or whoever may be a spokesman for Iran these days.  It is entirely possible that the global equity markets have gotten this situation completely wrong, and that over the next several weeks, the situation in the Middle East is going to deteriorate, but I am going to lean to the side that has trillions of dollars at risk and go with them for now.  After all, given all the talk about rampant insider trading, somebody’s buying a lot of equities!

Meanwhile, bond yields around the world are sliding as well.  the Bloomberg screen shot below shows that while yields around the world have risen over the past month, today investors are starting to accept that, perhaps, oil prices may not be $100/bbl for a very long time.

We did see February UK inflation data this morning, which printed unchanged and as expected at 3.0%.  We also heard from Madame Lagarde, who explained that the ECB would act decisively and swiftly, if necessary, given their absolute commitment to a 2.0% inflation run rate.  “We will not act before we have sufficient information on the size and persistence of the shock and its propagation. But we will not be paralyzed by hesitation: our commitment to delivering 2% inflation over the medium term is unconditional.”  

The interesting thing about this, to me, is how little the FX market seemed to care about her comments.  A look at the chart below of intraday price action with 5-minute candles, shows that her comments were enough to push the euro higher by…20 pips!  And that lasted for about 90 minutes.

Source: tradingeconomics.com

As I have been saying, central bank speakers have lost their ability to move markets, something I personally believe is quite healthy.  Alas, I am sure that when the hostilities end, or at least become more background noise (see e.g., Russia/Ukraine), they will flood the airwaves with their views in order to reclaim part of the narrative.

As to the FX market overall, movement has been pretty limited with both the euro and pound unchanged on the day, although AUD (-0.4%) is under a bit of pressure, ostensibly on slightly softer than expected inflation figures there.  Elsewhere in the G10, the two laggards are CAD (-0.2%) and NOK (-0.4%) as the oil price decline weighs there.  In the EMG bloc, ZAR (+0.5%) is benefitting from gold’s rebound with commodity discussions below, and otherwise, FX remains the least interesting market around.

Finally, oil (-6.0%) has fallen back below $90/bbl in the US and $100/bbl in London although the price for crude in the gulf on the correct side of the Hormuz Strait is as high as $150/bbl I’ve seen.  Asia is still desperate for more barrels of oil and willing to pay up for them.  It certainly seems likely that if the Strait remains effectively closed for much longer, the economic damage will grow apace, but right now, oil traders, at least futures traders, are of the belief the end of this stoppage is nigh.

Source: tradingeconomics.com

At this point, oil has retraced a bit over 50% of its initial spike.  Market technicians will be looking at the $84.95 level as the next key Fibonacci retracement level, with a break below there likely to convince some that lower prices are the future.

As to the precious metals, gold (+2.1%), silver (+2.7%) and platinum (+3.9%) are all rebounding sharply on the news as is copper (+1.7%).  This simply completes the positive viewpoint that has swept over markets this morning.

On the data front, German Ifo Expectations fell to 86.0, as expected, but it’s not clear that had much impact on anything.  From the US this morning we see only the Current Account (exp -$211B) a number that is never discussed, and then EIA oil inventories with a small crude build expected, although a more sizable draw of gasoline and products.

Governor Miran speaks and will certainly explain why rate cuts are appropriate, but nobody is listening to him right now.  And that’s all we have.  As has been the case for the past three plus weeks, Iran headlines will continue to drive market action with oil the first mover.  Close to the vest remains the best call in my view.

Good luck

Adf

Banish Conceit

Posted on by 
The back story of every war
Is nobody knows what’s in store
Especially now
As Trump’s sacred cow
Is changing his message once more

So, yesterday morning, his Tweet
Led many to think a retreat
Was on the horizon
But Trump is surprisin’
With him, one must banish conceit

This morning the story is talks
Twixt both sides are unorthodox
As leaders o’er there
Are fighting since there’s
Nobody in charge, doves nor hawks

Obviously, the Iran situation remains the key driver of all market activity at this point and the stories about negotiations are the lead.  From what I can gather, and there is no definitive source I trust completely, a number of nations including Russia, Egypt, Turkey and Saudi Arabia have been trying to get conversations going.  Of course, the biggest problem is determining who speaks for Iran as the bulk of their previous leadership has been decapitated.  My take is there are different factions, some really hard line apocalyptics who would rather the entire world burn down, especially the US and Israel, than end the hostilities, and there are others who are more pragmatic and want the fighting to end, while perhaps being willing to give up some previous goals, like nuclear weapons ownership.

Everything that I have read about the Iranian leadership structure is that there are many military group leaders who have preset plans if there is no central leadership, and I assume that is why headlines from this morning about ongoing Iranian missile attacks continue.  While I am no military strategist, just a poet, from what I have read, if the USMC does, in fact, take over Kharg Island, it is defensible militarily and would essentially end Iranian funding completely.  Trump’s comments about the US and Iran running the facility together would imply the US can determine how much oil is shipped while Iran earns the proceeds.  In that scenario, it would be possible for the US to starve Iran of the money they need to continue their reign of terror and support for proxy groups.  That could well be a very satisfactory outcome for everybody but the mullahs who continue to seek the destruction of Israel and the US.  It would also reopen the Strait of Hormuz and we would see dramatic reversals in the price of oil and inflation fears.  In fact, I bet rate cuts by central banks would be back on the table immediately!

Ok, enough prognostication from someone in the peanut gallery.  Let’s see how markets have responded some 24 hours after Trump’s tweet yesterday morning.  volatility remains the primary feature of every financial market led by oil futures.  As you can see in the chart below of the last week of WTI price action, there has been a nearly $18 trading range, about 20% of movement in that timeline.

Source: tradingeconomics.com

With the black sticky stuff higher by 2.2% this morning, I would argue that there will be no sense of calm in the markets until oil heads back toward its pre-war levels of $60/bbl or so.  If you recall, we discussed the support at $55/bbl in December and questioned what was driving the rise from there.  The daily chart for the past six months below offers a better sense of what I believe the market will find reassuring.  

Source: tradingeconomics.com

One other thing to remember is that the futures market remains in steep backwardation.  A look at the table below shows that prices for future delivery remain upwards of $20/bbl less than prompt prices.  All the evidence indicates that this war will be over soon.

Source: barchart.com

Sticking with commodities, precious metals have found some support with gold (+0.5%) and silver (+1.1%) both hanging on this morning.  

Turning to equity markets, yesterday’s solid rallies in the US, with all three major indices rising more than 1% was followed by broad strength in Asia (Tokyo +1.4%, HK +2.8%, China +1.3%) with more gainers (Korea, India Australia, Indonesia) than laggards (Taiwan, Malaysia, New Zealand) elsewhere in the region.  Two newsworthy items here were that Australia and the EU have signed a free trade agreement reducing tariffs between the two substantially, while RBNZ governor Breman talked about hiking interest rates if inflation picks up because of oil’s rise.  (As an aside, that would be a catastrophic error for the nation if she did it.)

Meanwhile, in Europe, it is a far less exciting session as they were able to respond to the Trump tweet during yesterday’s trading.  So, this morning, the DAX (-0.35%) is the laggard while the rest of the continent is +/-0.2% or less on the day.  This morning’s Flash PMI releases were broadly negative in tone as while Manufacturing readings were a touch better than expected Services in Germany, France, the UK and the EU overall, all showed substantial weakness.  I guess the prospect of another energy crisis in Europe is taking its toll.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, after a reversal yesterday, where Treasury yields slipped nearly -5bps, this morning they have backed up 3bps.  Bond investors remain caught between the idea that inflation is going to be a problem because of higher energy prices and the idea that the economy is going to slip into a recession because of higher energy prices.  Remember, too, there is an underlying dynamic where many analysts believe the US is going to hit a financing wall and yields are going to explode much higher.  But that story has been with us for quite a while, so I don’t put great stock in it for now.  

European sovereign yields also slipped yesterday and this morning they are little changed to slightly higher, with both France and Italy (+2bps) the worst performers and all other continental bonds, along with Gilts, essentially unchanged.  As to JGBs, last night yields slipped -5bps on both the prospects of the war ending and lower oil prices as well as a better-than-expected inflation reading where headline fell to 1.3% and core to 1.6%, down from 2% in January and a tick below expectations.

A funny thing about Japanese inflation is that if I look at a chart over the past 5 years, it is not hard to make the case that the BOJ has things moving in the right direction, and of course a reading of 1.6% is below their target.  In fact, if you look at the chart below comparing Japanese (blue bars) and US (gray space) core inflation, I expect Chairman Powell would give anything to have the Japanese chart!

Source: tradingeconomics.com

Finally, the dollar, while firmer this morning (DXY +0.3%) has traded right back into its long-term trading range of 96/100.  Again, I cannot look at the chart below and conclude that the dollar is going anywhere anytime soon.  If skyrocketing oil prices and a war in Iran cannot get a real breakout, I think we will have to go back to interest rate differentials as the driver!

Source: tradingeconomics.com

As to specific currencies, ZAR (-1.35%) is the day’s laggard as the recent sharp decline in both gold and platinum weigh on the nation’s accounts, as well as their status as a major energy importer.  We’ve also seen weakness in PLN (-0.5%), HUF (-0.6%), INR (-0.5%) and, interestingly, AUD (-0.5%) despite the latter’s deal with the EU.  I think ongoing high energy prices remain the issue here.  For the majors, -0.2% is the order of the day for the euro, pound, yen and Swiss franc.

On the data front, there’s not a ton of data this week.

TodayNonfarm Productivity Q42.0%
 Unit Labor Costs Q43.5%
 Flash Manufacturing PMI51.3
 Flash Services PMI51.5
ThursdayInitial Claims210K
 Continuing Claims1860K
FridayMichigan Sentiment53.8
 Michigan Inflation Expected3.2%

Source: tradingeconomics.com

In addition to the modest data releases, we hear from 5 Fed speakers over 7 venues this week, but it is very hard for me to believe that anything they say will matter while the war hogs the headlines.

Prognostication is silly here as headlines drive everything.  My sense is playing it close to the vest remains the best strategy.  But remember this, despite all the pearl clutching and teeth gnashing, the S&P 500 is just 6% from its high print back in January.  This has not even achieved what is typically considered a correction.  The lesson here is that history shows we can decline much further, but also that there is a lot of resilience in the market right now, hence, close to the vest.

Good luck

Adf

Doesn’t Make Sense

Posted on by 
There’s something that doesn’t make sense
As stock market rallies commence
While word from the Strait
Just doesn’t look great
And politics worldwide is tense

Can every investor ignore
The risk of a much longer war?
Or will, sometime soon
They sing a new tune
And sell stocks whose risks they abhor?

One must be impressed with the way markets, in general, have handled the disruption caused by the ongoing conflict in Iran and the Persian Gulf.  The insouciance with which it appears most investors are treating the situation is remarkable.  There seem to be endless ways in which this can result in much greater damage to the global economy, mostly related to the impact on energy and food production going forward.  You’ve all heard the numbers, I’m sure, about the 20% of daily oil and LNG that traversed the Strait of Hormuz prior to the war.  Less well known was the amount of sulfur (~44% according to Grok) and nitrogen fertilizer (~30%-35% according to Grok) that regularly transited the Strait and has now been stopped.

The latter two matter greatly for global food production, but also for mining as sulfuric acid is a key part of almost all metals mining operations.  Too, one-third of global helium supplies went through the Strait, and that is critical in semiconductor manufacturing.

The point is, if the conflict continues for too much longer, it is quite possible, if not probable, that parts of the global economy could be impaired for a much longer term with real negative consequences for economic activity.  And while this may be a tail risk, the fact that the potential impact could be so large leads me to believe the market is underpricing potential damage from the war, at least economically.  Last night, Alyosha posted a very interesting piece regarding potential consequences for the Gulf region as a whole as well as oil markets.  His conclusion was that if things don’t end soon, there may be irreversible damage to the Gulf oil industry as well as the Gulf nations themselves as their cashflows are being completely starved for now.

I know that doomsaying is a losing proposition with equity markets over the long run, as the century long trend shows human innovation continues to advance economic prospects and outcomes.  But in the shorter term, interruptions of that trend are common and can be quite painful for those investing when they occur.  Recall how you felt when Covid shutdowns resulted in a 30% decline in two months in early 2020, as per the below chart.  How about the similar drawdown, along with the selloff in bonds, during 2022’s inflation led declines?

Source: finance.yahoo.com

All I’m saying is that markets can ignore things for a long time before suddenly repricing an outcome and I have a feeling that is what we are witnessing right now.  So, as we head into today’s FOMC meeting, which seems unlikely to have any impact whatsoever, I would play things close to the vest and am doing just that myself.

Ok, let’s tour the euphoria in markets, which remains puzzling to me.  You have to search far and wide to find an equity index that fell in the past twenty-four hours and here is a Bloomberg snapshot of major indices at 7:10 this morning,

Literally, every market in Asia rallied, some excessively so, Korea (+5.0%) and I could only find two markets in Europe that are down this morning, Denmark and South Africa, both of which have slipped about -0.3%.  Otherwise, it’s all green as prospects are, apparently, great. US futures are also higher as I type, up about +0.6% or so.  Certainly, there is little concern about potential long-term consequences of this war.

In the bond market, yields everywhere are slipping again with Treasuries (-2bps) falling back into that longer term range, while European sovereign yields are lower between -2bps and -3bps and JGB yields fell -5bps.  As per the below chart from tradingeconomics.com, we spent 5 days above the top of the trading range.  

Perhaps the market is starting to price in a recession and much weaker growth, although with oil prices firmly above $95/bbl, inflation is coming, at least in the near future.  Of course, the Fed response is going to be critical here, and while they will almost certainly make no policy changes today, all eyes will be on their forecasts via the dot plot and SEP.  We shall find out at 2:00pm.

Speaking of oil (-1.7%), perhaps its new home is $95/bbl, not $100/bbl like I mentioned yesterday, but for now, there doesn’t seem to be urgency in either direction.  The futures market remains in steep backwardation although in the US, there are ample supplies.  So, while gasoline prices at the pump are up substantially, there is no rationing here in the US, nor I suspect, will there be given we are pretty self-sufficient on that front.  But demand destruction can be real, as even though the short-term elasticity of demand for oil is limited, over time, substitutes will be found.  In fact, this is the biggest risk for the Gulf nations, the idea that substitutes can be found and their key resource loses value.  I don’t believe that is going to happen on any visible timeline, but stranger things have happened.  

In the metals markets, gold (-0.9%) is slipping this morning, but remains right near that $5000/oz level and silver is unchanged, just below $80/oz.  The price action in both precious metals and oil is remarkably similar, if offset by one month as metals spiked and dropped first, then found a new home in the middle of those extremes, and oil has done the same thing.  You can see the similarities in the two following charts:

Source: tradingeconomics.com

Source: tradingeconomics.com

Finally, whatever people are doing in financial markets, FX is not part of today’s equation.  The dollar is virtually unchanged vs. the euro, pound, yen, CAD or CHF.  In the EMG bloc, +/- 0.2% pretty much defines the range of movement.  There’s really no story here right now.

On the data front, we see PPI (exp 0.3%, 2.9% Y/Y headline and 0.3%, 3.7% Y/Y core) as well as Factory Orders (0.1%). The Bank of Canada will leave rates on hold this morning, and of course the Fed will do the same this afternoon.  We also see the EIA oil inventory data with a small draw expected in gasoline and distillates but a crude oil build.  Yesterday’s API oil data showed a 6.6-million-barrel build.  As I said above, there is no shortage of the stuff in the US.

The uncertainties of war remain the market drivers, but as we frequently see, markets have relatively short attention spans.  Absent a significant increase negative news from the Gulf (e.g. more Iranian destruction of other gulf assets) I’m not sure what will change this sentiment.  And if something happens that reduces the conflict, the initial view will be extremely bullish I believe.

Good luck

Adf

Keep Up the Fighting

Posted on by 
The Strait of Hormuz remains closed
And right now, both sides seem disposed
To keep up the fighting
While pundits keep writing
That Trump will soon find himself hosed

Meanwhile, this week central banks meet
And none are expected to treat
The oil price spike
With any rate hike
Though keep eyes on each balance sheet

Nothing seems to have changed dramatically in Iran with US bombing attacks continuing and Iranian missile and drone attacks continuing.  It remains a daunting challenge to discern reality on the ground there as every news source spins any information to their political viewpoint, and I, for one, have been unable to pull much signal from the noise.  This is truly the fog of war.

With that in mind, it does appear that different markets are taking very different cues from the situation, with some (oil and the dollar) continuing to hew to a strong risk-off viewpoint while others, equities and bonds, remain unconvinced that the world is about to end.

As such, perhaps we should take a few moments to consider the fact that this week, we are going to see interest rate decisions from every major Western central bank in the following order: RBA, BoC, FOMC, ECB, BOE, BOJ, SNB, starting tonight and concluding on Thursday.

Of all these banks, only the RBA is expected to move, raising its base rate by 25bps to 4.10%, although that was baked in prior to the events in Iran beginning.  I would contend this is not a response to the oil price.  In fact, one must assume that central bankers are aware of the history of responses to exogenous price shocks, like an oil spike, and that any attempt to offset the inflationary consequences in the past has led to major economic pain.  It is not hard to understand that a sharp rise in oil prices, and the concurrent rise in gasoline and diesel, acts as a “tax” on the economy which tends to reduce economic activity.  Hiking rates into that scenario would very likely result, and historically has resulted, in a recession in short order.

Remember, the reason central banks, in general, look to core inflation, is because they know they cannot impact the prices of food or energy via interest rate policy.  While the ultimate impact of this oil price spike will only be known many months from now, if the conflict ends in the next several weeks, it is likely that any structural price issues will be avoided.  Of course, we have no idea how long things will last right now, so as investors and hedgers, reduced exposure to financial markets is likely the best advice for almost everyone.

Which means, it’s time to look at the markets and see what they are telling us.  After Friday’s soft close in the US, Asia saw a mix of outcomes.  Tokyo (-0.1%) did little overall, and we saw some weakness in Australia (-0.4%), New Zealand (-0.3%) and the Philippines (-0.9%) with Indonesia (-1.6%) the regional laggard.  However, there were numerous markets who ignored the oil price and rallied including Hong Kong (+1.5%), Korea (+1.1%), India (+1.3%) and Singapore (+0.6%) with mainland China essentially unchanged in the session.  China released a raft of data showing that the economy there continues to have property troubles (House Prices -3.2%), but the rest of things were largely in line with their reduced GDP expectations excepting Unemployment, which rose to 5.3%.  

Europe, too, is seeing a mixed picture this morning with some gainers (Germany, UK) and some laggards (Spain, France, Italy) although none of the movement is very significant, < 0.3% in every case.  US futures at this hour (7:10) are all pointing nicely higher, in fact, by 0.5% to 0.8%.

My point is that despite fears of the death of the equity rally, as I type this morning, the S&P 500 is just 4.5% from its all-time high made at the end of January.  I am no technician, but the chart below shows both the long-term direction and the 52-week moving average, and the current price is well above both of these indicators.  This is not to say the market cannot decline from here, just that the broader trend remains higher.  It does not feel very apocalyptic to me at this point.

Source: tradingeconomics.com

Turning to the bond market, yields are lower across the board this morning with Treasuries (-3bps) backing off the highest levels seen last week, and currently at 4.25%.  While that rate is clearly above the lows, it hardly smacks of panic nor of a bond-buying strike.  Of course, historically, when uncertainty rises, Treasuries have been a primary safe haven, and that has not been the case this time either.  It appears to me that investors are caught between fears of rising inflation and fears of economic contraction so don’t know whether they want to hold their bonds or sell them.  As to European sovereigns, all are in fine fettle this morning with yields slipping between -2bps (Germany) and -6bps (UK).  Again, this does not smack of inflation fears today.

Which takes us to the key driver of almost everything, oil.  Right now, WTI is trading lower by -1.5% and is back below the $100/bbl level.  While, of course, the recent trend is higher, that is entirely on the back of the Iran situation.  If/when that is resolved, I expect the price to retreat sharply right away, although probably not to its prewar levels for another few months.  But if it traded back to $70/bbl, that would remove virtually all the inflation talk and investors would need to look elsewhere for cues.

Source: tradingeconomics.com

In the metals markets, gold (0.0%) is trading just above $5000/oz and silver (-1.6%) just below $80/oz, and neither has responded as would have been expected prior to the Iran conflict.  Recall, both peaked at the end of January, just before the Kevin Warsh as Fed chair announcement, and as you can see below, both have largely gone nowhere, albeit with a lot of daily volatility attached to that lack of movement.

Source: tradingeconomics.com

It makes no sense to me that after a 5000-year history as the ultimate monetary safe haven, gold has suddenly lost its allure in that capacity.  As such, I continue to believe that the lack of follow-through higher during this war is a result of leveraged investors needing to raise cash to cover margin calls and given the gains that were available in their gold positions, and the liquidity in the market, gold was the most convenient way to manage positions.  Remember, leverage has been a key part of the story of recent market moves, with margin debt at all-time highs, > $1.1 trillion, although it represents just 1.9% of outstanding market capitalization, less than the all-time high percentages seen ahead of the financial crisis.

Source: investing.com

Nothing has changed my take on the underlying demand for precious metals at this point.

Finally, the dollar is a bit softer this morning but has retained most of its gains from this move.  However, as a descriptor of today’s lack of fear, the dollar’s pull back is as clear a signal as any.  So, the euro (+0.5%) is rebounding away from the 1.1400 level seen Friday, while the yen (+0.4%) is backing away from the 160 level.    AUD (+1.0%) seems like it is preparing for this evenings’ RBA rate hike, but the dollar is lower across the board after a solid run ever since the Warsh announcement.  Looking at the DXY (-0.35%) below, you can see that today’s move is modest in the scheme of things, and we will need to see a lot more dollar selling before this trend changes.

Source: tradingeconomics.com

EMG currencies are having a very strong day, almost like the war is over.  CZK (+1.8%), HUF (+1.7%), PLN (+1.1%), ZAR (+1.0%), MXN (+0.9%) and KRW (+0.9%) are representative of today’s price action.  I’m wondering if I missed the news that the war ended!

On to the data this week, which in addition to all those central bank meetings includes a large array of generally secondary data, although PPI is part of the mix.

TodayEmpire State Manufacturing3.2
 IP0.1%
 Capacity Utilization76.2%
WednesdayPPI0.3% (2.9% Y/Y)
 -ex Food & Energy0.3% (3.7% Y/Y)
 Factory Orders0.2%
 FOMC Rate DecisionUnchanged
ThursdayInitial Claims215K
 Continuing Claims1855K
 Philly Fed9.0
 New Home Sales720K

Source: tradingeconomics.com

I imagine that folks will look at the PPI data to see if they can glean anything about inflation going forward, but it, too, is a February number, so will not have anything from the war.  It will also be interesting to see what Chairman Powell says in his press conference, but I can’t imagine much new information will flow there either.  After all, with the war, they are kind of stuck for now.

So, it continues to come down to market interpretations of commentary regarding the war.  As I said, this morning, investors don’t seem that worried things will get worse.  The Greed and Fear index is at 22, not great, but we have seen worse just recently.  Again, lighter positions are the way to go in my view.

Good luck

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Not Be Sublime

Posted on by 
Investors are starting to shun
The riskiest things one-by-one
So, stocks feel the pain
And bonds, too, feel strain
The dollar, though’s, on quite a run

It’s nearly two weeks since this started
And so far, no ending’s been charted
The impact o’er time
Will not be sublime
Thus, trading’s not for the faint-hearted

Another day and there is no end in sight for the ongoing military action in Iran.  US strikes continue apace and Iranian retaliation also continues, albeit at a lesser rate it seems.  However, the information from the war zone remains difficult to trust as all of it is spun for various audiences with no sense of objective truth.  As such, it is difficult to have an opinion on how long this will continue.

With that in mind, all we can do is observe market behavior and see what we can glean.  Starting with equity markets around the world, the below screenshot from Bloomberg.com this morning shows that risk is clearly off, although not catastrophically so, at least not yet.

So, weakness in the US yesterday was followed by weakness overnight in the major markets in Asia as well as in other regional markets (Korea -1.7%, India -1.9%, Indonesia -3.1%) with the rest having declined by lesser amounts.  It is important to see that all the Asian markets (and European and US markets) have fallen in the past month, but remain higher, in some cases substantially so, since this time last year.  The point is that this move can still rightly be considered corrective, rather than a dramatic change in opinion.

European bourses are demonstrating similar behavior although US futures at this hour (6:45) are slightly higher, about +0.15% across the board.  Thinking about equity markets overall, one of the main features of the US market was that it maintained a relatively high P/E ratio, no matter whether measured on a forward looking or historical basis.  Thus, a correction in equity prices, even absent the war, would not have been that surprising.  The same could not be said about European or Asian markets, which trade at much lower valuations, but then, in Europe especially, prospects for growth remain hampered by individual national domestic policies along with EU wide policies, notably in the energy sector.    Under the rubric a picture is worth 1000 words, it is not hard to understand why US equity markets dominate global markets.

Source: tradingeconomics.com

Germany has averaged -0.3% GDP growth over the past 3 years, and the EU is just above it at +0.4%.  Meanwhile, this morning’s UK GDP data showed weaker than expected outcomes, with Y/Y of 0.8% after a stagnant January.  Are US markets richly priced?  Sure, but what prospects do you have elsewhere?

Turning to bond markets, the traditional safe haven appeal of bonds, especially Treasuries and Bunds, is MIA.  While this morning, Treasuries (-1bp) and most European sovereigns (-1bp across the board) have seen prices stop declining, the picture over the past two weeks has not been encouraging.  The chart below shows the price action in both Treasuries and Bunds and, as you can see, both have seen yields rise sharply since the beginning of the month/war.  Given the ongoing stress in oil markets, and the implications that has for inflation worldwide going forward, it should not be a surprise that bonds don’t appear to offer their ordinary haven characteristics.

Source: tradingeconomics.com

The big question here, and around the world truthfully, is how will central banks respond to the rise in energy prices and subsequent rise in headline inflation?  If they try to address price pressures by raising rates in this scenario, it will almost certainly lead to recessions everywhere.  But will their models allow them to hold their policies if inflation starts to rise sharply?  It’s funny, I have been remarking how central bank policies have lost their luster recently, having been overwhelmed by fiscal policies, but suddenly, monetary policy is back in the limelight.  We shall see how they perform.

In the commodity markets, WTI (-1.3%) rallied sharply yesterday but is giving back a bit this morning.  The big headline yesterday was that Brent crude closed above $100/bbl for the first time since 2022 in the wake of Russia’s invasion into Ukraine.  Of course, that was more about the big, round number feature, than the percentage rise.  After all, is there really a difference of $98/bbl or $100/bbl in the broad scheme of things?  Oil continues to be THE driving factor in all markets right now and that is not likely to change anytime soon.  As long as the Strait remains closed to traffic, this pressure will continue to build. 

In the metals markets, both gold and silver continue to consolidate around their recent levels ($5100 in gold, $85 in silver) and it appears we are going to need another catalyst of note to get that to change.  I see no change in supply metrics, that’s for sure, but if there is a recession, silver demand may well be reduced given its industrial uses.

Finally, the dollar is king of all it surveys, at least in the FX markets.  The euro is below 1.15 (it seems like only last week that pundits were talking about the consequences of the euro trading above 1.25.  The DXY has broken above 100, although we will need to see an extension of this move to be convinced that it is going to head much higher, and USDJPY is now pushing near 160 again, which brought out comments from Katayma-san, the Japanese FinMin, about closely monitoring the yen’s value.  Of course, given the broad-based rise in the dollar, the current yen weakness cannot be seen as that troubling.

But what is a bit more interesting to me, and more definitive proof that the dollar is not about to collapse, is the coincident moves higher in the dollar vs. a number of other currencies.  Look at the chart below of ZAR (-0.15%), SEK (-0.3%) and MXN (0.0%).  Each demonstrates virtually identical trade patterns, and all of them reached their respective peaks (dollar’s nadir) on January 29th.  You may recall that was the day president Trump named Kevin Warsh as the next Fed Chair, and we saw a major reversal in stocks, gold, silver and other markets.  

Source: tradingeconomics.com

My best estimate is that FX markets are pricing in a tighter Fed at this point, which. Based on Fed funds futures, showing just one cut potentially this year in December, makes a lot of sense.  I guess it remains to be seen how other central banks will respond to the ructions in markets caused by the war, but this is the first order consequence.

Source: cmegroup.com

Turning to this morning’s data, we see a bunch as follows: 

Q4 GDP (2nd estimate)1.4%
Personal Income0.5%
Personal Spending0.3%
Durable Goods1.2%
-ex Transport0.5%
PCE0.3% (2.9% Y/Y)
Cpore PCE0.4% (3.1% Y/Y)
JOLTs Job Openings6.7M
Michigan Sentiment55.0

Source: tradingeconomics.com

As with Wednesday’s CPI data, the PCE data does not include the war, so will be dismissed.  My take is the Income and Spending numbers, and the JOLTs number will be the most impactful if they are a long way from estimates.  

And that’s where we stand.  Markets are still unsure of what to believe regarding the war, and when it comes to war, things happen that are unexpected all the time, the so-called unknown unknowns.  In the end, it is hard to bet against the dollar for right now, but that could change in an instant based on the next headline.

Good luck and good weekend

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