Tag Archives: #politics

Death For the Trend

Posted on by 
The five-year sale went terrib-ly
So, doomsters are all filled with glee
There was a long tail
Though not quite a fail
They claim, now, the future they see

In fact, they claim, this is the end
That bonds will have nary a friend
And stocks will get smoked
As strong growth evoked
The specter of death for the trend

Well, everybody who has been crowing about the end of the US bond market is feeling their oats today, that’s for sure after yesterday’s terrible 5-year Treasury auction that wound up with a 3.1 basis point tail, extremely long for such a short duration instrument.  (The tail is the difference between the actual outcome and the when-issued trading that takes place in the market prior to the auction.  A long tail implies that demand was weaker than expected.)  The upshot is that Treasuries sold off hard, with yields climbing upwards of 15bps in the 2-year and 11bps in the 10-year as you can see in the below chart.

Source: tradingeconomics.com

The starting point was the release of the much better than expected Flash PMI data where both Manufacturing and Services beat handily with 58.0 handles, but the price pressures indicated got the inflation story back as the key narrative.  The yield peak came at 1:00 when the auction results were announced although they slipped a few bps before the close.  And this morning, the 10-year yield is another 3bps higher along with European sovereign yields where we see France (+5bps) having the worst day but the rest of the continent, and the UK all showing yields climb 2bp to 3bps.  Neither was Japan immune to this price action with 10yr JGBs jumping 9bps overnight.  

It’s funny, for a very long time, the idea that good news was bad would have been ridiculous as a concept.  Strong growth would indicate increased profit opportunities and higher equity values.  But it started with Greenspan, when he first cut rates to, and left them at, 1.0%, for far too long and equity markets decided they liked low interest rates more than company fundamentals.  The GFC and ZIRP increased the intensity of that reaction function, and we are still feeling that pain as higher rates, especially caused by strong economic growth, are now seen as a negative for stocks.  The world is upside down.  It is, however, the world in which we live.

On top of the markets’ hard beating
Both Xi and Trump soon will be meeting
The talks are on trade
While AI is weighed
It’s doubtful, though, deals are completing

In China the ‘conomy’s split
Twixt exports of plenty of sh*t
And people at home
Who live in the gloam
And can’t change their lives e’en one bit

While here in the US the sitch
Is talk of the poor and the rich
Election day’s nearing
And though some are cheering
For Trump it could be a real bitch

While the bond market has taken up most of the space of the financial market analysis, the meeting between Presidents Trump and Xi is clearly of great importance.  Both nations have significant issues they are trying to address although in many ways they are mirror images of each other.  On a macroeconomic scale, given the Chinese mercantilist model and the excess investment into productive capacity there, they build an enormous amount of stuff for export and starve the local economy of consumption.  The result is extremely low inflation, if not deflation, while indicators like Retail Sales turn negative.  Recall, consumption represents just over 50% of the Chinese economy compared to about 70% in the US.

For instance, the below chart shows a comparison between US (gray bars) and Chinese (blue bars) retail sales over the past 3 years.  you can see just how soft Chinese activity has been domestically compared to the US.

Source: tradingeconomics.com

I have long maintained that the biggest weakness China has is that they rely on the US as the buyer of last resort and President Trump (and lately followed by many other nations) has been pushing back by imposing tariffs on much of what China sells, thus reducing those sales.  If China lacks export growth, given the domestic weakness, that becomes a huge problem for Xi.

Meanwhile, the US spends far too much, at least the government does, and while there has been a dramatic increase in investment into the US, that has brought along significant demand for credit, hence higher yields, and demand for things that are scarce, like electricity, where power increases cannot keep up with industrial demand.  The upshot here is that inflationary pressures are rising even without the impact of the large rise in oil prices since March and the Iran war began.  

Of course, Xi’s greatest advantage is he doesn’t have to face the electorate, as there is none over there, while in six weeks, Election Day may prove monumental to President Trump’s plans.  We need to watch more than markets right now as both the wars in Ukraine and Iran along with the politics are going to have major impacts for a while longer, I believe.

Turning to markets beyond the bonds, yesterday saw weakness in the US, although not quite as bad as might have been feared with losses of about -1.0%.  To keep that in perspective, even with this morning’s pre-market futures lower by -0.5%, the S&P 500 is less than 2% from its all-time high set last month as you can see in the chart below.  It’s not Armageddon quite yet!

Source: tradingeconomics.com

But the follow on in Asia was filled with red numbers as although the Nikkei (+0.8%) managed a gain, virtually every other index in the time zone fell including: China (-1.7%), HK (-0.3%), India (-1.7%), Australia (-0.7%) and all of the smaller exchanges as well.  South Korea was on holiday, so no trading there.  Meanwhile, in Europe, the picture is not so dour, although most markets there slid yesterday as well.  This morning, the DAX (-0.5%) and CAC (-0.4%) are the laggards while the other major markets are flat to slightly higher, 0.1%.  And as mentioned above, US futures are under pressure again this morning.

In the commodity markets, oil (+1.0%) is continuing its rebound off the lows from earlier this week as President Trump’s threats of annihilation of Iran has some on edge, although I have read that talks continue to find a way to end the conflict.  But precious metals have no friends right now (gold -0.6%, silver -1.25%) as between higher yields and a rising dollar, fear over debasement has given way to greed for the last basis point of yield.  Copper (+0.4%) though is starting to trade on its own terms as the strength in the US economy continues to underpin demand for the red metal.  In fact, to highlight that economic strength, a look at the Atlanta Fed’s GDPNow estimate for Q3 shows that the data supports a positive view.  It currently sits at 5.1%, far above analyst estimates as per the below chart.

Finally, turning to the dollar, as I mentioned earlier this week, a move to the top of the trading range was quite possible and we are on the way to getting there as you can see in the below chart.  The peak is 101.80, so still 0.5% away from where we are, but the recent trend is strong.

Source: tradingeconomics.com

This strength is broad based and entirely on the back of the US rate structure and growth story as markets price in a greater likelihood of a rate hike next month, now 70%, and an additional hike next year as you can see in the below cmegroup.com table.

While the movement today has been pretty uniform across both G10 and EMG currencies, we do need to start to watch USDJPY again as it is heading back to the 160 level.  Now, if the dollar is strong against all currencies, there is far less reason for intervention in the yen, but that doesn’t mean it won’t happen.

On the data front, this morning brings the weekly Initial (exp 201K) and Continuing (1750K) Claims data as well as New Home Sales (620K).  Yesterday’s data also included oil inventories, which remain more than adequate.  Something else to remember is that the SPR releases were all executed via swaps, so starting November 1, the SPR is going to get refilled over the ensuing several years and my guess is we will not hear a word about that in the future.  The diesel export ban is a terrible idea, and hopefully cooler heads will prevail.  Diesel prices are high because Ukraine continues to destroy Russian refining capacity, not because the US exports the excess over what we use.

It’s an odd thing this morning.  I have seen many stories about the imminent collapse of the stock market now that bonds are under pressure and maybe that is exactly what will happen.  But I am not getting the same level of fear from the current situation so while a correction is completely viable, I think we need a much bigger disruption to force a major downturn in risk assets.

Good luck

Adf

To Be Agamemnon

Posted on by 
Apparently inside Tehran
The pressure that Trump has brought on
By blockading ships
Is set to eclipse
Their goal to be Agamemnon

At least with respect to his win
In Troy, though much to their chagrin
They may meet his fate
Because of a Strait
And views they should be its kingpin

One week ago today, oil traded above $106/bbl as concerns about Iran’s ability to inflict further damage on Gulf capacity along with their Houthi allies reached a peak.  The punditry was going all-in on the idea that as oil prices rose, and especially as product prices rose, that President Trump would have to back off his pressure campaign because rising diesel prices would collapse the Republican hopes for retaining the Senate, let alone the House, in the upcoming midterm elections.

What a difference a week makes, 168 little hours (my apologies to Dinah Shore) as the news this morning is that Iran has just pledged to reopen the Strait of Hormuz if the US ends the blockade.  Oil prices (-2.6% today, -15.5% in the past week) are responding as one would expect.

Source: tradingeconomics.com

According to Kyodo news, Iran is really feeling the pain now and discussing reopening negotiations as per the below report.

Now, as I have maintained all along, there is no way for any of us to really know what is going on in Iran as the propaganda from all sides runs fast and heavy.  And it is entirely possible that this is another head fake that will precede another series of attacks on vessels in the Strait, or on the Saudi East-West pipeline.  But markets are certainly buying it right now, hence the oil price decline as well as the continuation lower in bond yields with Treasuries and European sovereigns all lower by -2bps, except for French OATs (+1bp) as investors continue to look at French finances and worry further.

Seemingly, adding to the good vibe is the word that Iranian President Pezeshkian may meet with President Trump this week in a side meeting during the UN General Assembly thus priming views that something real may come of this.  I certainly hope that is the case, but I would not bet the farm on that outcome.  Until IRGC leadership feels significant pressure, it is hard to believe much will change.  But that, too, could be in our future.  If all 8+ million people in Tehran march in defiance of their rules, will the IRGC shoot them all?  Seems hard to believe, but the stories that have gotten out of Tehran paint a terrible picture there and a larger popular uprising cannot be ruled out in my view.

In the meantime, this is the best news we have seen in a while, and at least it has diverted attention from the AI death throes that are promised soon.

So, was this the driver behind yesterday’s equity rally?  It doesn’t seem so as that was very tech focused with the Mag7 all having strong sessions although I continue to read the dire stories of terrible market breadth.  That is a measure of the relative performance of different parts of the market and the concern is that somewhere around 50% of companies are below their 200-day moving average, a bearish signal, while the market indices are making new highs.  Some say this is a sign of a weak rally while others explain the index can work to drag all stocks higher.  But, as with everything else, both sides are certain they are correct!

Let’s look at how things have behaved overnight away from oil and bonds.  After the strong US equity performance, Asia was generally more subdued as Japan remained on holiday (they are back tonight) while China (+0.1%), HK (+0.2%) and even Korea (+0.15%) all saw minor gains only.  Korea is the most surprising given the tech led nature of the US markets.  Elsewhere in the region I see many markets having risen something like 0.3% with one major outlier on the downside, Indonesia (-1.7%) as concerns over a pending rate hike and higher fiscal deficits has international investors fleeing.

In Europe, though, things are a bit greener with gains nearly across the board (Spain +0.7%, France +0.5%, Germany +0.45, UK +0.15%) although Italy (-0.15%) is bucking that trend.  The confusing thing to me is France, where concerns reign regarding their fiscal picture in the bond market, but the equity markets are non-plussed on the subject.  And at this hour (7:00), US futures are pointing slightly higher, +0.1% or so.

Quickly in the metals markets, while gold (-0.5%) and silver (-0.7%) continue to struggle despite the decline in oil prices, copper (+1.3%) is back to within pennies of its all-time high set two weeks ago.  Certainly, the trend here is higher and, once again, I will remind you that current production is insufficient to meet demand and the timeline to bring new production online is measured in decades.  In my view, this metal could go much higher over time.

Source: tradingeconmics.com

Finally, the dollar refuses to collapse despite so much wishin’ and hopin’ by a large part of the punditry.  While it has not risen substantially of late, it has not fallen either.  In fact, the DXY (0.0%) sits above 100 currently which is clearly near the top of its trading range for the past year as per the below.

Source: tradingeconomics.com

Perhaps the biggest news here today is that the ECB has begun its experimentation with a CBDC, a terrible sign for the people of Europe, I believe, but a typical European response to US activity.  While private sector stablecoins are seen as a key part of the future for the US, Europe went the government route.  Now, they make the laws and can certainly force some uptake, but my money is on USD stablecoins dominating electronic payments going forward.  As to major movers here, there is only one, KRW (+1.35%) which has seen increasing volatility, but is really just back on the track it has been since early July as per the below.  I guess the rebound was just corrective in nature.

Source: tradingeconomics.com

On the data front, there is nothing of note on the calendar although we get plenty more Fedspeak with Williams, Jefferson and Barkin all on the calendar.  Yesterday, not only did Goolsbee say rates would need to rise further, but so did St Louis Fed President Musalem.  The interesting thing to me is they all talk about the oil price shock and then still say we must hike rates.  This is quite odd to me given the inherent dovishness of almost every central banker.  I cannot tell whether this is a result of their virtually religious belief in Keynesianism or if it is all TDS.  It is, however, a mistake for them to raise rates further.

And that’s all there is today.  Potential Iranian-US talks seem like the biggest opportunity for a change in the narrative, but I don’t give them that high a probability of being successful.  In the meantime, ain’t nobody selling the dollar!

Good luck

Adf

All-Knowing

Posted on by 
The war in Iran’s getting hotter
With tankers now under the water
So, oil is climbing
Which right now is priming
A stock market starting to totter

Meanwhile, Scotty Bessent is crowing
Take care ‘bout the shade that you’re throwing
Now, I am the house
And while you may grouse
In markets, I now am all-knowing

Remember back at the end of July when the MOF/BOJ intervened in the FX markets and the US Treasury was ostensibly right alongside them, selling €13 billion vs. yen, give or take a nickel.  And then, for the next month, the yen behaved as it ordinarily does after an intervention, it slowly crawled lower (dollar higher) as per the chart below.

Source: tradingeconomics.com

So far, so normal.  But something changed a week ago as there has been another significant leg lower in the dollar with no sign of official activity.  The story at the time, which has been neither confirmed nor denied, was that the GPIF was moving funds back into Japan to the tune of several billion dollars’ worth, and that certainly fit the price action.  But that was a one-day event.  And yet, here we are this morning with USDJPY plumbing new lows for the move, more than 2% below levels reached last week.  Something else is happening.

Which brings us to Secretary Bessent.  Yesterday, speaking at an event at SMU in Dallas, he made the following comments, “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do.  And you can bet against me if you want.”   On the one hand, those are pretty arrogant comments to come from any politician, especially one who knows exactly the limits of power governments have when it comes to markets.  (Remember, he was instrumental in the trade that broke the pound back in 1992 and forced it out of the Exchange Rate Mechanism).  On the other hand, not only does he understand markets extremely well, he also has a setup where one of the key drivers of the market he is pushing against has been increasing leverage, and leverage is very fragile.  

If we look at futures positioning as our proxy, you can see in the below chart from cotsignal.com that there are still quite a few net short JPY futures positions, although those positions have been reduced over the past month.

Remember, too, when looking at currency futures positions, they represent a tiny fraction of the market, <1%, but they do offer directional views.  The point is that the net short JPY trade remains quite large, and if Japanese investors are truly starting to bring their money home, the yen can strengthen quite a bit further.  As an aside, while this may correlate with a sell-off in risk assets, it is important to understand that the causality in this case would be reversed, so yen strength would be the driver, not the risk-off response.  As I wrote yesterday, my take is 140-145 is a viable target, a level that would offer a solid adjustment without necessarily resulting in a major negative response in other risk assets.  We shall see.

Turning to oil (+2.3%), over the past two months, we have seen WTI rally from a low of $67.0/bbl to today’s price of $95.17/bbl, a 42% climb as per the below chart.

Source: tradingeconomics.com

Clearly things are not getting better in Iran, or Russia/Ukraine, but the former appears to be the proximate cause for this move.  Ostensibly, the US sank three Iranian oil tankers near Kharg Island after the Iranians fired ballistic missiles at two US warships.  The Iranians claimed they hit the ships, the US claimed they didn’t and that is what you would expect to hear.  I have no idea what is true, although it appears to be true that those tankers are sunk.

My two cents, if they are worth even that, is that Iran has decided that if it can force gasoline and diesel prices high enough ahead of the midterm elections, that can serve to weaken President Trump and his resolve in this war if the Republicans lose power.  Maybe yes, maybe no.  Today is the beginning of the Republican mid-term convention in Dallas, a new idea designed to excite the Republican base to get out and vote.  From what I have read, polls remain close in several key states where senatorial elections are going to take place, and both the House and Senate are up for grabs.  This will certainly be the main story for the next two months.

Which takes us to action in other markets.  Equities remain under pressure almost universally.  After yesterday’s weak US performance, Asia had a more subtle performance with only a few markets showing substantial strength (Korea +1.4%) or weakness (India -1.1%, Singapore -0.7%) while the rest of the region saw movement of just +/-0.2% or so.  However, the same cannot be said for Europe, where substantial declines are the order of the day (Spain -2.3%, France -1.7%, Germany -1.5%, UK -0.8%) as rising oil prices, Brent is over $100/bbl, have weighed heavily on profit prospects there.  Too, US futures at this hour (7:10) are pointing lower with declines on the order of -0.5% or so.

In fact, Europe is having a rough day overall as bond markets there are all under pressure as you can see in the below Bloomberg screenshot.

While the ECB is almost certain to hike rates tomorrow by 25bps, it appears bond investors in Europe are seeking a greater commitment to fight inflation.  Alas for Madame Lagarde, the fact that Eurozone growth is hovering just below 1% per annum makes it hard for the Keynesian view of how to fight inflation (raise rates) to help the economies there.  As to Treasury yields, they continue to creep higher, up 2bp this morning at 4.81% and the recent winner continues to be JGB markets, with the 10yr yield there slipping -1bp.  However, before we get too enamored of the JGB price action, a quick look at the chart for the past 6 months shows that we have seen this type of movement, a move higher with a several session retracement, at least eight times during this period.  It could be nothing more than ordinary trading here.

Source: tradingeconomics.com

Looking briefly at the metals markets, gold (+1.1%) is rallying this morning despite the rise in oil, a break from that recent negative correlation, and it is dragging silver (+0.9%) along for the ride.  Copper (-0.8%) however, is not playing the same game.

Finally, the dollar…well away from the yen, the dollar is doing nothing.  The DXY is still hovering either side of 99.0 and other than the yen’s move today, +0.3%, there are really no currencies that have moved more than 10 basis points in either direction.  Right now, FX is secondary except USDJPY.

On the data front, there are no releases and as we are in the Fed’s quiet period, there are no Fed comments on the calendar.  For now, markets are going to maintain their focus on Iran and oil prices and on the yen story.  Absent more headlines in either of those, I see no reason for major excitement today.  But remember, we do get CPI on Friday, so there is still something critical on the near horizon.

Good luck

Adf

Run-Of-The-Mill

Posted on by 
The funniest thing that I read
Was Bloomberg, in which someone said
That Bessent's bond buys
Have seen prices rise
So maybe, he's not a blockhead

Meanwhile, today brings PCE
Which pundits are anxious to see
If it comes out hot
They'll claim Warsh has wrought
Disaster and sip their Chablis

But if PCE remains chill
The pundits, when ink meets their quill,
Will pivot to stories
In new categories
And claim it was run-of-the-mill

As we await this morning’s PCE data (exp 0.1%, 3.6% Headline; 0.2%, 3.3% Core), as well as a bunch of other stuff like Personal Income (0.2%), Personal Spending (0.1%) and GDP (1.5%), many in the market continue to discuss the pros and cons of Treasury Secretary Bessent’s efforts to push down longer dated Treasury yields.  Before this morning, it was widely reported, or perhaps loudly reported is more accurate, that this was a desperate act and demonstrated that he didn’t know what he was doing and was simply a Trump puppet.  But the top story in Bloomberg this morning is titled “Bessent Bounce Starts to Emerge in Long Bond Market Metrics”.  In the story, they describe that despite all the controversy and certainty it would fail, it seems to be working for now.

Certainly, based on yesterday’s bond market price action, where 10-year yields slid -6bps, that may be the case.  And remember, the increased buybacks aren’t going to take place for another two weeks, so we still don’t know how much the Treasury is going to buy.  Personally, I like the idea of Treasury buying bond futures, where there is a massive speculative short position, and squeezing them all badly.  Remember, he was a hedge fund manager and knows exactly how that process works.  (As an aside, I have a feeling that Druckenmiller’s op/ed was him talking his book because he is short futures as well.)

At any rate, now that complaining about Bessent is not in tune with today’s market, the punditocracy has pivoted back to Chairman Warsh trying to anticipate what he is going to say Friday morning.  As Warsh remains tight-lipped about everything, it is much easier for the pundits to make claims without being proven instantly wrong.  And whatever Warsh says, you can be sure the pundits will claim they knew it all along!

Meanwhile, in the markets, I believe oil (-2.6% today, -5.0% in the past week) continues to slide and is back at levels seen earlier this month around $80/bbl as per the below chart. 

Source: tradingeconomics.com

I am continually amazed at the commentary regarding oil and Iran and potential peace talks as the response to virtually every statement by the Trump administration about the situation, whether about the ability to traverse the Strait, or the status of talks with Iran, is to dismiss it out of hand by many commenters on X, but when Iranian propaganda media makes claims, it is taken as gospel.  Yesterday I recall Iran claiming economic sanctions won’t matter, they are prepared, and yet today there are stories of how Iran and Oman are furiously trying to come to some type of agreement.  I do not know the situation on the ground there but after 6 months of bombardment and embargos on their oil exports, my sense is the IRGC is feeling a lot of pressure.  I guess we shall see, but in the meantime, oil inventories remain robust with no shortages seen.

As to other markets, let’s tour around to see what’s happening.  Completing the commodity group, metals are consolidating weekly gains with gold (-0.8%) and silver (-0.2%) slipping a bit although both remain higher by more than 2% this week and about 15% in the past month.  Copper is little changed.

In the bond market, after yesterday’s sharp decline in yields, where European sovereigns followed Treasuries, albeit not quite as far, this morning has seen yields back up 1bp across both the treasury and European markets.  As I have been saying, I believe this market is waiting for Chairman Warsh to speak before deciding its next move.

In the equity markets, US markets all rallied yesterday afternoon and closed near their highs with that price action following across most of Asia.  Tokyo (+0.6%), HK (+0.6%) and China (+0.85%) all had good sessions as did Korea (+1.0%) and Taiwan (+1.5%) as all those tech related markets await Nvidia’s earnings to be reported after today’s US close.  The exception here was Australia (-0.4%) which slipped after higher than forecast inflation readings were released and markets have increased the probability of a rate hike by the RBA at their September meeting to 45% from about 25% prior to the release as you can see in the chart below from rateprobability.com.

In Europe, equity markets are fairly quiet overall with modest gains of 0.2% to 0.4% everywhere except the UK which has seen a decline of -0.2%.  Ironically, despite the problems the UK is having with energy prices, two key members of the FTSE 100, Shell and BP are lower on the lower oil price and that is dragging down the index.  As to US futures, at this hour (7:40), NASDAQ (-0.5%) futures are softer, but the other major indices are little changed.

Finally, the dollar is slightly firmer this morning but continues to be an afterthought in markets.  The DXY is exactly where it was yesterday when I wrote and the only true outlier today is AUD (+0.25%) which is benefitting from higher interest rate expectations.  Otherwise, the dollar is modestly firmer against most every counterparty of note.  At some point, the dollar will get interesting again, I just don’t know when that will be.

And that is really it today.  Perhaps there will be a deal from Iran although I doubt it.  

Instead, a tribute to one of the true superstars of our time, and by all accounts one of the finest human beings ever, Ms Dolly Parton.

Good luck

Adf

Things Are Bleak

Posted on by

The one thing on which you can rely is that there is a large segment of the punditry who will complain about every action taken by financial authorities, often offering ad hominem comments to make their case while demonstrating their own ignorance.  The benefit you have here is that I know there are many things I don’t know and don’t pretend otherwise.

Of course, I am referring to the Treasury Secretary’s recent announcement to ‘at least’ double the activity in their bond purchase program.  Once again, let me remind everyone that Secretary Bessent did not unilaterally pass laws to enact spending, that was Congress’s doing and the dramatic increase in spending has been ongoing for at least 25 years.  Just like every treasurer in every company, Bessent’s primary job is to ensure there is sufficient funding, and that is what he is doing.  Machinations as to the tenor of the debt are left to his discretion and fortunately, he is a man with an extraordinarily broad and deep understanding of financial markets.

The claims that he is panicking now are ridiculous, although I’m sure he isn’t thrilled with the situation.  But he inherited the situation, he didn’t create it.  For every doomster out there explaining the bond market is going to collapse, or the government is going to be forced to change their ways, my response is, don’t hold your breath.  

While yields have certainly risen over the past several years, that was from the extremes of Covid policy.  If you take a longer look, as per the chart below from FRED, the current level of 10-year yields is hardly dramatic, and actually, as I have written before, remains well below the long-term average.

Now, I understand that the amount of debt outstanding is much larger, on both an absolute and relative to GDP basis, but I also know that there is literally a 0.0% probability that the US will not repay that debt.  The question is what the real value of the dollars you receive will be when they are returned, and there, the picture is less bright.  Of course, as you can see from the below chart, also from FRED, this is hardly a new concept either.  In fact, ever since the Federal Reserve was created in 1913, the value of the dollar has declined by about 97%.  This is not a new phenomenon.

Which brings us to Chairman Warsh.  I find it interesting that the punditry believes that Bessent’s activities were completely independent of Warsh.  The two are BFF’s for god’s sake, and speak every week, if not every day.  Each has a job to do, and each is working to achieve it.  Inherently, Warsh’s job is made more difficult because of the US fiscal situation, not because Bessent is tweaking the Treasury’s maturity ladder.

And here’s the thing, both men are working to make institutional changes in hidebound institutions that are fighting things tooth and nail.  Frankly, I sincerely hope both are successful.  Back to Warsh.  Friday, he will speak at the KC Fed’s annual Jackson Hole Symposium, this year titled “Financial Innovation: Implications for Payments and Policy.”  Now, that is a bit afield from the details of monetary policy, as I suspect the policy part of the title refers more to the stablecoin question rather than the size of the Fed’s balance sheet.  But I am confident he will discuss current monetary policy in some manner.  I am also confident he will not offer suggestions as to the next rate move.  

The current narrative has morphed into, the problem for markets/analysts is not the lack of forward guidance, it is those people don’t understand the Fed’s reaction function.  This, too, is disingenuous in my mind as Chairman Warsh has made clear, his function is to reduce inflation to the 2% target, and he has clear ideas how to do that.  The problem is his ideas are different than the neo-Keynesian views that dominate the Fed (and every other central bank), and so are making people uncomfortable.  He has made very clear he is happy to allow the bond market to do the Fed’s work, tightening policy.  He is also very politically astute and clearly understands Bessent’s actions.  I would contend that of all the dysfunction in the government, the least concern should be afforded to the Fed/Treasury nexus.

And finally, it appears that the latest trade talks with Canada have broken down and both sides will be imposing tariffs on the other side.  My personal view is this is a mistake, only because there is no predatory relationship between the two nations, but politics is politics and PM Carney has called on national pride as his rationale.  The thing for the US is, it isn’t going to matter that much. According to Grok, Canadian imports represent ~10% of total US imports and ~1.5% of GDP, so higher tariffs on that relatively small amount is not going to change much.  For Canada, though, exports to the US represent ~20% of GDP, so interruption there is going to hurt a lot more.  Something tells me we will get a deal here pretty soon though as both sides will benefit.

The market’s initial reaction in USDCAD was a slight hit to the Loonie (-0.6%) as you can see in the chart below.  But the CAD has been appreciating over the past month like every other currency vs. the dollar, and this move is hardly breathtaking.  My take is USDCAD remains far more beholden to the broad dollar story with this simply a blip.

Source: tradingeconomics.com

Sticking with the currency theme, the dollar more broadly is a touch higher this morning, with the DXY up 0.2% and modest gains vs. most of its G10 and EMG counterparts.  With the dollar back in the middle of its broader long-term range, it is hard to get excited in either direction at this point.  Certainly, a case can be made that we will see a significant decline going forward if the worst-case scenarios play out, but that is not my base case.  Rather, I have a sense that we are going to remain somnolent in the dollar for a while to come, at least until policies are clearer and that is anybody’s guess as to the timing.

Looking at commodity markets, oil (-2.2%) which spent most of last week rising on increased concerns over Iran and the situation there, has reversed course this morning on two stories.  First, it appears that flows through the Strait of Hormuz have been picking up again as per this article, although it remains very uncertain as to the full amounts.  However, oil is moving.  The second story is the latest set of sanctions that the US is set to impose on Iran and secondary nations that trade with Iran as a means to effectively starve the regime there.  Regardless, lower oil prices are certainly better than higher from a global perspective.

Meanwhile, despite the dollar’s modest strength this morning, the barbarous relic (+1.1%) is higher by 15% since the beginning of August and really appears to be building strength in the move.  Is this related to concerns over fiat currency debasement in the US and elsewhere?  Probably as that 5000-year history of holding value in all times is starting to seem quite attractive.  Not surprisingly, this has helped silver (+0.5%) and copper (+0.1%).

Source: tradingeconomics.com (that green bar on the right appears to be a misprint)

In the bond market, yields are edging lower this morning with Treasuries (-3bps) leading the way and most European sovereigns, as well as JGBs seeing -1bp declines.  Nothing has changed the big picture here with too much government debt being issued around the world, but I have a feeling everyone is waiting for Chairman Warsh on Friday before taking their next steps.

Finally, equity markets which had a decent session in the US on Friday, are more mixed.  In Asia, the big markets all fell (Tokyo (-0.75%, HK -1.9%, China -1.2%, Korea -3.1%, Taiwan -1.0%) with only Australia (+0.5%) bucking the trend on stronger commodity prices.  In Europe, it has been a very quiet session, no surprise at the end of August, with bourses there within 0.2% of Friday’s close.  US futures, though, are being dragged down by tech and the NASDAQ (-0.8%) at this hour (8:05) although the other indices are only marginally softer.

As I’ve run on too long as it is, I will cover data this week tomorrow given there is nothing to be released today.  The oil story and anecdotes about tech are the keys for now absent a major White House surprise, something you can never rule out.

Good luck

Adf

Held At Bay

Posted on by 
The doldrums have finally arrived
As interest in markets nosedived
While stocks still creep higher
The marginal buyer
Is sleeping and must be revived

But it seems unlikely today
Is going to show us the way
I think, til Warsh speaks, 
And that’s in two weeks,
Excitement will be held at bay

While not every market is completely stagnating, for the past seven sessions, despite NFP, CPI and many stories about oil and war, market price action has been extremely dull.  Whether we look at stocks:

Source: tradingeconomics.com

Or bonds, which in fairness have been a little choppier but still gone nowhere:

Source: tradingeconomics.com

The dollar:

Source: tradingeconomics.com

Or even oil, which in the past week has barely moved on net:

Source: tradingeconomics.com

We are very clearly in the summer doldrums.  I think even the narrative writers have gone on summer holiday as there is precious little to discuss.  Yes, we’ve seen a soft NFP report and softer than expected CPI and PPI data, but that has not generated much excitement.  While the Iran situation can always find something for people to discuss, certainly based on the recent EIA oil inventory data, the ‘running out of oil’ story has been put to bed.

Frankly, there is very little to discuss, and I have a feeling it is going to stay that way until we hear from Chairman Warsh at the Jackson Hole summer confab in exactly two weeks.  As it’s August, we already knew that Europe was on vacation, but other than some primary elections in the US, where the effort to generate excitement ahead of the midterms in November has not yet gained traction, what is really new?  Arguably, the most interesting story is Enes Kanter Freedom, the ex-NBA player declaring for the WNBA draft as the WNBA cannot seem to figure out how to define a woman.

So, to keep things brief, I will give a quick rundown now and send you on your way.  Yesterday’s modest gains in US equities were followed by a mixed session in Asia with Tokyo (+0.6%), Korea (+2.4%, which these days is a modest movement here) and Indonesia (+1.6%) all gaining while China was flat and HK (-1.1%), Australia (-0.8%) and Taiwan (-0.5%) all slipped a little.  It is hard to tell a story about this outcome.  

In Europe, only Germany (+0.7%) is showing any life, reaching another record high on the back of some more strong earnings reports, mostly from German defense manufacturers.  But the rest of the continent is little changed, +/- 0.1%.  And at this hour (7:10), US futures are also +/-0.1%, in other words flat.

In the bond market, Treasury yields, which slipped -5bps yesterday as both PPI and oil prices were softer, have edged higher by 1bp.  However, European sovereign yields are all higher by between 3bps and 4bps this morning, although it is not clear what is driving this movement.  In truth, if I use bunds as my example, while like Treasuries, the price action has been choppy, as you can see in the below chart from tradingeconomics.com, we haven’t gone anywhere in weeks.

As to JGB yields, this morning they are unchanged, hanging on just below the recently achieved multi-decade highs.  

But speaking of Japan, while the yen (+0.2%) is slightly stronger this morning, as you can see in the chart below, the post intervention pattern remains in force.  In fact, Bloomberg had an article about how speculators used the intervention to reload on short JPY positions.  But the more interesting thing I saw this morning was the following Tweet:

Now, I don’t know how they arrived at that number, and while I always thought the trade was in excess of $3 trillion, $20 trillion is much larger than I expected, but if this is true, it certainly adds a certain stress level to the global economy.  I have maintained that outward Japanese investment in financial products, so purchases of non-Japanese bonds and stocks buy Japanese institutions is a part of this process and adds to the number.  I assume that is part of the calculation Deutsche has made, but I could be wrong, I have not seen the actual report.  But along those lines, in the most recent week, Japanese investors purchased >¥1.6 trillion (~$10 billion) in foreign bonds, keeping up the flow.

If we look at just the G-SIB banks, the major players in international finance, according to Grok, their total combined balance sheets summed to about $78.4 trillion at the end of 2025.  Of course, assuming the carry trade makes heavy use of derivatives for financing, much of that alleged $20 trillion may not show up on their balance sheets, but perhaps it represents as much as 15% of bank assets.  This is quite a concern, especially as, again according to Grok, those same banks have only ~$4.7 trillion in Tier 1 capital.  

So, if these numbers are even in the ballpark, it tells a tale of a highly leveraged banking system that is subject to major convulsions if a certain series of events unfold, notably, the carry trade loses its luster.  (if you ever wondered why goldbugs are goldbugs, this is exhibit A).  The thing to remember is it has taken decades for this trade to accumulate, and it will not decumulate in weeks, or even months, but will take years to do so.  As well, if things start to turn, you can be certain that central banks will do their best to prevent a runaway train, and they have enormous power, specifically the power to print money, to slow things down.  But that doesn’t mean things won’t get ugly if this is the future.  I hark back to my comments regarding the end of forward guidance and how that will enhance markets’ collective anti-fragility.  It feels like the global financial system, if this is true, is seriously fragile!

Ok, let’s wrap up.  In FX, the dollar is softer this morning across the board, with the DXY (-0.4%) quite representative of the movement across both G10 and EMG currencies.  However, the thing to remember here is that we are still rangebound overall for the past year in G10 currencies, although we have seen broad based strength in a number of EMG currencies like MXN, BRL and ZAR , all of which have much higher real rates than the US.

Lastly, oil (+0.3%) is a touch higher, while metals prices (Au +0.3%, Ag +0.8%) are also firming up on the softer dollar.  But there is little to discuss here.  News that the US is sending another aircraft carrier to the Persian Gulf area got oil to rise earlier, but that is fading already.

On the data front, this morning brings Retails Sales (+0.1%, +0.2% -ex autos) and then Michigan Sentiment (54.5) at 10:00.  There is one Fed speaker, an Atlanta Fed VP and acting President as they seek a new President.  However, given her acting status and the fact Atlanta is not a voter, I don’t think anybody will even listen!

So, absent a seriously strong Retail Sales report, the die is cast for another slow day in my view. 

Good luck and good weekend

Adf

Investors Are Troth

Posted on by 
The doom mongers are up in arms
As though they raise many alarms
Investors don’t care
And add risk with flair
Ignoring the much-mooted harms

So, war is no longer concerning
And though hyperscalers are burning
Through all of their cash
Amid much backlash
Investors, their shares, are still yearning

And what about data and growth?
Investors care naught about both
Concerns about yen?
Not that trope again!
To stocks most investors are troth

As I read through my X feeds in the morning, as well as the WSJ and Bloomberg, the overriding theme appears to be the end is nigh.  Whether discussing Iran and the oil price and the future of the Strait of Hormuz, AI and the bubble or the potential for massive job losses and the creation of Skynet, the economic data and the incipient recession coming because people cannot afford to continue their consumption habits, or the idea that we are on the precipice of a Treasury bond market collapse because the Japanese yen is weak, the dominant theme is disaster is around the corner.  It is really tiresome, I have to say.

Now, you might say that I simply follow the wrong people, and that may be true, but my feed hasn’t changed, and I never look at the algorithm’s selections for me, I only look at my followings.  So, I cannot tell if people have become that much more bearish on the overall situation, or if they simply write these things because they believe they will get more engagement.  I fear it is the latter, but that simply devalues anything useful they may have to say.  Mostly, it’s frustrating to try to get an unbiased sense of what is happening in the world these days.  After all, while I understand that governments put out propaganda constantly, I thought the idea behind X and Substack was you could avoid that.  I think I am going to go back to reading books!

So, as we await this morning’s payroll report, I’ll try to touch on the key issues I believe matter.  Starting with the yen, which continues to garner attention, or more accurately, the joint intervention garners attention, I first have to laugh at the following Bloomberg headline, “Yen Surrenders Nearly Half Its Gains From US-Japan Intervention”.  This was written by Mia Glass, and I don’t know anything about her except her grasp of arithmetic is tenuous.  Here is the chart of USDJPY and while the yen has been weakening steadily since the intervention last week, half?  Even taking the spike low into account, we are nowhere near a 50% retracement and on a closing basis, it is a ridiculous claim.

Source: tradingeconomics.com

There continues to be much fodder made about Secretary Bessent trying to prevent a meltdown in the Treasury market but Occam’s Razor tells me that it is far more likely that a too-weak yen is bad for Japan because of its inflationary impact and the US because it impedes US exports so joint intervention made sense.  And as I have maintained all along, unless underlying fiscal and monetary policies change, the yen is going to continue to weaken.

Turning to Hormuz, the press continues to write with glee about President Trump’s miscalculation and the US losing the war and whether Iran and Oman are going to come to some agreement on the Strait, but oil prices, while they rallied a bit yesterday, are lower this morning by -0.6% and -9.25% in the past week.  Looking at the chart below, despite all the discussion of inventory depletion, which are real, but obviously not as important to the price as many previously believed, the trend remains downward and we are well below the trend.  Frankly, at $75/bbl, it appears the world works fairly well.

Source: tradingeconomics.com

Look, I would rather pay less for my diesel, and I know you would all like to pay less for your gasoline, but here’s a 20-year history of the RBOB (NYMEX gasoline) contract.  We are hardly in unprecedented territory having spent a lot of time around here from 2011 through 2015 as well as the beginning of the Russia/Ukraine war.

I have no idea how things will end up in Iran, nor does any other commentator.  I know I am happier if Iran does not have a nuclear weapon and ballistic missiles that can reach Europe, let alone the US.  But I would say the market has almost lost interest in the war.

As to the hyperscalers and the AI bubble, in truth, it seems much of the animosity has been turned toward SpaceX as everyone loves to hate Elon almost as much as they love to hate Trump.  But it appears by many metrics that equity markets continue to benefit across the board from strong earnings results, with ~85% of companies (depending on your source) beating estimates which is well above the average of 77%.  So, the economy continues to grow pretty strongly, and companies continue to make money, and investors continue to want to buy shares.  The hyperscalers aren’t leading the pack anymore, but they have not collapsed either.  There are many who continue to explain this cannot go on forever and there will be a reckoning, and they may well be correct, but in this case, being early and being wrong are the same thing.

Ok, enough of that.  Let’s see if anything noteworthy has happened overnight.  The truth is, not especially.  Asian shares were mixed with Chinese shares doing well after solid trade data, but the rest of the region drifted lower.  European shares are firmer across the board after broadly positive data (German IP and Trade, French Trade) although the French Unemployment Rate ticked higher to 8.3%.  And US futures are higher this morning as well ahead of the NFP report.  Despite the doom and gloom, equity markets are doing fine.

Bond markets have barely moved overnight, although we did see Treasury yields back up 5bps yesterday.  That appears to have been on the back of the oil price rise, although as I look at probabilities of central bank rate hikes, there is a growing belief that the Fed, ECB and BOJ are all going to raise rates next month as hiking rates into an energy shock seems to be their MO.

Source: rateprobability.com

We discussed oil but gold (+2.0%) and silver (+4.1%) are the real story in commodities as both are extending their recent rallies from the consolidation lows.  For instance, silver is higher by 11% this week and $9/oz since July 17th.

Source: tradingeconomics.com

Finally, the dollar, despite all the anxiety about the yen, remains quiet overall.  The DXY is below 100, back in its range and showing no inclination to move in either direction.  This morning ZAR (+0.7%) is the king of the hill on the rally in gold while MXN (+0.3%) is a touch higher after Banxico left rates on hold.  But remember, peso rates are still high and economic growth continues apace so investment opportunities abound.  The peso has strengthened more than 17% since the beginning of 2025, shaking off any tariff concerns easily.

Source: tradingeconomics.com

As to the data, here are consensus forecasts:

Nonfarm Payrolls80K
Private Payrolls78K
Manufacturing Payrolls4K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.6%

Source: tradingeconomics.com

We also see Canadian employment data (exp 6.5% Unemployment Rate) and hear from Thomas Barkin, the Richmond Fed president.  But it is a summer Friday and typically, about an hour after the NFP release, traders are gone for the weekend so don’t expect too much today.

The world is not ending, the dollar is not collapsing, the Treasury market is not collapsing, and equity markets are not about to implode.  My take is the big stories from the past months have lost their luster and I suspect after a lull, we are going to start to focus on the politics of the midterm elections in November.  But until then, have a cold one and relax.

Good luck and good weekend

Adf

A Bad Taste

Posted on by 
For weeks, things appeared to get better
As yields slipped and helped every debtor
But we’ve seen some changes
With yields breaking ranges
And oil back to the pacesetter

So, stocks are not really embraced
While bonds have left all a bad taste
The dollar’s moved higher
While gold’s back to dire
With analysts worldwide disgraced

Investors are not as happy this morning as they had been for the past several weeks as the situation in Iran and the Middle East appears to be deteriorating again.  The US continues to attack Iranian missile launchers and fortifications on a daily basis while Iran continues to fire missiles at targets throughout the Gulf region.  As well, the Houthis are back at it in the Red Sea restricting oil flows through there as well.  Arguably the chart below of oil (+4.0%) is the most descriptive view of what is driving everything.

Source: tradingeconomics.com

Crude is higher by 29% in the past month and back above $90/bbl.  This makes things tough on everybody but the oil companies.  Does this mean we are running out of oil?  I don’t think that is the case.  Rather, the short-term impediments to shipping it are driving the price.  But the price is rising nonetheless and that is impacting everything else.  If you recall when things kicked off in this war back in March, the oil price was the primary catalyst for movement in every market. As things seemed to settle down and it appeared there was an opportunity for a resolution, focus turned back to things like earnings for equities and interest rate differentials for currencies with oil in the background.  But it appears we are back to, as oil goes, so goes every other market.

For instance, here is a chart of oil and 10-year Treasury yields over the past month.  As you can see, the trajectory, especially over the past several sessions, is quite similar.

Source: tradingeconomics.com

But if we look at 10-year yields across Europe, we can see that they are all climbing in sync as well.

German yields have reached their highest level in 15 years according to Bloomberg.

The entire moderation story is falling apart.  So, now instead of conversations discussing the relative merits of AI and whether it will be a boon for mankind or end it, we are discussing the probability that the world will end soon.  I guess it’s no surprise that risk is under pressure.  Of course, the latter conversation doesn’t seem that coherent to me as if there is concern over the end of the world, I would have thought gold would have a better bid!

At any rate, oil is the main story and the driver of every market.  It underpins the question of whether the ECB will hike rates today (they won’t) or whether the FOMC will do so next week (also, they won’t) but the probabilities for those moves have risen.  It has also detracted from the earnings stories, or perhaps exacerbated the negatives, or perceived negatives.

For instance, Alphabet reported last night and Q2 revenues beat estimates coming in at $119.8 billion.  But all the talk is of free cash flow, which in this Bloomberg chart shows how much they are spending on the AI buildout.

Here’s my question, is it bad that Alphabet is spending its money to improve its future?  If it recognizes the criticality of AI to the future of its own existence, it seems like a reasonable move.  Of course, the naysayers claim that spending all that cash is a waste.  I don’t know the answer, and I suspect nobody does yet, but companies spending their cash flow on improving their business seems to be the whole idea behind having companies in the first place.  

It begs the question, on what did investors base the value of Alphabet before AI?  If it was seen as only a cash cow, it certainly traded at a very high multiple for a boring business.  But today, it will be tarred with the oil brush along with all stocks.

Ok, I have gone far afield here, let’s get back to markets overnight.  Yesterday’s lackluster US session was followed by strength throughout most of Asia.  Tokyo (+0.5%), China (+0.25%), HK (+1.3%) and Korea (+4.4%) all had solid sessions with Korea continuing to define what volatility means in equity markets.  Look at the expansion in the daily ranges in this barchart.com chart of the KOSPI over the past month.  It’s remarkable!

European bourses, though, are having a much rougher go of things this morning as Brent crude approaches $100/bbl.  France (-1.1%), Italy (-1.9%), Spain (-0.6%) and Germany (-0.6%) are under real pressure this morning as earnings numbers there have been lackluster and the broader macro picture deteriorates all the while.  As to US futures, right now (7:40), they are pointing lower led by the NASDAQ (-1.2%) although it has not yet breached that critical support level as per the below chart.

Source: tradingeconomics.com

We’ve already discussed bond markets, with yields higher this morning by between 2bps and 3bps across Treasuries and all European sovereign markets.  Turning to the metals, while we had a couple of days where they rallied alongside oil, this morning they have reversed course with gold (-1.3%), silver (-2.6%) and copper (-0.7%) all under pressure.  It seems the interest rate story is today’s discussion as higher yields are the topic du jour.

Finally, the dollar is stronger across the board this morning, although most of this strength just materialized over the past few hours with the Asia session broadly unchanged.  But no matter how you slice it, the dollar is firmer vs. all its G10 counterparts by about 0.25% and almost all of its EMG counterparts by a similar amount.  The exceptions this morning are BRL (+0.25%) and KRW (+0.3%).  Regarding Brazil, you must remember they are an oil exporter, so benefit from high oil prices and have amongst the highest real interest rates around, so draw capital for that as well in the carry trade.  The real has appreciated about 8.5% during the past year, so this is nothing new.  As to KRW, the government’s efforts at internationalization continue to be paying off and a look at the chart below shows that this trend is quite strong right now.

Source: tradingeconomics.com

There was an interesting article in Bloomberg this morning explaining how the dollar’s weakness vs. LATAM currencies has begun to bite for local companies but I find it quite interesting when it comes to discussions about the dollar; some find it too strong and are looking for it to tumble while others complain it is too weak!  Seems nobody is ever happy here!

On the data front we see Chicago Fed National Activity (exp 0.14) as well as Initial (212K) and Continuing (1809K) Claims.  Of course, we have the ECB announcement shortly, although no change is expected.  Something getting very little press is the fact that Crude Oil stocks rose in the US last week, but I guess that doesn’t suit the narrative!

This market is entirely focused on oil, and as it moves, so will everything else.  If oil keeps climbing, look for stocks and gold to fall while yields and the dollar rise.  If oil reverses, so with those moves.

Good luck

Adf

Decidedly Iffy

Posted on by 
Though war in Iran keeps on going
The impact is not really showing
Risk assets seem fine
And oil’s benign
So, bubbles still need some more blowing

As I often say, markets are perverse and recent price action is a perfect example of this reality. As the US struck Iranian targets for the 10th consecutive day, and risk appetite during yesterday’s US session clearly waned such that all three major indices closed slightly in the red after solid openings, it was easy to expect a continuation of a risk-off attitude this morning.  But as you can see from the tradingeconomics.com screenshot below at 6:45 this morning, only Australia last night did not get the memo.

So, for now, it appears that everything is just fine.  The big banks all reported blow-out earnings last week and next week we are looking forward to the big tech names’ earnings reports.  Now, recent price action has shown that companies that miss their estimates are punished severely, so there is ample opportunity for more fireworks this week.  But so far, a look at the chart of the NASDAQ below shows the line in the sand that must hold in many market technicians’ eyes to keep the party going, and it continues to hold.

Source: tradingeconomics.com

It’s funny, yesterday afternoon I was considering buying some QQQ puts as my concern was that we were about to break down and a 5%-8% correction would be quite reasonable.  My read on the sentiment was turning decidedly negative, although I didn’t pull the trigger, deciding to wait for the actual break before acting.  And last night I wrote the following limericks, expressing my sense of things.

The mood is decidedly iffy
With stock market bulls getting miffy
And now we’ve heard calls
For much further falls
With bears’ attitudes, oh so sniffy

So, two things have risk-takers tense
The first is the increasing sense
That war in Iran
Has no master plan
And may cause, more problems, immense

The second is whether AI
Has peaked, or has further to fly
If we’ve seen the top
The ensuing drop
Will bring a Wall Street hue and cry

In fact, I think it is instructive to help understand just how quickly sentiment can change without any obvious catalyst.  For the life of me, reading through the headlines this morning, there is nothing I have seen that would cause me to believe things are so much better today than at the close yesterday.  But perhaps this is a case of less market activity allowing a bit more volatility in markets.  After all, it is summer and there are many market participants on vacation on any given day.  According to Grok, in the past 5 trading sessions, average volume for NASDAQ shares was about 7.6 billion, but as large as that is, it is well below the YTD average of around 9.0 billion.  In reduced volume markets (no matter how large they are) there can be large, unexplained moves based on individual flows.  I’m grasping at straws here!

Regardless, this is where we stand this morning.  There are headlines dueling between further military action and further efforts at peace talks, with markets clearly preferring the latter rather than the former.  Oil prices (+0.9%) remain within their recent range although are creeping higher this morning.  Is this a prelude to a move back to $100/bbl?  

Source: tradingeconomics.com

The problem with that story is that there continues to be a massive supply of crude oil around.  And Ukraine’s success in attacking Russian refineries has actually brought more crude to market as the Russians can no longer refine their own in the same volumes thus are shipping it to anyone who will buy it. 

Products, though, are a different story as the lack of refining capacity (US refiners are running at about 98% capacity) has led to record high crack spreads.  (The crack spread is the value of the products created from crude; gasoline, jet fuel and diesel largely, compared to the price of a barrel of crude.  The higher that spread the more profitable the business is for refiners, and the more we pay at the pump). Referring back to the chart above, the blue line is gasoline futures in NY, which as you can see are much closer to their early war highs despite the more dramatic decline in oil (green line).

In fact, this chart may be the best metaphor for the current sentiment in the US with the population suffering from rising gasoline prices while the government touts the decline in crude prices.

Net, I am having trouble finding a single coherent narrative that is widely believed.  So, let’s look at how other markets behaved overnight, having already seen equities and oil.  Bond yields rose yesterday with Treasury yields higher by 5bps and a further tick up this morning.  Similar price action was seen in Europe although more of these markets are +2bps this morning, rather than the +1bp in Treasuries.  And JGB yields rose 3bps overnight.  

Speaking of Japan, you may recall the story from about two weeks ago where Japanese FinMin Katayama expressed the idea that Japanese pension funds should consider investing more domestically, bringing home some of their massive $3+ trillion in assets.  The market got quite excited about that and as you can see in the below chart, the yen immediately rallied.  

Source: tradingeconomics.com

Well, that was sooooo two weeks ago!  This morning, the yen is just 5 pips, as I write, from breeching the peak seen before the last intervention scare.  As you can see in the chart, the move is extremely gradual, but in this case, the tortoise is being played by the yen.  I saw more discussion on this pension story this morning but while I think it is highly probable to play out over time, I think the timeline is better measured in years, not weeks, or even months.  As such, the gradual depreciation of the yen seems likely to continue.  Elsewhere, it remains very hard to get excited about the dollar vs. any currency right now.  Sure, NOK (+0.6%) is rallying on the oil rally, and perhaps the real surprise today is ZAR (+0.5%) which despite higher oil has seen higher gold prices help sustain it.  But if we look at the dollar writ large, the ‘breakout’ from its year-long range seen back in mid-June has been a damp squib as per the below chart of the DXY.

Source: tradingeconomics.com

Perhaps the big surprise this morning is the metals (Au +1.2%, Ag +4.2%, Cu +3.1%) are all higher despite the rise in oil prices and yields.  While I remain long term constructive on the metals sector, it is very difficult to understand what is driving today’s price action at this point.

And that’s really it today.  There are no frontline data points to be released so I expect that oil sentiment will continue to lead markets although there will certainly be excitement about equities if they can maintain the rally today.  As to the dollar, nobody seems to care.

Good luck

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Iran’s Bases, to Stress

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For nine days and nights the US
Has sought, Iran’s bases, to stress
So, ships through the Strait
Will now have to wait
Until Trump has made more progress

The upshot is prices for crude
Have risen a fifth and are skewed
Right now, to go higher
As three key suppliers
All find their production subdued

Oil (-0.7%) started the overnight session more than 2% higher after nine consecutive days of US military strikes on Iranian ports and missile sites amid more threatening rhetoric on both sides.  It certainly seemed like things were rapidly deteriorating.  Iran struck targets in Jordan as well as Kuwait, Qatar and Bahrain as the conflict escalates.  As such, we cannot be surprised that there has been a steady rise in the price of oil during this period.  Since the increase in fighting, WTI prices have risen about 20%. However, a quick look at the chart below shows that things reversed overnight.  

Source: tradingeconomics.com

The proximate cause for this reversal was commentary from Secretary Rubio that Iran has signaled an interest in resuming negotiations.  Additionally, there is another story about other Gulf intermediaries, although unnamed, who are trying to bring proposals toward the same end.  Now, the one thing I know is that both sides in this conflict (and any conflict really) put out reams of propaganda, especially about the conflict.  With that in mind, we have no way of knowing whether negotiations are going to restart or not.  However, it appears market participants are willing to believe that is the case.  

What does this mean for markets?  If we have learned nothing else throughout this conflict, it is that many old relationships are no longer operating the way they had in the past.  Consider gold for a moment.  Prior to this conflict it was considered the ultimate safe haven, the thing you wanted to own if things got really bad and there was an escalating war.  And yet, here we are with gold having fallen some 25% since the US first bombed Iran as you can see below.

Source: tradingeconomics.com

Now, two things about this are that first, that followed a remarkable rally for the previous twelve months, so a correction wasn’t crazy and second, it seems that one of the key drivers in the price decline was selling of gold by sovereigns that needed the money including Russia and Turkey.  After all, that is why those reserves exist, for a rainy day, and it was certainly raining hard.  Nonetheless, that narrative theme, owning gold in case of war, has not played out at all as expected.  

Or we can look at the equity markets, especially tech stocks.  It is hard to look at the chart of the NASDAQ below and conclude that the Iran conflict was anything but beneficial for them.  This, too, runs counter to the general narrative prior to the war that risk assets would suffer during a war.

Source: tradingeconomics.com

Now, if we widen our lens a bit to include other nations’ equity markets, Korea in this case, the story is not so sanguine.  As you can see from the below chart of the KOSPI, it has fallen 29% since it peaked about one month ago.

Source: Bloomberg.com

But is that war related?  Or is that the air coming out of what appears to have been a massive bubble in semiconductor stocks.  Recall, about 40% of the value of the KOSPI is made up of just two companies, SK Hynix and Samsung, and both have mooned because they build semiconductors that are in huge demand due to the AI race around the world.  

Now, one of the few truisms in markets is that every shortage is followed by a glut as the high prices from the shortage lead to massive overinvestment in whatever is lacking.  So, consider this comment from someone I believe is quite reliable.

There will be a comeuppance in tech sector shares, I believe, although I would not dare to guess when.  Semiconductors are historically a cyclical industry, and I don’t think anything has changed about that, except perhaps the amplitude of this cycle.  But there will be a downwave and likely one that wipes out many of the gains seen.

And how has the escalation/de-escalation played out elsewhere?  Well, Chinese shares rallied (+1.5%, HK +2.3%) although that was because the Chinese plunge protection team was in the market buying shares, and they told us so.  Tokyo was closed for Marine Day and otherwise, Friday’s weak US performance was followed by general declines, although far less than Korea’s -4.5%.  As to Europe, there is very little ongoing this morning with virtually no data, no commentary and limited market movement.  Arguably, the only story of note was the official resignation of Kier Starmer as PM and the installation of Andy Burnham, although that has resulted in the FTSE 100 selling off -0.5%, the laggard in Europe.  And given his history, including a lack of experience and stated preferences for far-left policies, I think there could be more to come there.  As to US futures, at this hour (7:30) they are slightly higher across the board, +0.3% or so.

Treasury yields have edged higher by 2bps, and European sovereign yields are higher by 1bp across the board with only UK gilts (+3bps) doing worse.  But it remains difficult to look at 10-year yields and get overly excited about anything.  I grant that there has been some choppiness, but in the big scheme of things, a 20bp range on a 4.5% handle over the course of the past month is not all that shocking, especially given the backdrop of a war and extremely volatile oil prices.

Source: tradingeconomics.com

With oil retreating, the three major metals, gold (+0.4%), silver (+2.4%) and copper (+1.2%) are all firmer this morning.  That relationship has been quite consistent, I will admit.

Finally, the dollar remains uninteresting overall with the DXY little changed although there have been two stories of note.  First, KRW (+0.6%) has rallied more than 5% over the past several weeks as the BOK works to change its status from a restricted currency to one that is freely convertible.  They have just announced plans for that to become the reality starting in January 2027 and I expect that it will help the won going forward.

Source: tradingeconomics.com

While the downside of convertibility is a potential increase in volatility, one need only look at the chart above to see it was already reasonably volatile.  But the positive is that KRW can become a viable asset for international utilization, opening up investment to a much wider community and that is inherently strengthening.

The other story is INR (0.0%) which while little changed this morning, saw another bout of central bank intervention on Friday as you can see on the chart below (the long green spike downward on the second candle from the right).

Source: tradingeconomics.com

Alas, the 1.4% gain was very short-lived and merely wasted some more of the RBI’s reserves.  The rupee is likely to remain under pressure until the Iran conflict ends as higher oil prices are a severe impediment to the Indian economy.  I cannot help but think that we are going to test 100.00 at some point before the end of 2026, although I also imagine we will see some more substantial changes from India going forward to help mitigate the impact.  But other currencies are doing little overall.

On the data front, it is an extremely quiet week with the ECB meeting (no change expected) arguably the highlight on Thursday.

TodayLeading Indicators-0.1%
ThursdayECB Rate Decision2.25% (unchanged)
 Chicago Fed Index0.14
 Initial Claims212K
 Continuing Claims1809K
FridayNew Home Sales610K
 Flash PMI Manufacturing54.5
 Flash PMI Services51.5

Source: tradingeconomics.com

As we are in the quiet period, there will be no Fedspeak until, at least, the FOMC meeting next week.  So, the war remains the story to watch, and who knows how that will go this week.

Good luck

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