Tag Archives: #risk

Missiles are Flying

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Apparently, nerves are on edge
Though pundits, no worries, allege
But missiles are flying
So, traders are buying
Safe havens as they start to hedge
 
So, it cannot be that surprising
The dollar and gold keep on rising
While sales are quite brisk
For assets with risk
Like stocks with investors downsizing

 

While some of you may be concerned over the news that Russia has launched an intercontinental ballistic missile in an its latest attack on Ukraine (as an aside, since both Russia and Ukraine are in Europe, was it really intercontinental?), by focusing on mundane aspects of life and death, you may have missed the truly important news release from yesterday afternoon, Nvidia’s guidance was disappointing and its stock price declined!  It is for situations like this that I write this morning missive, to make sure you focus on the important stuff.

All kidding aside, the knock-on effects of the escalation of the fight in Ukraine are likely to be more impactful over time, especially for Europe.  Consider the fact that most of Europe has recently been blanketed by a major winter storm with much colder than normal temperatures, and another one is forecast for the coming days.  As well, part of this weather pattern is weaker than normal wind speeds, so much of the continent is suffering a dunkelflaute again.  The energy implications are significant as both wind and solar power are virtually non-existent which means they are hugely reliant on NatGas to both keep the lights on and keep warm.  

However, Europeans continue their energy suicide and have recently closed one of the only domestic sources of NatGas to satisfy their Green tendencies.  This means they will be buying more LNG and competing more aggressively with Asia for cargoes.  While NatGas prices in the US have risen sharply in the past month, ~46%, they remain far below prices in Europe, less than one-quarter as expensive.  It is exactly this reason that an increasing number of companies in Europe are looking to relocate to areas with less expensive energy, like the US, and why investment in the US continues to outpace investment elsewhere.  Look no further than this to understand a key ingredient of the dollar’s ongoing strength.

Of course, there is another story that is dominating the press, the ongoing Trump cabinet picks and all the prognostications as to what they all mean for the future of US policies.  You literally cannot read a story without someone elsewhere in the world quoted as explaining they are awaiting the inauguration to see how things evolve and so they are postponing any new actions.  This is true for both governments and private companies (although obviously, the Biden administration is taking the opposite tack of trying to do as much as possible before the inauguration, like starting WWIII it seems).  

And that is the world this morning, anxiety over the escalation in Ukraine, disappointment that Nvidia didn’t beat the most optimistic forecast expectations and uncertainty over what President-elect Trump is going to do once he is in office.  It is with this in mind that we look at markets and see that the best performances are coming from havens and necessities.  On days like this, risk does not seem as appetizing.

Let’s start in the commodity markets this morning, where oil (+2.0%) is responding to both the Russia/Ukraine escalation and the US veto of a UN ceasefire resolution in Gaza with both of these prompting increased concerns of a short-term supply disruption.  While yesterday’s US inventory data showed some builds, for now, fear is the greater factor.  Meanwhile, NatGas (+6.3%) is skyrocketing amid forecasts for colder weather as a polar blast hits both Europe and the West Coast.  While the longer-term implications of a Trump presidency are for energy prices to stabilize or decline on the back of increased supply, that is not yet the case.  Meanwhile, gold (+0.5%) continues its rebound from its recent correction as havens are clearly in demand.  Remember, too, that almost every central bank remains in easing mode as they all convince themselves they have beaten inflation.

However, a look at equity markets shows a less resilient picture, at least from Asia where we saw the Nikkei (-0.85%) slip after that Nvidia result and the Hang Seng (-0.5%) also feel that pain.  Remember, these indices are very tech focused and Nvidia remains the tech bellwether.  While mainland Chinese shares were little changed, there was weakness in India, Taiwan, Malaysia and Indonesia, as a taste of how things behaved overnight.  Europe, though, is managing to shake off some of its concerns and most markets have edged higher, between 0.2% and 0.4% although the CAC (-0.15%) is lagging.  The latter is somewhat ironic given that French Business Confidence rose more than expected to 97, although that is merely back toward the long-term average of that series.  Arguably, the European move is on the back of US futures, which had been lower all evening but at this hour (7:30) are now all in the green by at least 0.2%.

However, under the heading havens are in demand, bond yields are backing off a bit with Treasury yields lower by -2bps and most European sovereigns lower by between -1bp and -3bps.  The tension in this market remains between recent declines in some inflation readings and growing concerns over the potential inflationary policies that President Trump will enact when he gets into office.  Nothing has changed my view that inflation is not dead and that a grind higher in yields seems the most likely outcome.

Finally, the dollar continues to find support versus almost all its counterparts, although this morning the yen (+0.5%) is demonstrating its own haven characteristics.  But broadly, the DXY is higher by 0.1% with the euro creeping ever closer to 1.0500 and the pound to 1.2600.  As well, NOK (+0.3%) is benefitting from the oil’s rise. This latter relationship, which makes perfect economic sense given the importance of oil to Norway’s economy, has been quite strong for a long time as can be seen in the chart below.  While daily wiggles may be different, the only true disruption was the start of the Ukraine war where oil jumped massively, and NOK did not follow along given its proximity to the war.  But otherwise, it’s pretty clear.

Source: tradingeconomics.com (NOKUSD is the inverse of what you typically see)

As to the emerging markets, we are seeing weakness in LATAM (BRL -0.8%, MXN -0.5%) as well as EEMEA (PLN -0.3%, CZK -0.5%, HUF -0.5%) although ZAR (+0.2%) seems to be benefitting from the ongoing rise in gold.  Asian currencies were much less impacted overnight and have not moved much at all.

On the data front, this morning brings the weekly Initial (exp 220K) and Continuing (1870K) Claims data as well as Philly Fed (8.0) and then at 10:00 Existing Home Sales (3.93M) and Leading Indicators (-0.3%).  Chicago Fed president Goolsbee speaks this afternoon, but again, it would be quite a surprise if he veers away from Powell’s comments last week.  This morning, the Fed funds futures are pricing a 55.7% probability of that December rate cut, and today’s data seems unlikely to change that.  Next week’s PCE data will be far more important.

It is interesting to see the equity market rebound but there is a huge amount of belief that Mr Trump is going to fix everything.  While I hope his policies improve the situation, and there is much to improve, it will take time before we see any truly positive impacts I believe.  I understand that markets are forward looking, but clarity remains elusive at this time.  The one thing that remains clear to me, though, is the demand for dollars is likely to continue for a while yet.

Good luck

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Amid Hyperbole

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When Two Thousand Twenty began
The narrative with which we ran
Explained Trump and Xi
Were ‘bout to agree
On terms for a new trade game plan

The deal was agreed and then signed
But Covid infected mankind
Economies tanked
The market got spanked
And trade thoughts were soon left behind

So please tell me how it can be
That trade is now, quite suddenly
The reason that bulls
Are grabbing handfuls
Of risk amid hyperbole

As if to prove there is nothing new under the sun, the recent equity/risk rally is ostensibly based on the fact that the US-China phase 1 agreement, you remember the one signed back on January 15th of this year, is being enforced and followed by both sides.  It seems that good vaccine news is suffering from the law of diminishing returns, so a new story was needed to support the bull case.  Hence, news that there was a video conference between Messrs. Lighthizer, Mnuchin and He was quickly trotted out to show that all the benefits of the trade deal are still set to accrue to the US.  (It is coincidences like this one that encourage the conspiracy theorists in the world.)  At any rate, ostensibly, the result of the conversation was that both sides are fully committed to adhering to the deal, which basically means that China will be purchasing huge amounts of agricultural products from the US for the rest of the year.  Now, given that China is facing serious food shortages with food prices rising rapidly throughout the country, this shouldn’t be all that surprising.  And yet, this is the alleged impetus to go out and buy the FANGMAN group of stocks, none of whom sell as much as a single ear of corn.  Go figure!

Perhaps, however, I am being too hasty in describing the trade story as the driver of risk.  After all, it could be that German GDP ‘only’ fell -9.7% in Q2, not the -10.1% initially estimated.  Or perhaps it was the good news from Norway, where GDP was a surprisingly robust -6.3% in Q2.  If that doesn’t fit the bill, we should look to the UK, where the CBI Retailing Sales report fell back to -6, rather than rising to +6 as forecast.  I mean, isn’t this the type of news that quickens investors’ hearts?

Obviously, the point remains that the dichotomy of ongoing asset market rallies alongside ongoing economic distress has yet to change.  And while there is no question that markets are forward looking constructs, their recent ability to ignore significantly distressing economic situations and assume that economies will be returning to pre-pandemic levels of activity sooner, rather than later, is truly impressive.  Perhaps that will be the case, but as I highlighted yesterday, it may well be the most severe case of ‘buy the rumor, sell the news’ in the history of markets when that occurs.  Remember, if economies are ticking over nicely again, what rationale is there for central banks to continue to add liquidity to markets?  Why would interest rates remain pegged at 0.0% worldwide amid economic growth?  These are questions which will be much more difficult for the bulls to answer in the future, but for now, there is no need to do so.

And so, risk is rising again this morning.  We saw it in Asia, where the Nikkei (+1.35%) performed quite well, although both the Hang Seng (-0.25%) and Shanghai (-0.35%) couldn’t really get going.  European bourses, on the other hand, are uniformly green this morning, with both the DAX and CAC higher by 0.75% as I type.  And US futures have been steadily climbing all evening and are now pointing to gains of ~0.5% on the opening.

Perhaps the better risk gauge, though, is the bond market, where Treasury yields have backed up a further 3.7 basis points this morning and are pushing toward 0.70%.  Similarly, we are seeing significant selling pressure across all European government bond markets, with Bunds (+5.4bps) and Gilts (+3.7bps) having trouble finding buyers. Perhaps what is even more interesting is that Italian BTP’s (+7.1bps) are performing worst of all.  But more than simply risk-on is at work here.  In addition, we are seeing an uptick in the supply of bonds throughout the continent, and despite the ECB’s ongoing purchases, subscription rates for the new paper is falling to lower than expected levels with coverage ratios below 2.0.  I think Madame Lagarde will need to rev up the ECB’s purchases even more, which will, coincidentally, help prevent the euro from rallying too far as well.

Speaking of the euro, it has managed to trade higher by 0.3% amid broad-based dollar weakness today.  Given the news out of the Eurozone has been anything but bullish, the single currency’s strength is likely to be attributed to the dollar’s decline.  For instance, the pound has rallied 0.55% despite, arguably, worse economic data.  While NOK (+0.7%) has been leading the way in the G10 space.  Perhaps that GDP data was seen as a positive!  Confirming the idea that today is a risk-based session, the yen is the only currency weaker than the dollar, and substantially so, having fallen 0.5% thus far.  As there was no data or news overnight, the risk framework is the most likely explanation for the move.

EMG currencies have also benefitted from the risk framework today, although aside from ZAR (+1.0%) the movement has been less significant, with most currencies rising on the order of 0.25%-0.35%.  The ZAR story continues to be driven by the highest real yields available these days, and in times of limited risk concern, that is extremely attractive.

As I didn’t cover the upcoming data yesterday, let’s see what is on tap for the rest of the week:

Today Case Shiller Home Prices 3.60%
Consumer Confidence 93.0
New Home Sales 790K
Wednesday Durable Goods 4.5%
-ex Transport 1.9%
Thursday Initial Claims 1.0M
Continuing Claims 14.4M
Q2 GDP -32.5%
Friday Personal Income -0.3%
Personal Spending 1.5%
Core PCE Deflator 1.2%
Chicago PMI 52.5
Michigan Sentiment 72.8

Source: Bloomberg

Of course, despite some important data, notably the ongoing Initial Claims story, in truth, all eyes will be on Chairman Powell who speaks Thursday morning at 9:15am NY at the virtual Jackson Hole gathering.  Expectations are high that he will be explaining the Fed’s newly developed views on how they are going to manage monetary policy, and more importantly, on how they are going to view their inflation target going forward.  The consensus view is we will be moving to an average inflation target of 2.0%, meaning if inflation runs hot for a while after it has run cold for a while, they will not feel compelled to act to try to moderate it.  Given that inflation has run cold for the past decade, at least based on the way they measure it, get ready for much higher inflation in your everyday lives going forward.

And that’s really it for the day.  It strikes me that the risk-on narrative is weak this morning, and it wouldn’t surprise me to see the dollar claw back its early losses before we end the day.

Good luck and stay safe
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