Tag Archives: #politics

Twiddle Their Thumbs

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While nations worldwide celebrate
The holiday Marxists made great
Most markets are closed
With traders disposed
To twiddle their thumbs and just wait

Almost every market in both Asia and Europe was closed last night and this morning as the May Day holiday, which while it became a labor celebration in the late 1800’s was actually a pagan ritual in ancient times, coincides with the Golden Week holidays in most of Asia.  Yes, US markets are open, and so are UK markets, but that’s pretty much it.

The biggest market news, I would argue, was the BOJ intervention that we saw early yesterday morning, and then, apparently, again during the session.  Bloomberg calculated they spent ¥5.4 trillion in their efforts, a cool $35 billion or so.  As you can see from the chart below, it did look like there might have been a second, smaller wave this morning, but there is no confirmation of that happening.  The second sharp decline could simply be an order in thin holiday markets.

Source: tradingeconomics.com

Of course, the Japanese intervening in the FX markets is not that newsworthy in the big picture, they have done so many times.  What was much more interesting was the fact that they ostensibly intervened in the oil market as well, selling futures to help cap the price there.  While there are many market participants who decry official intervention in markets, and I understand their concerns, long ago I recognized that governments, by the very fact that they make the rules, are going to do what they want.  And while some will claim this was a sop to President Trump to help keep energy prices down, it helps the Japanese economy as well.  Japan has been negatively impacted to a much greater degree than the US by high oil prices.

Source: tradingeconomics.com

My final thought on this subject is that it is likely to be a huge win for the Japanese as well, shorting oil at $108/bbl, or whatever their price is will be seen as genius when the end game plays out and oil prices tumble due to massive supplies becoming available.

But really, it is hard to look around and see much more than that.  While there is still some discussion of Powell’s decision to remain on the FOMC after his chairmanship ends, I don’t think the market cares all that much anymore as all eyes are now on Mr Warsh to see how he navigates things.

Otherwise, every other story is clickbait and largely unrelated to financial markets today.  Rather, it is a good day to play golf, or sit outside and read a book, at least in NJ where it is sunny and heading to 65 degrees.

So, let’s do a quick recap of the few things that did happen overnight.  Apple reported strong earnings last night which helped confirm the new record highs in US equity markets, at least in the S&P 500, and helped all US markets to a strong session yesterday.  This morning, though, the NASDAQ futures are pointing slightly lower, -0.2%, as I type at 7:15 although the other major indices are in the green.  Overnight saw Tokyo (+0.4%) rally a bit as did Australia (+0.7%) and New Zealand (+1.0%), but they were the only markets open.  The rest of Asia was on holiday.  In Europe, only the UK (-0.5%) is open today with a lackluster performance on weaker banking profits and forecasts.

In the bond market, Treasury yields (+2bps) have moved a bit higher as have UK gilt yields (+2bps) with the rest of Europe closed.  One of the interesting things about the bond market is the fact that US economic activity continues to prove remarkably resilient as yesterday’s data showed strong Personal Income and Spending data (0.6% and 0.9% respectively), with GDP growing 2.0% and Initial Claims falling to 189K, its lowest print since 1968!  Meanwhile US energy exports have been growing to record levels, and the US economy is benefitting massively from the relative abundance of energy available here, especially with NatGas prices still one-sixth their price in Europe.  I must admit it doesn’t feel like the data points toward the need to cut rates.

Turning to commodities, oil (-0.6%) has not been able to reverse the impact of the Japanese intervention yet as all eyes remain on Iran to see if the blockade will force them to concede soon.  As well, the fact that the UAE has left OPEC, the 4th nation to do so in the past seven years, is an indication that OPEC has lost virtually all its pricing power.   I remain medium term and longer term bearish on oil as the political constraints fall away with the war just accelerating that process.  As to the metals markets, after a nice rally yesterday, gold (-1.0%) is backing off a bit while silver and copper are essentially unchanged.

Finally, the FX markets are also extremely quiet overall once you move away from the yen, which today is also little changed from yesterday’s closing level.  In fact, the entire market has only moved +/-0.25% or less from yesterday.  There is no story here.

And in fact, there is no story anywhere today.  ISM Manufacturing (exp 53.0) and Prices Paid (80.0) are on the docket and that’s it.  No speeches, and quite frankly I expect very little price action overall as most trading desks will take my advice and leave early.

Good luck and good weekend

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Throwing Shade

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For OPEC, the times are a changin’
With membership now rearrangin’
Thus, looking ahead
They’ve nowhere to tread
With more nations set for estrangin’

The proximate cause is the war
Which Gulf members rightly deplore
Meanwhile the blockade
Will keep throwing shade
On all their decisions before

One of the key features of the Fourth Turning, as so ably described by Neil Howe and William Strauss in their 1997 book of the same name, is that it is a time when institutions that have been part of the global system are torn down as they are no longer fit for purpose.  By the end of the turning, new institutions have arisen to take over those roles going into the future.

I will be the first to say that I don’t have any idea what may replace OPEC, but with the UAE’s announcement that they are exiting the group as of Friday, May 1st, OPEC is in a world of trouble.  OPEC was founded in 1960 as Gulf states sought to establish control over oil markets that had been developed by the “Seven Sisters” major global (and notably foreign) oil companies.  Of course, the 1973 oil embargo and the follow on in 1979 cemented their power for two generations.  Thus, Saudi Arabia and friends punched far above their weight on the global stage because of their oil reserves.  

But the fracking boom in the US in the 2010’s laid the groundwork for OPEC’s demise as suddenly, not only was there a major producer outside the group (there had always been a few like Norway and the UK), but there was a major producer that had power in its own right.  Thus, the seeds were sown back in 2014 or so, as fracking in the US took off, for the end of this organization.  And that’s where we stand today.  The US is the largest producer of hydrocarbons in the world by a long shot these days, as not only do they dominate oil production, but, too, natural gas and associated liquids.

So, now the world’s last standing superpower is no longer reliant on imported energy, and in fact, is a major energy exporter.  Remember, energy = life, or put another way, energy = economy.  Arguably, this is the biggest geopolitical shift the world has seen in decades, since the end of the Cold War.  

Returning to the thesis of institutions being torn down and rebuilt, I cannot foresee what type of institution is even necessary to replace OPEC.  Arguably, it will slowly disintegrate as it has lost all its coercive power, and each nation will simply pump as much oil as they can going forward.  For everyone who believes there is a long-term shortage of oil, and that oil prices are heading higher, I will take the other side of that bet.  History has shown that every shortage is followed by a glut, and this one will be no different.

There are many commentaries that Iran can withstand the US naval blockade longer than President Trump can stand the political heat.  I disagree with that on both sides of the equation.  First, as a second term president, Trump is not seeking re-election and just doesn’t give a f*ck about a lot of things.  Second, any stress Iran has felt in the past occurred while the government and infrastructure there were completely intact.  Now, Ahmad Vahidi, the effective leader of the nation, lives in a series of holes in the ground with no electronic communications because he knows that his days are numbered if he becomes public, and that’s a hard way to govern.  Second, the extraordinary damage that has been inflicted on the nation from the bombing campaigns has resulted in much less tolerance for additional stress.  Add to that the blockade is starving Vahidi and the IRGC of money to pay their proxies and soldiers, and the fact that at some point soon, Iranian oil wells are going to start to be shut in risking permanent damage, and Iran’s options are few and shrinking.  

Right now, oil prices (+3.3%) are continuing to trade higher, although have not yet returned to the initial spike levels from the opening night of the attacks and they could climb higher still in the short-term.  But I am highly confident that by autumn, they will be much lower as the roughly 1 billion barrels that are around in floating storage and stuck in the Persian Gulf come back to the market.  

Source: tradingeconomics.com

In the meantime, this will continue to lead the news, but my view is this is already a fait accompli. However, until such time as it ends, we must deal with the daily twists and turns.  Personally, I think it is healthy that there is another topic of interest, AI and the associated companies and their stocks, which has captured a growing share of the market’s collective mindshare.  We need more than one thing lest every X-pert who previously knew about Covid, Ukraine, Russia and now Iran, would suck up all the air in the room.

Touching quickly on AI, Torsten Slok, the Chief Economist at Apollo, posted an interesting, and I believe very useful, take on AI and its future impact on employment, calling it The Jevons Employment Effect.  In essence, as William Stanley Jevons explained for coal in 1865, the more efficient use of a resource results in increased demand for that resource.  So, Slok’s idea is that as workers become more efficient, there will be more demand for efficient workers which will expand economic output as productivity is enhanced.  Worth a thought to counter the entire black pill view that AI is going to take all the jobs.

Ok, I’ve gone on too long, so let me quickly tour markets here.  The inverse relationship between precious metals and oil remains in place with gold (-0.6%) and silver (-0.4%) both softer this morning.  We did learn that central bank purchases of gold in Q1 rose to 244 tons as they took advantage of the decline in prices post the peak.  Considering my view that oil’s price is going to fall sharply going forward, I think that may bode well for gold then.

In equity markets, yesterday’s declines in the US were followed by a mixed session in Asia with Japan the perfect symbol as the Nikkei (-1.0%) fell while the TOPIX (+0.6%) rose along with most other Japanese indices.  China (+1.1%), HK (+1.7%), Korea (+0.7%) and India (+0.8%) were all in fine fettle although other regional exchanges were less optimistic overall.  Turning to Europe, though, red is today’s color, with the UK (-0.8%), Spain (-0.7%) and France (-0.6%) all under decent pressure after inflation data showed continued stickiness which will prevent any central bank easing tomorrow by either the BOE or ECB, although the idea that either will hike rates remains ludicrous in my eyes, but they are error-prone, I will give them that.  As to US futures, at this hour (7:30) they are hanging around unchanged ahead of the FOMC meeting this afternoon.

In the bond market, yields are creeping higher across the board with virtually every market currently open in Europe and the US showing yields higher by 1 basis point.  It is hard to get excited here.

The dollar, too, is dull and boring today with little movement broadly.  NOK (+0.65%) is responding to the ongoing rise in oil prices, as is BRL (+0.4%) which is also benefitting from the idea that rising inflation will prevent the BCB from cutting rates much further.  On the flip side, ZAR (-0.4%) is under pressure on the back of gold’s weakness and rising oil prices as they import the bulk of their energy.  But the G10 is a bit boring with the exception of AUD (-0.3%) and NZD (-0.4%), both of whom released CPI data last night that while high, was not as high as forecast.

And that’s really it for today.  I chuckled at an article in Bloomberg discussing Chinese companies and their needs in the FX market as they explained it could move the CNY between 6.80 and 6.85, which given the current rate is 6.836, means it’s not moving at all!

On the data front, before we hear from Powell at 2:00, hopefully for the last time, we get Housing Starts (exp 1.4M), Building Permits (1.39M), Durable Goods (0.5%, 0.4% ex Transport) and the Goods Trade Balance (-$87.0B), with the FOMC statement and comments clearly the most important thing.  Then, this evening after the close we get earnings reports from MSFT, META, GOOG and AMZN, which has the market on tenterhooks.

The clock is ticking in Iran and that remains the biggest unknown, its timing, for the market and the world writ large.  Let’s hope it ends soon.

Good luck

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Less Than Ideal

Posted on by 
Some mornings the quiet is real
With limited news of appeal
But traders still need
Their families, to feed,
A story far less than ideal

Yes, oil prices have traded a bit higher overnight and this morning, albeit amid extremely low volumes.  In fact, it is the volumes that speak to how little people seem to care about markets right now.  We are seeing extremely low volumes across oil, gold, stocks, bonds and even FX markets are quiet.  It’s not that they haven’t moved a bit, it’s just that there is no conviction amongst the trading community as to where things should be heading.  

Of course, this is never true of the narrative community, who will spin up something to get clicks, but frankly their stuff, which is often the thinnest of gruel, has even less traction now.  Arguably, reading through as much as I could this morning, the most noteworthy thing was the following clip I saw on X (and it is a worthwhile use of 13 seconds, I assure you) showing Representative Ilhan Omar discussing World War Eleven.  I wish there was more to say, but since there is not, let’s head to the markets.

The most relevant argument in markets right now is how long can Iran hold out while their revenue stream is stopped by the US naval blockade and correspondingly, how long before they have to start shutting in production?  How full is their storage?  I have seen estimates from what I believe are credible sources of between half full and 80% full which would mean, even in the best case for them, they have about another 2 weeks before shut-ins begin.  And if that happens, they are looking at the permanent destruction of upwards of half their current output.  In other words, this war is not merely existential for the IRGC and their grip on power, but potentially for Iran’s longer-term future as an economy.

In the meantime, oil prices (+3.3%) continue to grind higher on limited volumes as you can see in the chart below with the lower bars indicating volumes.

Source: finance.yahoo.com

As consumers, we are all feeling the pain of this price action, but BP just reported record profits, and we can expect similar outcomes from all the oil majors, making hay while the sun shines as all corporates do.  At the same time, gold (-1.6%) and silver (-3.2%) continue their direct negative correlation to oil.  This relationship seems quite robust at this point.  It appears that the ongoing dollar strength on the back of the rise in oil prices is undermining the status of gold as a haven asset.  I continue to believe this is a temporary phenomenon, but for those long gold, it is nonetheless a painful reminder of how markets can remain perverse.

Speaking of the dollar, yesterday’s modest declines have been reversed this morning with the greenback gaining on the order of 0.25% this morning across the board.  The biggest news here was the BOJ meeting last night where, as expected, Ueda-san left policy unchanged, although the vote was 6-3, with the three dissents seeking a rate hike.  From what I can tell, Ueda-san prattled on for an hour in his press conference without giving any clear direction as to the future, confusing one and all by explaining they may not reach their objectives but may raise rates anyway.  You can see in the chart below when Ueda started speaking as it initially sounded hawkish, but here we are, 7 hours later and it was as though he never opened his mouth.

Source: tradingeconomics.com

The overriding concern in the yen is whether it will weaken through (dollar above) the 160 level, which it briefly touched back in late March, but has since been trading just below.  That is perceived by many as the ‘line in the sand’ regarding intervention.  However, if we go back to the summer of 2024, when the BOJ last intervened, USDJPY was pushing 162 before they pulled the trigger as you can see below.  It certainly suits them that the market is afraid of pushing this envelope, but my take is it will happen before too long.

Source: tradingeconmics.com

As to the rest of the FX space, zzzzz is the story.  Perhaps the other interesting thing is that NOK (-0.15%) is weaker despite oil’s climb.  Everything else is softer vs. the dollar by -0.2% and -0.4% with no real outliers.  FX is just not that interesting, like most markets these days.

In the equity space, yesterday’s US performance was uninspiring, but we saw more weakness (Tokyo -1.0%, HK -1.0%, China -0.3%, India -0.5%, Australia -0.6%) than strength (Korea +0.4%, Malaysia +0.7%) across Asia.  However, there are no new stories to drive things here with the Iran war and energy prices the only topic of note.  In Europe, markets are feeling better this morning with gains across the board led by Spain (+1.0%) and the UK (+0.6%). I must admit I am confused by the Spanish performance as the only data point of note released this morning was Spanish Unemployment which jumped to 10.83% (such precision), far above last month’s 9.93% and a full point above economists’ forecasts.  But I guess if you look at the longer-term history of Spanish Unemployment, this is still far better than it has been in the past and the trend remains intact.

Source: tradingeconomics.com

Meanwhile, US futures are pointing lower at this hour (7:25) with OpenAI having missed its own targets for user acquisition undermining the overall AI thesis thus far this morning.  Plenty of time for that to change though, at least based on how buying remains the default position.

Finally, bond markets have sold off with yields continuing to edge higher across the board.  While it’s not really a rout, as you can see from the Bloomberg screenshot below, every European sovereign yield is higher along with treasuries, although JGB’s managed to remain unchanged overnight.

Certainly, there is nothing new in the bond market right now, although I imagine as the Iran war drags on, we will see increased government borrowing across the board which ought to pressure yields higher.

And that’s it, really, for this morning.  We see the Case-Shiller Home Price Index (exp 1.1%) at 9:00 this morning and Consumer Confidence (89.0) at 10:00.  Neither of these is going to matter to traders anywhere, not even algos.  

Until there is a change in the situation in Iran, it is hard to see more than lackluster interest across most markets.  I imagine that if this extends for weeks, the offsetting forces of reduced supply and demand destruction will find an equilibrium point, which may well have already been found around $100/bbl.  Remember this with respect to the dollar, since oil is priced in dollars almost universally, there is going to continue to be demand for the greenback everywhere in the world.  It is hard for me to make a significant bearish case for the dollar right now, at least in the medium or long-term.  In the short term, who knows?

Good luck

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Dumfound

Posted on by 
The clock has been wound and rewound
And meantime stock buyers dumfound
The good and the great
Who mostly, Trump, hate
And fear that their power’s southbound

But still the blockade is in force
And info depends on your source
Will Trump send marines
To take Iran’s means
And break them as matter of course?

Another day and nothing has changed in the Persian Gulf or the Strait of Hormuz.  The US’s naval blockade is still in force with several Iranian tankers being stopped on outbound routes.  As well, Iranian small gunboats have attacked several freighters seeking to exit the Gulf.  No negotiations are on the calendar, although Pakistan, Egypt and Turkey are ostensibly working to get the two sides together.  This has become a waiting game, it seems, to see if Iran can suffer the loss of 90% of its revenue for longer than President Trump can suffer the political damage that higher oil prices are inflicting on the economy.

The funny thing is the economy doesn’t seem to be that bad overall.  Clearly, nobody is happy to pay more for a tank of gas, but the data has yet to show a major disruption in the US economy.  And in fact, this morning’s Flash PMI data from around the world has shown a pickup in manufacturing activity as per the below table (data from tradingeconomics.com):

CountryActualPrevious
Australia51.049.8
Japan 54.951.6
India 55.953.9
France52.850.0
Germany51.252.2
Eurozone52.251.6
UK53.651.0
US52.5 expected52.3

The narrative on this improvement centers on the idea that people/companies are trying to get ahead of the future where price hikes and shortages of goods become extant, similar to the front-running of the tariffs in Q1 last year and that is certainly part of the story.  But it also appears that, in the US at least, there is real manufacturing growth occurring.  

Freightwaves is a company that tracks trucking and freight movement around the US, and its latest data show solid increases in activity along with a tighter market (rising costs) as demand rises.  Too, this activity is emanating from the center of the country not the West coast, indicating this is domestic production and not imports.  Anecdotally, I have a friend in the trucking business, and I asked him about this situation yesterday.  He confirmed that the trucking business is booming.  

Remember, too, that in the last NFP report, Manufacturing employment rose 15K, far surpassing expectations.  I make these points to highlight that the US economy continues to perform pretty well despite the angst over the war and rising gasoline and diesel prices.  One last tidbit is Retail Sales, which rose a greater than expected 1.7% last month, and 0.7% in the control group which excluded gasoline.  Those numbers do not confirm economic weakness.  

And you know what helps confirm that the US economy is ticking over nicely?  The continued equity market rally.  Since the war began, after the initial fears that rising oil prices were going to collapse the global economy, the market has completely reversed course as you can see in the below. Chart.

Source: tradingeconomics.com

From the nadir on March 30th, the S&P 500 has rebounded 12.5% to new all-time highs.  Earnings data that has been released for Q1 thus far has shown significant growth, upwards of 18% profit growth, again not a sign of a struggling economy.  And perhaps the key feature of my argument is the following cover of The Economist magazine, which seems to have an almost perfect track record in terms of its cover articles, it is wrong nearly 100% of the time.

There continues to be a great deal of doom porn available if you like that type of stuff, but I am having a hard time seeing the depth of the damage that many claim.  Certainly, things can get worse if Iran lashes out in final death throes of the regime and seeks to destroy as much GCC infrastructure as possible, but right now, I don’t see that outcome.  My belief is the marines go for Kharg island shortly and are better than even odds to be successful.  If that is the case, then we will be in the final stages of this conflict and people will move on.  After all, who remembers Venezuela as a major crisis today?  Most people have very short attention spans.

Ok, let’s see how things stacked up overnight after yesterday’s continued US equity rally.  This morning, feelings are not as buoyant although it is not clear why.  Equity markets in both Asia and Europe were broadly lower although that could simply be a bit of profit taking after some strong runs all around.  Tokyo (-0.75%), HK (-1.0%) and China (-0.3%) all slipped as did Australia (-0.6%), India (-1.1%) and Taiwan (-0.4%).  But Korea (+0.9%) bucked the trend along with Malaysia (+0.6%) while the rest of the region was weak.  The Korean economy showed surprising strength in Q1 with GDP last night released at 3.6% annualized in Q1 supporting the market there.

As to Europe, despite the solid Manufacturing PMI data, Services data has been under more pressure and equity markets seem to be following that with Spain (-1.3%), the UK (-0.9%) and Germany (-0.5%) all slipping although France is unchanged this morning.  As to US futures, they are softer as well at this hour (6:55), down by -0.5% or so across the board.

In the bond markets, Treasury yields have backed up 2bps this morning with European sovereign yields higher by between 1bp and 3bps.  The outlier here is UK gilts (+5bps), which seems to be responding to general financing concerns in the UK as the budget deficit there continues to grow faster than forecast.  JGB yields also backed up 2bps.

Oil (+1.2%) is beginning to get concerned again about the Iran situation as we are currently in the midst of a 3-day rally.  While the WTI price, at around $94/bbl, is sitting in the middle of its range since the inception of the war, clearly there is some concern.  

Source: tradingeconomics.com

The EIA inventory data showed a build in crude inventories but a pretty large draw of gasoline and distillates.  Perhaps it was the latter that is the driver.  As to the metals markets, the negative correlation between oil and gold is back with the barbarous relic (-0.8%) slipping while silver (-3.8%) is really having a rough session.  It is key to remember, though, that silver is an inherently more volatile commodity than gold given the market’s much smaller size.  In truth, looking at the chart over the past six months, it is hard to get the sense that it is doing too much at all right now.

Source: tradingeconomics.com

Finally, the dollar is rebounding a bit this morning, with the DXY (+0.2%) continuing to trade in its broad range from the past year as per the below chart.

Source: tradingeconomics.com

While the death of the dollar and de-dollarization narratives remain popular amongst a broad set of analysts, data outovernight from SWIFT shows that the dollar’s portion of international transactions rose to a record 51.1% in March, its highest level since SWIFT revised its procedures.

Source: Bloomberg.com

I regularly read analysts who are very smart explaining all the reasons why the dollar is destined to collapse amid concerns over the unsustainable debt and the use of the dollar as a political tool, and those things are true as far as they go, but for the foreseeable future, TINA is the rule.  No other fiat currency is going to be an effective substitute because no other nation has the heft and strength of capital markets to do so.

The dollar’s strength today is pretty universal with nothing terribly noteworthy regarding specific moves.  Perhaps the one surprise is NOK (-0.3%) which is not following oil higher.

On the data front, this morning brings the weekly Initial (exp 212K) and Continuing (1820K) Claims data as well as the above-mentioned Flash PMI data.  Again, despite all the teeth gnashing, the labor market seems to be holding in quite well overall.  Perhaps my glasses are tinted rose and I don’t see that, but the data releases that we continue to see do not point to an imminent collapse in the US economy.  Rather, continued strength seems the most likely result.  With that in mind, I do not see the dollar falling sharply under any scenario and suspect that a test of 100 on the DXY and 1.15 in the euro may be on the horizon.

Good luck

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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