Tag Archives: #politics

An Eye Blink

Posted on by 
Last night it appeared a reprieve
Was offered, though I don’t believe
That Trump will delay
Much more than a day
Ere US Marines, wins, achieve

But as of last night, markets think
That peace will come in an eye blink
Thus, futures have rallied
While bond prices dallied
And oil has started to sink

This is the Tuesday night look, which is subject to significant change by the time I wake up tomorrow morning.  But here are the futures prices at 9:30pm:

Source: tradingeconomics.com

As you can see, US futures are higher and the Nikkei 225 is also modestly higher with no indication that there is concern over the US landing on Kharg Island and other Iranian key strongholds.  All this comes after news has filtered out that Ahmad Vahidi, who appears to be the senior most IRGC leader left, has arrested the civilian government members who were scheduled to meet with the US and hammer out a deal.  To my eyes, and from what I have read from what I believe is an excellent source, marines will be on Kharg Island before the week is out.  It strikes me if that is the case, the current equity rally, which has been impressive, will get challenged.

As to bonds, last night they were essentially unchanged with 10-year yields at 4.29%.  Again, this is not the stuff of major concern.  And oil?  Modestly lower and back below $90/bbl.

The early results are confusing
With recent attacks Iran’s choosing
But elsewhere there’s hope
That peace is in scope
Despite lots of, others, accusing

As of 6:20 this morning, although there have been several ships fired upon by Iranian gunboats, the US has not escalated, and the President has indicated he is waiting for news today on the situation.  One of the takes is that the Iranians are going to come to the table and seek a deal, although it is difficult for me to believe that Vahidi is ready to cede power.  But like virtually everybody else, nobody really knows what is happening.

However, markets appear to have made up their mind that the worst is over and there is no reason to panic any further.  In fact, it appears they are getting excited about the opportunities that will come about because of all the post-war reconstruction that will be necessary and will certainly be profitable for those companies engaged.

The other story from yesterday was the confirmation hearings for Fed Chair nominee Kevin Warsh.  I imagine it went about as largely expected with every Democrat despising him and every Republican liking him, but until the DOJ case against Powell regarding the reconstruction of the Eccles Building is finished, Senator Thom Tillis has said he will not allow a floor vote.  Warsh did consistently explain that the Fed has lost its way and has not achieved its goals so it is time to start thinking of new approaches.  And it is certainly true, as the below chart shows, that the Fed has been a failure with respect to its inflation target of Core PCE at or below 2.0%, a number last seen in February 2022 (the left=most bar on the chart).

Source: tradingeconomics.com

And with that in mind, let’s turn to markets this morning and see how things played out overnight and are evolving right now at 7:00.  US futures are virtually in the same place they were last night as per the below screenshot from tradingeconomics.com

Asian markets were mixed overall with Tokyo (+0.4%), China (+0.7%) and Taiwan (+0.7%) all having a decent day while HK (-1.2%) and Australia (-1.2%) led the way lower for those regional exchanges that were under pressure.  But in truth, it was about 50:50 with respect to gainers and losers.  Certainly, there was no strong theme.  Meanwhile, in Europe, markets have drifted a bit lower, but the CAC (-0.3%) and Spain’s IBEX (-0.3%) seem to be the worst of it.  Net, it is hard to get too excited about anything in the equity space right now.

Similarly, bond markets are somnolent with Treasury yields edging lower by -1bp and similar price action in European sovereigns with the entire continent, and the UK, showing small yield declines of between 0bps and -2bps.  Overnight, JGB yields were unchanged as well.  While we continue to get inflation reads that include the war and the sharp rise in energy prices, there is no indication prices are running away yet.  For example, the UK (3.3% headline, 3.1% core) released CPI this morning as did South Africa (3.1% headline, 3.2% core).  Frankly, if you look at the chart below showing headline CPI for both nations (South Africa in blue, UK in grey), you would be hard-pressed to attribute any price pressure to the war given what has been going on in both places for the past three years.

Source: tradingeconomics.com

Turning to the commodity markets, oil (+0.8%) has rebounded from last night’s levels, but not that much, although WTI is back above $90/bbl, barely.  NatGas (+1.15%) remains the absolute bargain in the energy world with US prices at $2.72/MMBtu, vastly cheaper than oil on a per unit basis of energy.  Interestingly, in the metals markets, the recent negative correlation between gold and oil has broken down this morning with the shiny stuff rallying and taking all its friends along for the ride (Au +0.8%, Ag 2.0%, Pt +2.5%, Cu +0.7%).

Finally, the dollar doesn’t really care about anything right now, virtually unchanged against most of its counterparts this morning.  There are a few outliers, notably NOK (+0.9%) which continues to benefit from the oil story, CLP (+0.3%) which is higher on copper’s rally and NZD (+0.3%) which continues to gain on rising expectations of higher rates there.  One other amusing thing was a story in Bloomberg this morning about CNY and how its recent strength, it has gained more than 6% over the past year as the below chart highlights, is causing problems for Chinese exporters.

Source: tradingeconomics.com

Of course, this has been a US (and global) complaint for a long time, that the renminbi has been manipulated to remain excessively weak to provide a competitive advantage for Chinese exporters.  In fact, according to the OECD, the CNY’s PPP value is approximately 3.303 vs. its current level of 6.82, meaning it is trading in markets at half its appropriate value.  

Source: ceicdata.com

My sense is that TEMU would not be able to sell all that sh*t so cheaply if that was the exchange rate, just saying.  In fact, this is something President Trump has been bashing the Chinese on for years.  But Bloomberg managed to offer a sympathetic tone for those “poor” Chinese companies who have seen the CNY gain 6% in a year.

Off the soap box and on to data where the only releases are the EIA oil inventories with a modest expected crude oil draw.  This comes after the API indicated a 4.1-million-barrel draw last week.  There are no Fed speakers on the docket with the FOMC meeting coming up next week, so my take is today will be all about the ongoing earnings releases, which thus far have been quite positive, and waiting for President Trump, who ostensibly will be speaking at 3:00pm this afternoon.  It is hard to have a strong opinion in this market, that’s for sure.  Unchanged seems to be the best bet absent a major headline announcement.

Good luck

Adf

Blow-By-Blow

Posted on by 
It wasn’t all that long ago
That if people wanted to know
The news, they would turn
To TV to learn
The latest events blow-by-blow

But now TV news when it airs
Has reached the point nobody cares
‘Cause it’s been on X
Without any checks
For networks, the stuff of nightmares

Which brings us to info this morning
That claims, Tehran, talks have been scorning
But also, we hear
A framework is near
For risk takers, this is a warning

I wonder if all of you face the same situation I do, which is answering the question, what is real?  The fog of war is truly a descriptive term for the inconsistencies in the information that comes out of the Trump administration, the mainstream media that covers it with their own spin, the Iranians (who seem to be fighting aggressively among themselves) and then looking at prices in financial markets as well as economic data, much of which seems to be inconsistent.  How exactly are we to gain an understanding of the big picture, let alone the intricacies of particular markets, given the overwhelming volume of noise we absorb every day.

The below table shows the prices of key markets when I last wrote compared to this morning:

MarketApril 14April 20
Oil$97.35$88.50
Gold$4778$4796
10-year yields4.295%4.267%
S&P 500 futures69067090
DXY98.0498.24

Source: tradingeconomics.com

I know this is an incomplete listing of things, but I just wanted to touch on the basics.  A quick look shows that oil has had, by far, the largest move, nearly a 10% decline, but after that, very little net activity.  Sure, there has been some volatility in the interim as you can see in the following charts from tradingeconomics.com, but markets always have a certain amount of inherent volatility, it is the nature of the beast.

In the same order as above:

Oil 

Gold

10-year Treasury

S&P 500 Futures

DXY

Of course, much of the movement came after Friday’s announcement by President Trump that the Strait of Hormuz was now open, and the overnight reversals have been a response to the Iranians contradicting that statement and firing on several ships.

It appears that as of now, the Strait is not yet open for free navigation, although apparently there are going to be a second round of talks tomorrow in Islamabad.  An interesting story I read indicated that the internal divisions between the IRGC and the secular government in Iran are huge, which is one reason we seem to be hearing multiple things regarding negotiations and goals.  We also must remember that all sides in a conflict like this issue propaganda for their own populations that may have nothing to do with their stance in the negotiating room.

The net of all this is, reading about things, no matter how well-read you are, doesn’t really capture the reality on the ground in my view.  However, someone else made the point that focusing on the actions, not the words, may be a better tell of the situation, and the action of note is that US troops continue to move into the region, not out of it.  I fear there is much more to come here, and the general lack of market volatility is not a sign of calm, but a sign of ignorance on the part of market participants, i.e. nobody really knows what to do!

With that in mind, let’s see how markets have behaved in the wake of the Iranian rejection of the statement the Strait was open.  Starting in equities, apparently, Asian investors didn’t care as we have seen gains in Tokyo (+0.6%), China (+0.6%), HK (+0.7%) and Korea (+0.4%).  In fact, if I look across the entire region, the only notable decline was in Indonesia, and that was only -0.5%.  Otherwise, generally speaking, equity investors in the region are sanguine about the current situation.  This seems a bit odd to me as Asia is the region that is most negatively impacted by everything going on, but then, I’m just an FX guy.

In Europe, though, things are not as happy with all major indices lower this morning.  Germany (-1.4%), Italy (-1.4%), Spain (-1.4%) and France (-1.2%) have set the tone while the UK (-0.8%) is not quite as negatively impacted.  I continue to read a great deal about the European rearmament efforts, but net, it doesn’t appear investors are flocking to the continent right now.  Uncertainty as to energy availability remains a key impediment, at least in my mind, with respect to a strong investment thesis here.  As to US futures, despite the Iranian denial regarding the Strait, the major indices are only lower by -0.6% across the board.

In the bond market, Treasury yields have edged higher by 2bps since Friday, but as you saw above, remain essentially unchanged from last week.  European sovereign yields are higher by between 3bps (Germany) and 6bps (Italy) as concerns continue apace regarding the future for European inflation as well as economic activity.  JGB yields slipped -2bps overnight amid news that the BOJ is reportedly not considering a rate hike at their meeting next week.  In addition, I must note a strong earthquake, measuring 7.4 on the Richter Scale, occurred a few hours ago, so we shall watch closely for how things evolve.  Recall it was Fukushima that set off the European madness to end their nuclear power efforts.  Hopefully, regardless of the outcome, nothing so incredibly stupid will come of this.

In the commodity space, oil (+5.9%) is obviously higher, but not even back to $90/bbl.  There are many conflicting narratives regarding the availability of oil, how much is in storage, how much inventory is around and whether we are going to see production increases outside the Middle East.  No market is more directly impacted by the Strait than oil, and since we have no idea how that will evolve, it is hard to see into the near future.  Ultimately, I remain of the view that there is loads of oil around and over time, it will come to market keeping prices in check.  But it is going to be a bumpy ride.  Turning to metals, as has been the case lately, oil and gold (-0.9%) have maintained their negative correlation with the barbarous relic taking silver (-1.7%) and copper (-1.5%) along for the ride.

Finally, the dollar remains an afterthought to traders right now, barely moving against most of its counterparts as the opportunities elsewhere for outsized gains remain far larger.  Looking across the major currencies, they are all within 0.2% of Friday’s close, although the direction is uniform with a modest dollar rally.  

On the data front this week, perhaps the most interesting thing will be Fed Chair nominee, Kevin Warsh, and his senate confirmation hearings.  But here is what the data looks like.

TuesdayRetail Sales1.4%
 -ex autos1.4%
 Control group (ex-gasoline)0.2%
 Business Inventories0.3%
ThursdayInitial Claims212K
 Continuing Claims1820K
 Flash Manufacturing PMI52.5
 Flash Services PMI50.0
FridayMichigan Sentiment47.6

Source: tradingeconomics.com

Much has been made lately about the dichotomy between the Michigan sentiment survey printing its lowest level in the 84-year history of the index while the S&P 500 is making new, all-time highs.  As I mentioned at the top, what should we believe?

If pressed, my own view is that the US is going to increase the military activity, but that oil prices are already anticipating that action.  Much will depend on the success of that situation which remains unknown although I remain positive regarding our military’s capabilities to complete their mission.  That will define risk appetite, which I anticipate would be reduced initially, although any signs of success would see that reverse.  But again, I’m just an FX guy, so take it for what it’s worth.

Good luck

Adf

PS, this is where I have been the past several days which prevented (?) me from writing, if you care.

Completely Reversed

Posted on by 
The market response was, at first
That things moved from bad to now worst
But by session’s end
The short-term downtrend
Was over, completely reversed

The narrative now making rounds
Is by starting naval lockdowns
Trump’s turned Iran’s table
And thus, may be able
To finish the goal he expounds

The irony, to me, of the entire Iranian situation is that, generically, the US shouldn’t need to care about Iran anymore.  Back in 1979, when the US imported a majority of its oil, everything in the Middle East was critical for the economy as a whole, and therefore politically.  But that is no longer the case, and if the Iranian leadership had simply wanted to repress its own people and espouse its Muslim fundamentalism, without sponsoring terrorism around the world, Iran would have faded from the view of the US establishment.  While there would have undoubtedly been some who would say it was a terrible humanitarian crisis, and the US should do something about it, unfortunately those situations are rampant around the world.  

Don’t get me wrong, I think the Iranian regime has been one of the cruelest and most repressive on the planet, I’m simply highlighting that to the US, it was an oil source throughout history.  Now that it’s no longer a key oil source for the US, it has no political constituency in the US.  And yet, here we are with 3 aircraft carrier groups in the vicinity doing incalculable damage to the nation because that leadership was not satisfied to simply repress its own people but felt it was their mission to destroy other nations, notably Israel and the US.  That’s all I will say about the rationale for the current events.

But speaking of current events, it seems that President Trump’s decision to blockade the Strait of Hormuz has shown early signs of being quite effective.  Two stories have made that point, first that the Chinese have suddenly made their first comments about the war, explaining that free navigation through the Strait is an imperative and second, that the Iranians appear to be quite interested in a second set of discussions after the ones last weekend fell apart.

The interesting thing about markets is their ability to anticipate the way things work out, as despite the early panic over the weekend regarding the talks failing and the blockade being enforced, price action yesterday was entirely positive, reversing all the Sunday night fears.  Once again, the oil chart for the past week shows the continued ups and downs, with the latest leg back down.  This morning, WTI is lower by a further -2.3% and back well below $100/bbl.

Source: tradingeconomics.com

In truth, we cannot be surprised at either of these stories as the Iranian leadership knows it cannot live without its oil exports, nor the Chinese without its access to that oil.  While it is still unclear how things will evolve from here, a successful conclusion of the war, with Iran giving up its enriched uranium and pledging to stop trying to go nuclear is seemingly closer to fruition than before all this started.  Certainly, the market believes that is the case given the S&P 500 has traded back above its pre-war level and is now within 100 points of its all-time high just above 7000.

Source: tradingeconomics.com

And here’s the thing about the oil market.  As we know, every shortage is followed by a glut.  Every non-Gulf producer has been going full bore since this began and oil prices spiked, and this was alongside the massive releases from strategic petroleum reserves around the world.  If you add up the amount of oil that is sitting in tankers in the Persian Gulf, along with the amount that is in storage there, and the amount of both Russian and Iranian oil that had been in transit and unsanctioned, the numbers are staggeringly high.  The math I saw from Alyosha (Market Vibes) is somewhere around 600 million barrels are going to come flooding into the market in fairly short order once the Strait is reopened, and it will be reopened, of that I am certain.  At the same time, the war has reduced revenues of the gulf nations for the past 6 weeks, and they will want to be pumping as much as possible, at any price (remember, in Saudi Arabia, the cost per barrel to pump oil is estimated to be between $3 and $6, so $30/bbl oil is still profitable.). While this is not an investment discussion nor advice of any type, I have exited all my oil focused positions at this point.

There is another related story here as well, this about the Chinese economy.  Last night they released their trade data, and it was substantially worse than expected.  As you can see from the chart below, the surplus barely topped $50 billion, compared to a consensus estimate of $112 billion with not only a massive increase in imports, 27.8% and likely highly energy related, but a significant decline in exports, just a 2.5% rise there.  Again, if you wonder why suddenly President Xi is interested in reopening the Strait of Hormuz, the fact that it seems to be having a direct impact on the Chinese economy is one of the reasons.

Source: tradingeconomics.com

(A note about the data above shows that each February, the export numbers decline as a result of the Chinese New Year celebrations but always rebound strongly in March.  And this was March data released that fell so sharply, a far more concerning outcome for Xi.)

So, with all this in mind, how have other markets fared?  Well, equity investors around the world are over the moon as you can see from the Bloomberg screen shot below.  ‘Nuff said.

Bond yields have also fallen across the board as the decline in the price of oil, plus the idea that the war may end sooner than some had expected, thus reducing the inflationary pressures greatly, has bond investors grabbing for yield.  Yesterday saw Treasury yields slip -2.5bps though this morning they are unchanged.  In Europe, sovereign yields are all lower by between -3bps and -6bps while JGB yields fell -4bps overnight with even larger declines in the rest of Asia.  Fear is clearly not a factor this morning.

It should not be surprising that precious metals prices have rallied as well, between lower yields and a growing belief that forced sales have stopped.  So, gold (+0.5%), silver (+2.5%) and platinum (+0.5%) are all having a good day.  But so are the base metals with copper (+0.8%) not only recouping its war-related losses, but actually back within spitting distance of its all-time highs set in January above $6.00/lb.

Source: tradingeconomics.com

Finally, the dollar is giving back more of its war-related gains and lower across the board this morning, with G10 currencies gaining on the order of 0.3% to 0.4% across the board, while EMG currencies show similar gains with one major outlier, INR (+1.4%) easily explained by the fact that India has been the hardest hit economy from the war, and so the prospects it is ending have had a very beneficial impact on the rupee.  But to be clear regarding the dollar, all we have seen is that it has moved back to the middle of its yearlong trading range between 96.50 and 100.00 based on the DXY as per the below.

Source: tradingeconomics.com

On the data front, yesterday’s Existing Home Sales numbers were weaker than forecast and many pundits have been claiming that as a signal of much greater economic weakness.  We shall see.  This morning we have already seen the NFIB Business Optimism Index released at a weaker than forecast 95.8, not a great sign, but as you can see below, still well above levels of a few years ago.

Source: tradingeconomics.com

We also get PPI (exp 1.1% M/M, 4.6% Y/Y headline, 0.5% M/M, 4.1% Y/Y core) and a few more Fed speakers.  With CPI already having been released, PPI loses much of its luster, although it helps economists estimate PCE a bit better.  One cannot be surprised that Governor Miran explained he expected to see inflation back to target by this time next year, but I am not holding my breath for that outcome.

Summing it all up this morning, risk is back baby!!!  If ever you were curious about whether markets anticipate events, today is exhibit A.  I certainly hope the market is correct and we are about to wind down the Iran war but be wary as it ain’t over til it’s over.  If it has ended, look for previous narratives to be resurrected regarding markets, notably the dollar’s demise, but I am not holding my breath over that either.

Good luck

Adf

Checkmate

Posted on by 
The talks twixt the States and Iran
Collapsed like a climate straw man
Now there’s a blockade
In Hormuz, arrayed
As Trump pivots to a new plan

The first move in oil was higher
But I would beware as a buyer
If Trump rules the Strait
That could be checkmate
And force a much longer cease fire

As of 8:00pm last night, after the peace talks fell apart in Islamabad and President Trump announced the US would be blockading the Strait of Hormuz so no ships carrying oil, especially Iranian oil, would be able to pass the blockade, the price of oil spiked immediately as the futures markets opened.  You can see the last week’s roller coaster in the below chart from tradingeconomics.com

The question that needs to be answered at this point is, is there a substantive difference between the US blocking traffic in the Strait and Iran doing so?  I would contend there is a huge difference, especially if you are China.  But also, if you are Iran.  After all, you just lost your trump card (pun intended) and not only that, if Iranian oil is not able to be sold, then Iran runs out of money pretty quickly.  Remember, oil revenues represent approximately 90% of Iranian total revenues.  How long can the IRGC last with no money to pay their soldiers?

In the meantime, the Saudis are pumping 7 mm bpd across the East-West pipeline now, and the UAE is pumping 1.5 mm bpd to Fujairah, taking a decent sized bite out of the missing barrels.  I read this morning that upwards of 7mm bpd are now exiting the gulf via pipeline reducing the overall reduction in oil flow.  Granted, it is still a huge disruption but shrinking.  On top of that, if this continues, the Strait loses its strategic importance, which cements Iran’s loss of power.  In the short-run, oil prices can go in either direction in my view, but this has the opportunity to completely emasculate Iran’s ability to have an impact on the global oil markets in the future.  

And I would not be surprised if President Xi is burning up the lines to Washington because he just lost a key source of cheap oil, and oil he paid for in CNY.  (see WSJ chart below.)

There are many twists and turns here, and I’m sure there will be more.  But as of Sunday night, from what I have read, Iran is in a much worse position than they were on Friday.  Of course, things could all go pear-shaped from here, and this could turn out to be a complete failure.  Our goal here is to try to track how markets will evolve.

The remarkable thing, still, to me is that equity markets remain so blithe about the entire situation.  I make this claim based on the VIX Index, which remains relatively docile despite everything that is happening in Iran and the likely eventual knock-on effects.  But look at the chart of the VIX below which shows that markets are nowhere near as stressed as they have been in the past and are actually much nearer their long-term average. (The two spikes are the JPY intervention in August 2024, which lasted for just a few hours, and then the Liberation Day tariffs in April 2025 which quickly reversed as well.  

Source: tradingeconomics.com

It is worth noting that even the oil VIX, is off its highs and, while somewhat elevated, not running away.

Source: finace.yahoo.com

The thing about the VIX indices to remember, though, is that options decay and holding them is a losing proposition if the underlying market is not moving.  So, to maintain a high VIX, we need to see significant intraday as well as day-to-day price movement.

As Iran remains the major storyline for markets, let’s take a look at how things are behaving this morning.  Oil (+8.2%) has maintained its initial gains but not moved since last night.  NatGas (+1.7% in US, +9.0% in Europe) has also been impacted as there is no movement of LNG tankers through the Strait either.  Interestingly, both gold (-0.6%) and silver (-1.7%) while lower are well off the lows seen in the early overnight session as per the below chart of silver.

Source: tradingeconomics.com

I reiterate that the market perception of the current situation has not nearly matched the hysteria evident in much of the commentary.  I’m not sure whether to attribute that to market insight or market ignorance at this point, although I lean toward the former.  The problem with commentary these days is that hysterical takes generate clicks, and that is the goal of many commentators.

Turning to equity markets, Asian markets were generally, though not universally, lower.  Tokyo (-0.7%), HK (-0.9%), Korea (-0.9%) and India (-0.9%) all suffered on the breakdown in talks and the new blockade news.  New Zealand (-1.2%) was the worst performer, largely because their energy situation is deteriorating more quickly than anyone else’s.  But China (+0.2%), Taiwan (+0.1%) and Indonesia (+0.6%) all managed some gains despite the news.  Again, markets appear to be pricing a fairly benign outcome here.  Either the news is going to get better soon, or there is going to be a massive rerating of equity markets.  Something’s gotta give.

In Europe, things are a bit worse overall with Spain (-1.4%) leading the way lower although Germany (-1.0%), France (-0.9%) and Italy (-0.8%) are all under real pressure as well.  There has been a lot more press lately about how Spain’s PM Sanchez is cozying up to China as he seems to be pulling Spain away from the EU in several areas.  Of course, he is an avowed socialist, so perhaps this should not be that surprising.  However, this is further proof that NATO is surely going to die soon.

One market that has outperformed, though is Hungary (+2.8%) which is rallying sharply on the weekend’s election results that sent President Victor Orban into retirement.  Certainly, most others in Europe are thrilled as Orban had been a thorn in the side of the EU with respect to their Russia stance, but the economy there has been underperforming so new leadership is widely lauded, for now.  The forint (+1.9%) also benefitted from the election outcome.  

As to US futures, as I type at 7:00, the major indices are lower by -0.3% or so, well off the initial levels seen last night that were as much as -1.4% below Friday’s closing levels.  Again, markets remain sanguine over the weekend changes to the story.

In the bond market, Treasury yields have edged higher by 1bp and in Europe, we are seeing rises of between 1bp and 3bps across the board.  Here, too, it is hard to find panic in the streets.  JGB yields (+2bps) have made a new high for the move and continue to edge higher as concerns over the path of inflation rise given the oil price rise.  Last night, BOJ Governor Ueda gave a speech (actually his deputy did because he is in Washington for the IMF/World Bank meetings) and tried to quash the view that the BOJ was definitely going to hike rates at the end of this month, an outcome that had been priced at a 65% probability prior to his speech as you can see from the Bloomberg chart below.

Finally, in the FX market, other than HUF as described above, and NOK (+0.6%) responding to the oil move the dollar is firmer across the board.  However, the movement is not too large, generally on the order of 0.2% or so across the G10 and perhaps a bit more in the EMG bloc.  The worst performer today is ZAR (-0.8%) which is suffering the dual problems of a lower gold and higher oil price.  The other noteworthy thing is JPY (-0.3%) is creeping back toward the 160 level, which remains the default setting for the market belief as an intervention level.

On the data front, Friday’s CPI was hot, but not quite as hot as forecast, although you can be sure that next month will remain hot.  This week brings the following mostly secondary stuff.

TodayExisting Home Sales4.06M
TuesdayNFIB Business Optimism98.6
 PPI1.2% (4.6% Y/Y)
 -ex food & energy0.6% (4.2% Y/Y)
WednesdayEmpire State Manufacturing-2.0
 Fed’s Beige Book 
ThursdayInitial Claims215K
 Continuing Claims1840K
 Philly Fed9.0
 IP0.1%
 Capacity Utilization76.3%

Source: tradingeconomics.com

As well, we hear from eight different Fed speakers over 10 venues.  An interesting aspect of the commentariat lately is that individual FOMC members are going to be far more important as there is a growing diversity of opinion.  So, the monolithic Fed Chair running things and encouraging a vote in a particular way may evolve into an actual election, where the voters vote their hearts, not the Chairman’s views just to get along.  If this is the case, and I think it would be far better than what we currently have, we will need to listen more closely to the individual speakers and start a scorecard to see who seems hawkish or dovish at any given time.  The problem is, I fear it will encourage all of them to speak more frequently, which is a worse outcome, although any given voice will likely be given far less weight.  We shall see if that is the case.

As to the broad scheme of things. My head tells me that the market is underpricing the risks out there, but my eyes explain that this is the current consensus.  I hope they are right and I am wrong about things.

Good luck

Adf

A Slippery Slope

Posted on by 
For one day, at least, there was hope
The war might be shrinking in scope
But as of this morning
The markets are warning
That there’s still a slippery slope

The Strait is still under duress
Though some ships have found an egress
The truce is still frail
And much can still fail
Beware, we’re not past all the stress

The most interesting story, to me, about the cease fire is that Pakistan gave each side different terms so they both agreed to something different.  This might explain the confusion over whether the Israeli attacks in Lebanon were part of the deal, and the question about Iran’s collection of tolls for passing through the Strait of Hormuz.  On the one hand, that very duplicity calls into question the help that Pakistan actually offered in this process.  Of course, the other side is, if that subterfuge is what got the two sides talking directly, and apparently VP Vance is on his way to do that, then it was very worthwhile.  It is still far too early to determine if the fighting is going to stop and if the Strait is going to fully reopen soon, but talks are better than no talks, at least in my view.  

As to who ‘won’ the war, that question will take a long time to answer.  After all, whatever the short-term impacts, if Iran is dramatically weakened and its sponsorship of terrorism is eliminated, the world will have won the war, certainly the Middle East as a whole, as it will make for a much safer place.  However, if the radical wing of the regime there remains in charge and continues to press its global ambitions, then nobody will have won the war, not the rest of the Gulf nations and not the Iranian people themselves.  

In the meantime, since I am not going to bring about world peace, let’s see how markets are behaving.  After all, they really do offer some insight into global affairs as price information is some of the best information available.

After yesterday’s sharp decline in oil prices, we have seen a bounce this morning (+5.0%) although as I type at 6:50, it remains just below $100/bbl.  You can see from the chart below of the past month that we’re kind of in the middle of the range.  Alyosha (read Market Vibes on Substack) explains the Point of Control as the place where a market trades most frequently during a given period of time.  His records show that $94/bbl is that number in WTI, a level we touched and have since bounced from.  Headlines continue to be the driver, and I suppose that the next key headlines will be comments regarding the peace talks.

Source: tradingeconomics.com

NatGas prices (+0.3% in US, +2.0% in Europe) are also rebounding, but not nearly as dramatically.  In a way that is surprising as the Iranian attack on Ras Laffan, Qatar’s main LNG facility has inflicted significant damage, sufficient to cause multiple years of reduced production, yet gas has not been nearly as impacted despite its critical importance to the global economy. 

As to metals markets, gold (+0.4%) continues to find support, but is still far below the highs seen in January, and silver (0.0%) is at a loss for its next move.  On the one hand, silver, especially given its multiple industrial uses, seems likely to have significant long-term support, but right now, along with gold, it feels like owners are still liquidating as they need cash, and speculators aren’t interested yet. I still like both in the long run.

Turning to equities, yesterday’s huge rallies culminated with every major US market gaining 2.5% or more. But that seemed to be the peak, for now at least.  Overnight, Tokyo (-0.7%), China (-0.6%) and HK (-0.5%) all slipped a bit and that was emblematic of most of Asia with Korea (-1.6%), India (-1.2%) and most other markets slipping.  The few gainers (Australia, Taiwan, Indonesia) all managed gains on the order of just 0.2% or so, hardly inspiring.

In Europe, the Bloomberg screenshot explains things well, as yesterday’s euphoria gives way to more circumspection this morning, at least for now.  However, as you can see, equities remain far closer to their highs, than lows based on the gains over the past year.

There was some data this morning showing German IP far weaker than expected at -0.3% after a revised 0.0% print in January.  With this in mind, it is understandable that the DAX is lagging, and it seems ever more likely that Germany is going to have yet another quarter with no economic growth.  Looking at US futures, at this hour (7:10) they are all sitting lower by -0.3% or so.

In the bond market, Treasuries (-1bp) are the outlier this morning as all European sovereign yield are higher between 4bps and 6bps.  Yesterday’s euphoria over the potential end of the fighting and the decline in energy prices is being rethought as, undoubtedly, even if a peace treaty is agreed and signed over the next two weeks, there are going to be major impediments to the resumption of the pre-war status quo, if it ever returns.  I also suspect that investors here are growing concerned that after the European response to this military action, fears the US is going to exit NATO (NATO General Secretary Mark Rutte spent 3 hours behind closed doors in the White House yesterday with no comments afterwards) means that Europe is going to have to borrow and spend even more on their own defense.  This will, of course, strain the budgets as the turn from butter to guns may be a difficult one politically.

Finally, the dollar this morning is mixed.  It should be no surprise that NOK (+0.6%) is leading the way as oil rebounds, although three other major oil producers, CAD, MXN and BRL are essentially unchanged in the session.  The euro (+0.15%) has continued a touch higher from yesterday while the yen (-0.25%) is slipping a bit.  As I said, it is a mixed session overall with no direction of which to speak.

Turning to the data, this morning we get the regular Initial (exp 210K) and Continuing (1840K) Claims as well as the final look at Q4 GDP (0.7%).  But in addition, we get the February PCE data suite, which typically comes at the end of the following month, but given the ongoing issues from the shutdown, seem to be behind.  Expectations are for Personal Income (+0.3%), Personal Spending (+0.5%), PCE (0.4%, 2.8% Y/Y) and core PCE (0.4%, 3.0% Y/Y).  And those numbers are from before the war.  Arguably, of much more importance is tomorrow’s March CPI data, which we can discuss tomorrow.

Yesterday saw yet another build in oil inventories in the US, something which will eventually lead to lower prices, and the FOMC Minutes explaining that they were concerned about both inflation and employment.  In the meantime, a look at the Fed funds futures market shows that the market is pricing even less chance of a rate cut in 2026 with the first one now not assumed until June 2027.

The thing about futures pricing, though, is that while it does give a good sense of sentiment, it is subject to change quickly on new news.  There is much to be said about watching the 2yr Treasury note as the best predictor of Fed funds going forward and you can see how tight that relationship is in the chart below.

Source: tradingeconomics.com

My view on inflation is not that sanguine, and I fear it is going to remain far higher than the Fed’s 2.0% target for Core PCE for a long time to come.  Ultimately, that plays into my views on owning things that hurt when they fall on your foot, or shares in companies that generate profits.  (This is where I also mention USDi, for those of you inclined in the crypto space, as the only inflation-tracking currency around.  Learn more at http://www.usdicoin.com)

As to today, this is the rebound and since nobody knows what will play out in the talks, I would look for a choppy, but inconclusive session in pretty much everything.

Good luck

Adf

What They Most Fear

Posted on by 
For many, it seems very clear
That war is not what they most fear
But rather, for them
They need to condemn
Each Trumpian outcome and sneer

So last night, ere clocks all struck eight
The president said he would wait
Another two weeks
As peace that he seeks
Seemed closer than it had to date

As I’m just a poet in a room in New Jersey, I don’t have any intel on the situation in Iran, but boy oh boy, the number of takes out there is remarkable.  On one side are the naysayers claiming Trump chickened out again, that Iran won this war and the US is forever seen as a loser.  On the other side is Trump played it brilliantly, raising the stakes to a level where even the IRGC leadership decided that the destruction of their nation wasn’t worth the battle.

My observation is that whatever the actual rationale, the world is better off with the fighting stopped.  With that in mind, it is hard to look at the results of the war, where Iran saw both its Navy and Air Force obliterated, its senior leadership decimated and a large proportion of its missile launchers destroyed and feel like they won.  I think this would be called a Pyrrhic Victory.

But from our perspective here, the questions of note are how did markets respond?  You will not be surprised that much of the trauma that markets have felt over the past month has already been reversed.  Let’s start with oil, as that has been the keystone for all markets.  As per the below chart, it has plunged -16% overnight, back well below $100/bbl.

Source: tradingeconomics.com

While this is a picture of WTI, Brent (-14%) also tumbled as did the markets in gasoline (-10.0%) and all other products.  NatGas (-5.3%) fell to its lowest level since October 2024, as per the below chart.

Source: tradingeconomics.com

In Europe, TTF Gas (-14.7%) also tumbled but it remains far above its prewar levels as per the below.

Source: tradingeconomics.com

All told, as would be expected, energy prices have fallen sharply.  Of course, questions have rightly been raised as to whether this will remain the case because, remember, the cease fire is slated for only 2 weeks.  What happens if there is no agreement and the US resumes their attacks?  As well, the status of the Strait of Hormuz remains somewhat cloudy with mixed information about safe passage.  It appears that many ships in there may be able to exit, but will any go back in with the risk of getting stuck again?  My point is this may not be over, but for now, everybody is giddy.

In the metals markets, the rally has been similarly impressive with both gold (+1.6%) and silver (+5.4%) continuing their rebound from the March 23rd spike lows as per the chart below of gold.

Source: tradingeconomics.com

In fact, gold has retraced 16% from that low print and silver 26%.  But here, too, it will all depend on how the Iran situation evolves going forward.  Arguably, if the fighting starts again and oil rises, precious metals will head lower while if a long-lasting peace is secured, I would look for metals to head higher again.

In the equity markets, the all-clear has been sounded, as you would have expected.  The screenshot below from tradingeconomcs.com of futures markets shows that the only perceived loser from this deal is Russia.  Otherwise, every market is substantially higher (Toronto’s TSX is closed in the overnight session) or was so last night in Asia.

The thing we are likely to hear about a lot today is that the S&P 500 has traded back above its 50-day moving average, as per the below chart.  For the technicians, this will be seen as a key outcome and expect to hear much more about a test, and potential break, of the all-time highs of 7000 made back in January.

Source: tradingeconmomics.com

Moving on to bonds, Treasury yields are the big disappointment here, having only declined -5bps heading into the NY open, but as the Bloomberg screenshot shows, European sovereign yields have virtually collapsed, as have yields throughout Asia, although remain higher than a month ago.

It appears that all the fears about rising inflation have been virtually extinguished overnight!

Finally, the dollar has also reversed its recent gains, falling sharply across the board.  Using the DXY (-1.1%) as a proxy, it does seem to measure the average movement, but there have been some real outliers.  For example, ZAR (+2.3%) has benefitted from the combination of much higher precious metals prices and much lower energy prices as South Africa is a net energy importer.  SEK (+2.2%) has also exploded higher, although that looks more like a reversal of yesterday’s sharp decline, than any other news.  But, broadly speaking, currency gains on the order of 1% or more are the norm this morning.  However, as we have seen across almost all markets, this movement merely returns us to the middle of the previous trading range, it is not a signal for the dollar’s collapse.  Just look at the chart below of the DXY.

Source: tradingeconomics.com

So, across all markets, we have witnessed a major reversal of the war induced trauma.  It is not completely unwound nor are we confident it will exist in two weeks if no deal is reached.  But that’s the scoop for now.

While it certainly won’t have an impact today, it is worth looking at the Fed funds futures market to see how it has behaved.  While expectations for the meeting on April 29th remain for no change, as you can see from the aggregate probability table created by the CME, cuts are back in the thought process, although not until the end of this year.

On the data front, we receive EIA oil inventory data this morning and then the FOMC Minutes are released at 2:00 this afternoon, but I cannot imagine anyone paying close attention to those given the changing situation in the Middle East and its impact on markets, especially oil and the prospects for future inflation.

To recap, we all ought to be happy that the Iran war has stopped for now with prospects for a longer peace.  You can love Trump or you can hate Trump, but if he succeeds in eliminating the terror networks that Iran has long sponsored, that is a gigantic net benefit for the entire world.  Nobody has any idea how things will ultimately resolve, but certainly, as we wake up this morning, prospects for the future look better than they did twenty-four hours ago.  Of course, my advice had been to play it close to the vest because of unexpected outcomes like this.  Nobody has any edge trading markets like this, not even the algos.  Perhaps the one thing that will change is trading volumes will start to pick up and increase overall liquidity, and that would be a net positive.

Good luck

Adf

Quite Severe

Posted on by 
The current conclusion to draw
Which could be a huge, fatal flaw
Is war’s not deciding
For traders in guiding
Positions, as few hem and haw

But right now, a deadline draws near
Which ought, by all rights, instill fear
The war’s escalation
Will lead to stagflation
With outcomes in stocks quite severe

As I type some 14 hours from the latest Trumpian deadline for Iran to reopen the Strait of Hormuz or have their electricity and transportation infrastructure destroyed, investors appear to be quite sanguine about the entire process.  It seems very clear to me that market participants are quite certain the President will back away from this threat and extend the deadline or announce some other outcome.  That is the only conclusion I can draw from the fact that equity markets around the world are consistently higher this morning.  Investors clearly perceive this as an empty threat, which tells me that the pain trade is a sharp decline in equity markets if the US and Israel do destroy Iranian infrastructure.  I guess we shall all learn more sometime this evening in NY.

But that is the backdrop for markets this morning.  As I freely admit I do not know what the outcome will be, there is little point in hashing out the issue here.  However, I cannot help but laugh at this clip as a description of the President’s negotiating style.

Moving on, in brighter news, the 4 astronauts have circled the far side of the moon, setting the record for the furthest any humans have been from Earth, and are now starting their return trip after having sent some remarkable imagery of the moon.  

In truth, though, there’s little else to discuss so let’s look at markets.  Yesterday’s session in the US continued the rebound in share prices from the recent nadir on March 30th.  Since then, it has been four consecutive up days although futures this morning are little changed to very slightly lower.  But the US move has been mirrored around the world with essentially all of Asia and Europe back at it today.  

In Asia, while both Japan and China were essentially flat, Korea (+0.8%), India (+0.7%), Taiwan (+2.0%, catching up because it had been closed longer) and Australia (+1.7%) all had strong sessions.  Hong Kong (-0.7%) did slip, as did several of the other smaller regional exchanges, but the mood was pretty bright.  

In Europe, I’ll let the following Bloomberg screenshot do the talking, but you can clearly see that fear is not on the menu right now.  

In the bond market, Treasury yields are higher by 1bp this morning after a flat session yesterday while European sovereign yields have all risen about 3bps as they catch up from their long weekend with no trading.  JGB yields are unchanged this morning as their long, slow climb takes a day of rest.

In the commodity space, I first must correct an error I have made regarding the relative prices of WTI and Brent.  My go to source for oil pricing has been tradingeconomics.com.  Their methodology shows the front month of the futures contract, but they don’t list the month in question.  Due to the nature of the two different markets, currently, WTI’s front month is May while Brent’s front month is June.  Given the steep backwardation in the oil markets, that difference is enough to explain the anomaly that I had seen.  Below I have screen shots from barchart.com of the front contracts of both WTI and Brent and you can see the difference yourself.

If you look at the corresponding month in both contracts, you can see that Brent is consistently higher than WTI. (h/t Victor Adair, thank you Victor).

With that in mind, you can see that oil prices are a touch higher this morning, although they remain below the spike high seen at the beginning of the war.  The chart below of WTI is certainly ominous with respect to the strength of the trend higher, and I must believe that if the US does take out Iranian infrastructure, we will breech the spike high on the chart and go higher still.

Source: tradingeconomics.com

Turning to the metals markets, this is perhaps the least surprising headline one can imagine from Bloomberg:

China Ramps Up Gold Buying as Middle East War Dents Prices

With gold prices having fallen nearly 18% from their peak back in late January, and China continuing to diversify reserves out of USD directly, they saw this as a great buying opportunity.  This morning, the barbarous relic is little changed, although continues to trade lightly well above its spike lows.  Silver (-0.9%) is also doing little and it appears that commodity traders are a bit more uncertain how to move forward with the Trump ultimatum hanging over the Iranian’s heads.

Finally, as we might expect given the willingness for investors and traders to add to equity positions, the dollar is slipping a bit this morning, although as I type at 7:00, it has recouped most of its overnight declines.  Thus, the DXY is trading right at 100.00, the euro and pound have edged higher by just 0.1% and USDJPY continues to hover just below the 160 level, having touched it once on March 30, but not since.  The biggest mover today has been SEK (-0.8
%) which has fallen on the back of softer than expected inflation data which has encouraged traders to believe the Riksbank will be able to cut rates ahead of other central banks in the event economic activity slows sharply.  There is also a lot of discussion regarding INR (-0.3%) as the RBI has instituted policies restricting the size of short rupee positions local banks are allowed to maintain and forcing a lot of rupee buying to close those positions.  Thus, the rupee remains caught between the forced position closures and concerns about oil prices depending on how things evolve in Iran.

Source: tradingeconomics.com

The one other currency move of note has been KRW (+0.6%) which continues to rebound from its worst levels seen on March 30th, as it is trading far more in line with the equity markets than the oil markets.  If things escalate in Iran, I suspect the won is going to suffer greatly.

On the data front, this morning brings only Durable Goods orders (exp -0.5%, +0.5% -ex Transport) and speeches from two Fed members, Governor Jefferson and Chicago Fed president Goolsbee.  Services PMI data was released throughout Europe this morning and it was broadly weaker than forecast (Italy, Germany, UK) although both France and Spain managed slightly better outcomes.  

While I remain cautious and hedged personally, apparently my views are out of vogue.  However, it strikes me that today will see little in the way of large movement ahead of the deadline, unless, of course, the president changes something before then.  

Good luck

Adf

Feeling the Blues

Posted on by 
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

Beware

Posted on by 
While news from Iran shows the war
Continues apace, like before
On Wall Street it seems
It’s over, with dreams
Of stock market rallies galore

Now, I realize stocks look ahead
And discount the future instead
But wars tend to last
They don’t end so fast
Beware in which markets you tread

As March and Q1 ended, it appears that there have been some changes in opinions in the investment community.  At least that is what I glean from the following Bloomberg screenshot of major global equity markets including yesterday’s US session and the overnight activity.

As far as I can tell, missiles are still flying in the Middle East, the US and Israel continue to attack specific targets with B-52’s dropping significant amounts of precision guided bombs, the Strait of Hormuz continues to have extremely restricted movement and the UAE, according to the WSJ, is now ready to join the war directly.  None of that seems like de-escalation of fighting, but then I am not a military strategist, so perhaps I don’t understand the concept of de-escalation well.

One take I saw this morning was that equity markets are pricing in the increased likelihood that the US will be leaving the conflict.  On the surface, I liked that idea, and that would certainly explain some of the US rally yesterday, but that doesn’t explain why Asia soared and Europe has rallied as well, given they would have to deal with the rest of the process.  This evening at 9:00 President Trump will be addressing the nation, so I presume we will have a better understanding of things after that.  

One other thing to remember is that the president uses his Truth Social posts to add to the fog of war and create strategic uncertainty for all parties involved.  I read this morning that the administration has been speaking (not directly) with some Iranians and creating a plan for the future, but it is not clear if those people have sufficient power to unite the country there yet.  All in all, while anything is possible, it strikes this poet that things in Iran have not ended, nor will they until the Strait of Hormuz is back to full operational capacity regardless of the President expressing the view that the US (and Israel) have done the hard part and Europe and Asia can deal with the Strait themselves.

But that is where we stand this morning, with risk back in vogue across the board as oil (-1.5% and back below $100/bbl) slipping while gold (+1.5%) continues its rebound.  Bonds (-3bps this morning and down by 20bps from their peak on Friday) continue to rally and have taken European sovereigns along for the ride with most of Europe seeing yields slide between -7bps and -9bps although German bunds, which have held up the best, are only lower by -4bps.  Happy Days are here again!

With all that good news, let’s consider what else is going on, away from Iran, that may impact markets.  At this point, we know the Fed is on hold this month, and likely through the autumn, at least, given the short-term inflation impacts of the oil situation.  

Source: cmegroup.com

As an aside, there have been a number of analysts who are calling for a significant rise in food inflation but be careful on that front.  As @inflation_guy, Mike Ashton points out, [emphasis added]

“…secondary knock-on effects that will be felt eventually in CPI. One that has gotten a lot of press recently is that less oil means less fertilizer and less fertilizer means less crop production and less crop production means higher prices for food. I actually think that’s probably overblown in terms of what the consumer will see, because most of the cost of consumer food items is in the packaging and delivery and not the raw goods, and so as raw food commodity prices go up it will likely be partially offset by transportation prices declining.” 

In fact, I expect that most central banks are terrified of the current situation as they understand, intellectually, that the oil price shock will be temporary, but will feel significant pressure when inflation starts to rise to “do something about it”.  Australia already hiked rates, but that was assumed prior to the onset of the war.  The calculation they are all trying to make is will the negative impacts on growth outweigh the rising pressure on inflation and what will the timeline be like.  In the end, my take is very few will hike in response to this event, especially if the military activity ends before the end of April.  And that is why they get paid the big bucks, to get those decisions right.  Alas, their collective track record is not great.

And beyond that, I don’t see much news directly driving the narrative.  It is still the war, and all the individual takes there, and a much lesser role to the Fed and other central banks.  Economic data is decidedly not part of the current discussion in any meaningful way and given the impact the war is going to have on data for a while going forward, it will be very difficult to suss out underlying trends from headline numbers.  

I’ve already discussed most market segments, leaving just currencies untouched at this point.  Given the reversal in views, we cannot be surprised that the dollar, which has been a major beneficiary of the war, has reversed its recent price action as well.  In fact, using the euro as our proxy, we can see in the below chart that the reversal started at 7:00am yesterday morning and the single currency has rebounded by 1.25% since then.

Source: tradingeconomics.com

And while the euro (+0.5% today) has rallied this morning, it mostly lags other currencies with the pound (+0.7%), AUD (+0.8%), CHF (+1.0%) and SEK (+1.0%) all having very strong sessions.  As well, the yen (+0.2%) has backed away from the 160 level and even CAD (+0.2%) and NOK (+0.5%) are stronger despite the decline in oil prices.  It should be no surprise that the EMG bloc is also showing strength with CLP (+1.1%) leading the way followed by HUF (+1.0%) and ZAR (+0.9%). One disappointment is KRW (+0.2%) which has been one of the worst performers for the past month (-4.0%) and is barely rebounding.  Chile is intricately bound to the price of copper, which has rallied slightly (+1.0%) in the past week, but continues to lag the precious metals.  However, there is a story about the major copper company there, Codelco, which is supporting the currency this morning.  Net, the dollar is giving back some of its recent gains today and will likely continue to do so if risk appetite remains robust.

While data hasn’t had much impact, this morning we see ADP Employment (exp 40K) as well as Retail Sales (+0.5%, +0.3% ex autos) and then ISM Manufacturing (52.5) and Prices Paid (73.0).  Yesterday’s data was in line with expectations and did nothing to alter any perceptions about the economy or path of interest rates.

And that’s all we have.  US futures are rising this morning (+1.0% across the board at 8:00) and for now, risk is the way.  I guess we will have to hear what the President says this evening to consider changing views.

Good luck

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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

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