Tag Archives: #riskoff

Not All in Sync

Posted on by

The story that’s tripping off lips
Is whether the buildup in ships
And aircraft we’ve seen
Is likely to mean
A war with Iran’s in the scripts
 
But markets are not all in sync
As equities clearly don’t think
That war would be trouble
While bond traders’ double
Their bets war will drive stocks to drink

Economic data is clearly not a key driver of market movement these days, arguably because we continue to get mixed outcomes, with some things looking good (Initial Claims, Philly Fed) while others are less positive (Trade Balance, Leading Indicators), although granted, it is not clear to me what the Leading Indicators purpose is anymore.  My point, though, is that we have not seen unambiguous strength or weakness across the data set for several months.  This allows every pundit to frame the economic situation through their own personal lens, whether bullish or bearish.  A perfect example is the dichotomy between the strength of US corporate balance sheets, as per Torsten Slok and seen below, 

and the rise in corporate bankruptcies as per this X post from The Kobeissi Letter (a great follow on X) which shows the following chart.

So, which is it? Are things good or bad?  My understanding is that strong balance sheets and a high number of bankruptcies are not typically correlated, but I could be wrong.  

Given the lack of direction, markets have turned their focus to other things, with most headlines currently garnered by the ongoing buildup of US military power in the Middle East as President Trump tries to pressure Iran into ceding its nuclear and missile programs.  (Of course, the announcement that all information on UAP’s (fka UFO’s) has many excited, and of course, the Epstein files continue to garner attention, as does the SAVE Act, but none of those are even remotely related to financial markets.)

But even here, we are seeing very different responses by the financial markets.  For instance, equity markets continue to perform pretty well, even though Tokyo and Australia sank a bit last night.  Look at the monthly and YTD returns in Europe, Japan and Australia below:

                                           Daily   Weekly   Monthly   YTD

Source: tradingeconomics.com

It strikes me that if war was a major concern, investors wouldn’t be stocking up on risk assets.  Rather, havens would be in more demand, which we are also seeing with gold (+0.4%) and silver (+3.3%) rising overnight as despite extreme volatility in the precious metals space, there is clearly underlying demand for these havens.

Bond yields over the past month have declined, indicating that despite ongoing deficit spending, investors are seeking their perceived safety whether in Treasuries, Bunds or JGBs as per the below chart of all three.

Source: tradingeconomics.com

Finally, the dollar, despite frequent calls for its death, has been edging higher in a classic risk-off response as no matter how much some may hate the dollar philosophically, when bad things happen, its massive legal and liquidity advantages outweigh virtually everything else.  Once again, the DXY has moved back to the middle of its trading range, just below 98.00 this morning, and to my eyes, shows no signs of an imminent collapse.  Rather, if hostilities do break out in Iran, I expect the greenback to rally to at least the top of this trading range at 100, and depending on the situation, it could easily go higher.

Source: tradingeconomics.com

All this is to point out that nobody knows nothing.  Narrative writers continue to try to keep up with the action, and it is increasingly difficult to do so as things change on the ground so rapidly.  Let me be clear when I say I have zero inside information regarding any of this, I am merely an observer.  However, my observations are that there will be some type of military action in Iran as to build up this much fire power in a concentrated area and not use it would be remarkable and I can see no way in which the Ayatollah can accept the terms being offered as it would end his leadership if he does.  I guess we will find out soon enough as President Trump has put a 10-day timeline on things.

Arguably, the only market I didn’t mention here was oil (-0.5%) which is consolidating after a 20% rise in the past two months.  Remember, if military activity is directed at oil production or transport, we could see a sharp spike here and that will not help equities or economic data, although both gold and the dollar are likely to benefit.

Source: tradingeconomics.com

I don’t think there is anything else to discuss market wise so let’s turn to the data.  This morning brings a bunch of important stuff as follows:

Personal Income0.3%
Personal Spending0.4%
PCE0.3% (2.8% Y/Y)
-ex food & energy0.3% (2.9% Y/Y)
Q4 GDP3.0%
Flash Manufacturing PMI52.6
Flash Services PMI53.0
Michigan Sentiment57.3
New Home Sales730K

Source: tradingecomomics.com

We also hear from two more Fed speakers, but at this point, they are all singing from the same hymnal explaining policy is in a good place and unless there are major changes in the data, there is no reason to change.

Arguably, the PCE data is the key for markets here as if it continues to run hotter than target, hopes for further rate cuts will continue to dissipate.  In fact, the next cut is now priced in for July with a second for October.  

Source: cmegroup.com

Remember, too, at that point it will be Kevin Warsh’s Fed, not Jay Powell’s, and Warsh has a very different idea about the way things need to be done.  Interestingly, as this 4th Turning proceeds and old institutions come under increasing pressure, their efforts to fight back and maintain the status quo is no longer behind the scenes as evidenced by this Bloomberg article this morning.

As I have written before, President Trump is the avatar of the 4th Turning and the institutions that are going to change are desperate to maintain the status quo.  This is, truly, the big fight that will continue through the end of the decade in my view.  Every institution that has been overseeing the global situation, whether politically, financially or militarily, is coming under pressure as income and wealth inequality have driven an ever wider disparity of outcomes.  As much power as the rich have, there are a lot more people who are not rich.  Ask Louis XVI how much being rich helped him.

On a lighter note, I watched the gold medal skating performance of Alysa Liu and it was truly magical.  A much better thought for the weekend!

Good luck and good weekend

Adf

Chock Full of Crises

Posted on by

Their mandate includes stable prices
And that they should use all devices
To work to achieve
That goal lest they leave
A legacy chock full of crises

“Most participants, however, cautioned that progress toward the Committee’s 2 percent objective might be slower and more uneven than generally expected and judged that the risk

of inflation running persistently above the Committee’s objective was meaningful.”

These words [emphasis added] are from the FOMC Minutes released yesterday afternoon.  To set the stage, the Fed left rates on hold then, although there were two votes for another cut.  However, a full reading of the Minutes shows there were those who would have considered a hike as well.   Now, I am just a guy in a room who observes market behavior through the lens of too many years involved on a daily basis, and my resources are virtually nil, especially compared to the Federal Reserve.  I don’t have a PhD in economics (although I believe that is a benefit in this context, if not every context).  However, the bolded part of the comment seems a tad disingenuous to me based on the below chart which shows the history of their inflation metric, Core PCE prices.

Source: tradingeconomics.com

It has been exactly 5 years since their metric was at or below their 2% target by which they defined stable prices.  The idea that they are claiming the risk of inflation running hot was a meaningful risk is perhaps the worst gaslighting comments they have made.  It is very difficult to believe that the Fed, in its current incarnation, is going to ever address the inflation issue appropriately.  Perhaps a Chairman Warsh, if he is successful at reconfiguring their operating procedures will be able to drive positive changes.  I am hopeful but not confident.  The one thing we know is that changing government institutions requires a mammoth effort.  And let’s face it, he will only have two plus years of leeway for sure depending on whoever becomes president in 2028.

I continue to believe that the market is going to increasingly focus only on Warsh’s comments going forward as the direction he has expressed is very different than the current FOMC membership mindset.  We shall see how this all evolves.  In the meantime, I expect that Fed funds are not going anywhere before Warsh is confirmed.  As to bond yields, that is a very different question and will depend on both the macroeconomic outcomes and the risk perception of investors around the world.  For now, that trading range of 4.00%. – 4.20% seems likely to hold absent a major economic data miss in one direction or the other.  But as long as we continue to get mixed data, this market will remain on the backburner.

The fear that is growing each day
Trump’s policy might go astray
Regarding Iran
Although not Japan
Thus, oil’s up, up and away

Texas tea (+1.5%) is following yesterday’s 4.6% rise with another strong session and as you can see in the chart below, is showing a very clear trend higher since December.

Source: tradingeconomics.com

This movement is very clearly a response to the ongoing buildup of US military assets in proximity to Iran, with two aircraft carriers, and somewhere above 200 military aircraft as well as the carrier group tenders with Tomahawk missiles in tow.  While negotiations are ostensibly ongoing, the one thing that seems clear is that absent a complete capitulation by the Iranian government, something big is going to happen here.  Of course, the question is, how much, and for how long, will it impact oil supplies?

Obviously, nobody knows the answer to that question, but the recent history has shown that every time there was an event in the Middle East, whether the 12-day war several months ago, the killing of Suleimani, the attacks on Saudi oil infrastructure, or others, prices retraced pretty quickly as per the below.  

Even the Ukraine invasion in February 2022 saw prices retrace 50% within a few months.  Other issues lasted less time than that.  This recent history implies that fading the rally is the right trade, but boy, that is hard to do.  And of course, in the event that the Iranian government falls, the chaos could result in a significant degradation of Iranian oil production.  Given they pump about 5 mm bpd, ~5% of global supply, that would matter a lot at the margin.  Certainly, the oil glut narrative would disappear in a hurry.  This is a very large risk to both markets and the economy, and one which needs to be hedged, if possible.  This will certainly be the focus of markets for the next few weeks, at least, so be prepared.  Personally, I do own some stuff here, but I like the drillers generally, as they are going to be employed no matter what!

Ok, let’s see what else is happening.  After a solid US session yesterday, Asia saw some major positive price action with Korea (+3.1%) the leader although Tokyo (+1.1%) also had a solid session, as did Taiwan, New Zealand, Singapore and Australia.  The exception to this rule was India (-1.5%) which suffered after a three-day positive run as traders and investors fled worrying about oil, the Fed, and the future of India’s relationship with Russia after the seizure of more ‘dark fleet’ oil tankers trying to avoid sanctions on Russian oil.  Europe, meanwhile, is uniformly lower this morning, with all the major indices slipping -0.8% or so.  The narrative is pointing to the escalation in Iran as the cause du jour.  US futures are also slipping at this hour (7:20), -0.25% or so across the board.

I touched on bonds briefly above, but today’s price action shows yields edging higher by 1bp in Treasury markets and between 1bp and 2bps across European sovereign markets.  There has been no data of note to alter views, and the only ECB news is that Spain has thrown their hat into the ring to have the next ECB president.

In the metals markets, yesterday’s gains are being followed by a mixed picture with gold (+0.2%) and silver (+0.3%) edging higher while copper (-1.6%) and platinum (-1.8%) cede those gains.  However, as I highlighted yesterday, this all still feels like consolidation.  FYI, there is much talk in the markets about silver and how there is not enough physical silver in the COMEX vaults to cover open interest, and how that could result in a major squeeze, but my take is most of it will roll forward as the fundamental supply/demand equation does not appeared to have changed.

Finally, the dollar had a strong session yesterday, rising 0.6% as measured by the DXY, and making gains vs. almost all currencies.  This morning, those trends are continuing with SEK (-0.4%) and GBP (-0.2%) leading the way lower in the G10 space while ZAR (-0.85%), INR (-0.4%) and KRW (-0.4%) are dragging down the EMG bloc.  Again, data has been scarce, so I see this as a more traditional risk-off sentiment than some new macro story.

Data yesterday was generally stronger than forecast, notably IP and Capacity Utilization, which showed solid outcomes that were ascribed to AI infrastructure building as well utilities activity.  It strikes me this is exactly what the Trump administration is trying to achieve with their reshoring goals.  I guess the question is how productive this investment will be and how will it impact inflation readings.  This morning, we see the weekly Initial (exp 225K) and Continuing (1860K) claims, as well as the Trade Balance (-$55.5B), Philly Fed (8.5) and Leading Indicators (0.0%).  The interesting thing about the Leading Indicators number is that a flat result would be the highest in 4 years.  A look at the Conference Board’s chart below shows an interesting thing about this number, and to me, anyway, calls its value into question.  Leading Indicators have been declining for four years while coincident indicators (and economic growth) have been moving along just fine.  I’m trying to figure out what these indicators lead.

And that’s really it for today.  We do see oil inventories as well, with a slight build expected and we will hear from Minneapolis Fed president Kashkari, but I cannot remember the last time he said anything interesting.  To me, the concern today, and tomorrow and next week, is that we see an escalation in rhetoric regarding Iran, at the very least, if not an actual military strike.  That feels like it would be bad for stocks, good for bonds, the dollar and gold.  Hopefully I am wrong there.

Good luck

Adf

Yesterday’s Trauma

Posted on by

The story is yesterday’s trauma
As risk assets traded with drama
For stocks, it was news
AI could abuse
More sectors, that triggered the bomb-a
 
For gold and the metals, however,
It seemed an alternative lever
A bear raid, perhaps
Or filling chart gaps
No matter, twas quite the endeavor
 
Which leads to today’s CPI
Where narratives that with AI
Deflation is coming
As all jobs but plumbing
We’ll no longer need to apply

Let’s start with this morning’s CPI data as in some ways, I feel like that is a key part of the overall market discussion regarding yesterday’s dramatic declines.  Expectations are for both Core and Headline prints of 0.3% M/M and 2.5% Y/Y.  If we feed those numbers into the current narrative, the implication might be that the Fed is continuing to see a slowdown here and it would open the door to further rate cuts.  Remember, despite the comments of two Fed speakers earlier this week, Logan and Hammack, the most recent information we have is that the neutral rate is believed to be 3.0%, a full 75bps lower than the current Fed funds rate.  Interestingly, if we look at the Fed funds futures market, it shows that even after yesterday’s abysmal Existing Home Sales data (-8.4%), the probability of 3 cuts doesn’t hit 50% until the end of 2027!

Source: cmegroup.com

Remember, too, that the payroll report was strong on Wednesday, but that major annual revisions took much of the shine off that.  And of course, we cannot forget that since everything is political these days, certain FOMC members who dislike the President may be against rate cuts simply because the President wants them.  The point here is that the appearance of pretty solid economic activity combined with gradually decreasing inflation could argue for rate cuts but could also argue to leave things as they are since they seem to be working.  And let’s face it, the Fed doesn’t really know anyway, nor do any of us.

Which takes us to the broader narrative about what is driving stock market activity and why we saw such dramatic declines in the US yesterday, and pretty much everywhere else overnight.  It appears the proximate cause is the idea that recent AI announcements have indicated that there are entire service industries that may be destroyed because AI will serve as an effective replacement for their customers.  We have seen it for law firms, accountants and consultants and now logistics and software companies are under the gun.

Adding to the narrative is Elon Musk, who continuously claims that AI and robots will replace virtually all human labor and create enormous wealth for us all while driving prices ever lower.  The flip side of that claim is that throughout history, every major technological advance, while initially destroying jobs in the areas it was used, resulted in more, and better paying, jobs to help advance the overall economic situation.  Of course, historically, these changes took at least a generation, if not several to play out, while things appear to be happening a bit faster this time.

I have not done a deep dive on AI so take this for what it’s worth.  I use Grok as it is convenient for me given I have X open on my computer all the time.  I use it for quick research as it responds to my poorly worded questions with the information I seek and, happily, cites its sources.  But I am looking for data questions (e.g. the GDP of China or the size of European holdings of Treasuries) and I have never even considered using it to write my poetry.  Is it ready to make intuitive leaps in thought?  Maybe, but that seems a stretch.  As with all computers, its advantage over the human brain is its ability to ‘brute force’ a solution by making so many calculations in such a short time that no human can match.  However, my take is breakthroughs have come from intuitive leaps from one topic to another, not from simply doing more math on the same topic.  And it is not clear to me that AI programs, as they currently exist, are intuitive.

Of course, for our purposes, it doesn’t really matter right now if AI is that capable or not, it only matters if investors and traders believe that to be the case and invest accordingly.  That was yesterday’s story, as well as well as the story at the beginning of last week, at least based on the way the NASDAQ traded as per the below chart.

Source: tradingeconomics.com

We had six different significant drawdowns within a given hour since the end of January, and virtually all were described as a consequence of some industry sector being decimated by AI.  The thing is, valuations are pretty high in the tech sector (the area most likely to be hit) and it may simply be that investors have decided to sell the rich stuff and buy cheap stuff instead, like defensives and materials companies.  Just a thought.  But be prepared for a lot more of this narrative about AI eating some other company’s/industry’s lunch as we go forward.

Ok, let’s look at the overnight now.  First, remember, China is going on holiday all next week, and we will see much less activity from Asia accordingly.  But last night, Asia basically followed the US lower with Japan (-1.2%), HK (-1.7%), China (-1.25%) and Australia (-1.4%) headlining.  India (-1.25%) and Singapore (-1.6%) also suffered and you are hard pressed to find any markets that rose there.  As this was very tech focused, it should be no surprise.  (PS India is also suffering on AI as much of the business that had been outsourced to India could well be replaced by AI.)

In Europe, too, red is today’s color, and not simply because they lean more communist every day.  While tech is not a major part of the markets there, watching Italy (-1.5%), Spain (-1.0%), Norway (-1.1%) and Greece (-2.1%) all slide sharply tells the story, I think.  As it happens, France (-0.35%) and Germany (-0.1%) are the continental leaders and the UK (+0.1%) is the only market of note showing gains at all.  As to US futures, ahead of the data at this hour (7:30) they are softer by -0.2% across the board.

In the bond market, yesterday saw Treasury yields slip -4bps after the Housing data and this morning, they have recouped just 1bp.  European sovereign yields are all lower by between -1bp and -2bps as data releases continue to show a ‘muddle-through’ economy rather than one either growing strongly or falling sharply.  We did hear from ECB member Kazaks, telling us that the euro’s strength over the past year could have a negative impact on the economy there, implying the ECB may need to ease further.  Meanwhile, JGB yields (-2bps) continue to demonstrate virtually no concern about PM Takaichi’s plans for unfunded fiscal expansion.

Metals markets were the other noteworthy place yesterday with some very dramatic declines happening simultaneously in both gold and silver just after 11:00am.  (see below) My friend JJ who writes Market Vibes, explained last evening that the timing was impeccable as London had closed and the US is the least liquid metals market around, so if a large speculator was seeking to drive prices lower, that was when to do it.  And somebody did!  

Source: tradingeconomics.com

But that was then, and this is now.  As you can see from the chart, the market is already rebounding with gold (+1.0%) and silver (+3.2%) simply demonstrating that they remain incredibly volatile.  In truth, this was the best take I saw on the subject yesterday.

Turning to oil, President Trump indicated that talks with Iran may go on for weeks, so it is unlikely that things will combust there for a while.  At the same time, the IEA continues to try to convince everyone that peak oil is here and there is a huge glut, but net, Texas Tea slipped -2.8% yesterday and is lower by another -0.35% this morning.

Finally, the dollar…well nothing has changed.  the DXY (+0.1%) is clinging to 97 with no impetus to move in either direction.  JPY (-0.4%) may be softer this morning but is far enough away from 160, the perceived intervention level, that nobody cares.  AUD (-0.6%) slipped on the weak commodities pricing, although remains near its highest levels in three years as the RBA turned hawkish last week.  We are also seeing weakness in the EMG bloc (KRW -0.4%, ZAR -0.5%, CLP -0.6%) with yesterday’s tech and metals sell-offs the proximate drivers.  The narrative remains that the dollar is set to collapse, but I still don’t see it.  Maybe I’m just blind.  I cannot get past the economic growth outperformance and inward investment plans, as well as the need for dollars to continue the global USD debt flywheel as the key demand points.

And that’s really it.  Volatility is with us and likely to stay for a while.  This is a global regime change with respect to economic statecraft rather than the previous rules-based order, and frankly, nobody really knows how it’s going to ultimately play out.  This is why gold remains in demand, because history has shown it has maintained its value on a purchasing power basis for millennia, whatever the terms of the relevant currency may be.  But in the fiat world, I’m waiting for someone to make a better argument for something other than the dollar over time.

Good luck and good weekend

Adf

Gone Astray

Posted on by

Though Friday will lack NFP
We still will have something to see
The States and Iran
Will meet in Oman
To talk about nuke strategy
 
But til they, in fact, do sit down
Be careful as crude moves around
And what if talks fail
To find holy grail
Beware oil shorts and their frowns
 
With that as the background today
The narrative has gone astray
’Cause all kinds of tech
Resemble a wreck
While metals are fading away

Sometimes it’s hard to determine which stories are really driving markets as there are so many that have potential conflicts between them.  With that in mind, I will start with oil this morning, which has seen a bit of choppiness during the past week on the back of on-again, off-again, on-again talks due to be held between the US and Iran.  See if you can guess where the worries about a US military strike gained ground, were quashed by news of potential talks, saw a military skirmish in the Strait of Hormuz and then when talks were reconfirmed.

Source: tradingeconomics.com

Net, there is still an underlying concern about the situation, which is why, I believe, the price of crude (-1.1%) is still above $64/bbl.  Remember, it was not that long ago when it had seemed to find a comfort zone below $60/bbl.  It strikes me that if some type of accommodation is reached at these talks, where Iran gives up its nuclear weapon dreams and stops funding terrorism (I believe these are the administration’s goals) then there is plenty of room for oil prices to slide back below $60/bbl and continue what had been a longer term down trend as per the below chart.  

Source: tradingeconomics.com

After all, given the fact that Venezuelan oil is going to be returning to the market, the continued expansion of production in Guyana, Brazil and Argentina, and now the idea of welcoming Iran back into the good graces of nations, that is a lot of potential supply that is currently not available.  My concern is if Iran agrees to those terms, it may be an existential threat to the theocracy, so I guess they need to weigh that risk vs. the risk that the US does escalate militarily, which could also be an existential risk to the theocracy.  Net, choppiness seems to be the likely road ahead.

Finishing commodities, precious metals have reversed the reversal and are down sharply this morning (Au -1.7%, Ag -11.0%, Pt -4.4%).  Volatility remains extremely high and given the competing narratives of a) it was a bubble, and b) the fundamentals remain in place, I expect we will continue to see price action like this for a while yet.  Although remember my strong belief that markets can only maintain volatility of this nature for a few weeks as at some point, all the participants simply become too tired to trade.  There was a very interesting chart I saw on X this morning that showed the price action in gold during the German hyperinflation of the Weimar Republic a bit over 100 years ago.  

I’m not implying we are heading to a hyperinflation, just that gold (and silver and platinum) prices can move very far in short order, as we’ve seen.  In the end, nothing has changed the fundamentals with demand for gold still price insensitive, demand for silver still greater than mining supply with the same true for platinum.  But it will be a rough ride for a little while yet.

So, let’s turn to the equity markets, where there are far more plugged-in analysts than me, but I want to take a higher-level look.  While yesterday’s price action was mixed (NASDAQ and S&P lower, DJIA higher) it seems to indicate that there is an ongoing rotation out of tech stocks into other areas, amongst them consumer staples, energy and defensives.  What I find so interesting about this, though, is that if I look at a chart of the three major US indices, they are all the same chart.

Source: tradingeconomics.com

Granted, the NASDAQ had the highest high back in November, but, in reality, they all move very much in sync.  This begs the question, what can we expect going forward?  At the end of the day, I still believe that stocks represent the value created in the economy.  As such, if the Trump administration’s plans to reduce regulations and encourage banks to lend more to the real economy, rather than purchase financial assets, can be implemented effectively, that is a very real positive for equity markets over time.  However, that probably means a much less steady climb, especially if the Fed is not explicitly supporting assets as the new Chair, Warsh, tries to shrink the balance sheet.  It is going to be messy and there are going to be a lot of cross narratives and claims, so at any given time, the only reality will be increased volatility.  But at least there’s a plan.

As to the rest of the world’s equity markets, it does appear as the bifurcation between those nations that are willing to work closely with the US and those working closely with China is likely to continue.  It remains to be seen which bloc will outperform, although I like the US odds given the legal structure and the demographics.  

With all that in mind, let’s look at the overnight price action.  Asia had a tough go of it given the high proportion of tech names there.  While Tokyo (-0.9%) slipped along with China (-0.6%) the real laggards were Korea (-3.9%) and Taiwan (-1.5%) and there were far more laggards (India, Australia, Malaysia, Indonesia) than gainers (Singapore, HK).  This is the tech story writ large.  In Europe, even though they largely lack tech, weakness is the norm (Spain -1.1%, Germany -0.2%, UK -0.3%) although the French (+0.3%) have managed to buck the trend.  It is not clear why Spain is lagging so badly, although perhaps PM Sanchez’s efforts to import 500K new people while unemployment remains at 10%, the highest in the EU, has some concerned.  As to US futures, at this hour (7:15), they are pointing higher by about 0.2%.

In the bond market, once again there is nothing going on.  Treasury yields are almost exactly unchanged since early Friday morning, although we did see a dip and rebound after the Warsh announcement.

Source: tradingeconomics.com

The US yield curve is steepening as 30-year yields edge higher although those remain below 5.0%, a level that many are watching closely as a signal of a bondmageddon.  On the continent, European sovereign yields have edged higher by 1bp to 2bps, but activity is muted ahead of the ECB meeting announcement (exp no change) scheduled later this morning.  UK yields have edged lower by -1bp after the BOE left rates on hold, as expected, with a 5/4 vote, the 4 looking for a cut.  I continue to believe that the odds are for the ECB to cut rates again far sooner than the market is pricing.  And JGB yields slipped -2bps overnight as market participants await Sunday’s election results.  Given PM Takaichi is forecast to win with an increased majority, it is hard for me to believe that if she does, JGB’s will sell off sharply on the idea she has promised more unfunded spending, they already know that.

Lastly, the dollar is firmer this morning, continuing to defy all the calls for its demise.  The pound (-0.8%) is the laggard after the BOE sounded a bit more dovish than expected, but we are seeing losses across the entire G10 bloc.  As to the EMG bloc, ZAR (-0.7%) is the laggard, but given the dramatic reversal in precious metals, that is no surprise.  Otherwise, losses on the order of -0.3% or so are the norm.

On the data front, Initial (exp 212K) and Continuing (1850K) Claims lead the way and later we see the JOLTs Job Openings Report (7.2M).  The word is that the NFP report will be released next Wednesday with CPI next Friday.  Atlanta Fed president Bostic speaks later this morning, but I continue to believe that until we hear from Mr Warsh, the Fed’s words have very little impact.  Arguably, the neutering of the Fed is why the bond market remains so quiet.  Traders have lost their cues.

Risk attitudes are getting revisited around the world as the seeming permanence of increased risk appetite is starting to be called into question.  There is no better signal of this than Bitcoin, which has broken back below $70K this morning to its lowest level since October 2024.  

Source: tradingeconomics.com

It was January 2024 when the ETF, IBIT, started trading and BTC was about $43K at that time.  As BTC is a pure risk asset/vehicle, it’s recent decline may well be the biggest signal that risk-off is coming.  That could well impede the Trump efforts to rebuild the US manufacturing base, but perhaps, it could also encourage it, as business risks are easier to understand than market risks.  The volatility is not over.

Good luck

Adf

Most Enthralling

Posted on by

Some fractures are starting to show
In markets, as Trump’s blow by blow
Attack on the Danes
And friends, really strains
The view ‘Twenty-Six will lack woe
 
So, equities worldwide are falling
While bond yields, much higher, are crawling
The buck’s in a rut
While oil’s a glut
Thus, gold is the thing, most enthralling

 

“Something is rotten in the state of Denmark.”  So said Marcellus, when Shakespeare introduced him to the world in 1603(ish) in one of his most brilliant works, Hamlet, and it seems true today, 423 years later.  By now, you are likely aware that President Trump has imposed 10% tariffs, to begin on February 1st, on Denmark, Norway, Sweden, France, Germany, Finland, the Netherlands and the UK as he presses his case for US ownership of Greenland.  This is not the venue to discuss the relative merits or pitfalls of the strategy, so I won’t bore you with my views on the subject.  

Rather, this is a venue to discuss the market impacts and how they may evolve, in one poet’s eyes, going forward given the new starting condition.  As I type this morning, investors around the world are extremely unhappy, at least holding paper claims on either assets or governments.  However, holding real assets, notably gold (+1.15% and at new all-time highs), silver (+0.9% and at new all-time highs) and platinum (+1.45%, not quite at new highs yet) are feeling much better.

It is interesting to me that the WEF is meeting this week, and likely no coincidence that President Trump escalated things ahead of the meeting where he is scheduled to speak tomorrow.  It seems that the protagonists in this latest drama are set to meet while in Davos as well, so all these views are subject to change at a moment’s notice.  But for now, since there really is no other story that matters, let’s look at how markets have (mis)behaved since we last saw them here in the US on Friday.

As you can see from the chart below combining the Nikkei 225, the DAX and the S&P 500 futures, the move has been consistent since the close in NY on Friday, with all three main indices lower by between -1.75% (Japan) and -3.1% (Germany), with the US (-2.1%) in the middle.  

Source: tradingeconomics.com

In fact, that price action has been widespread across the rest of the G10 markets and many EMG markets as well. Only China (-0.2% since Friday) has bucked the trend and remains little changed.  Of course, that makes sense given this spat has nothing to do with China, on the surface.  At this point, I expect that all equity markets are going to remain under pressure until there is some resolution.  While Europe has threatened to invoke its Anti-Coercion Instrument on the US if those tariffs come into being, one must wonder will that do more damage to the US or Europe?  FWIW, I expect some type of resolution to be achieved before the Feb 1 deadline but could easily be wrong about that.  One last thing about tariffs; remember last week when expectations were high that the Supreme Court was going to rule on the legality of the ones already imposed?  That has suddenly gone very quiet.  My take there is the longer we don’t hear anything, the more likely they are not going to stop them.

Perhaps, though, the bond market is the more interesting place to look this morning with government bonds around the world getting sold aggressively.  While all eyes have been focused on the US (+6bps and well above the top of the previous range) and Europe (Germany +5bps, UK +7bps, France +6bps) perhaps the real activity is happening in Japan (+9bps).  In fact, Japanese 30yr yields have exploded higher by 40 basis points since Friday’s close, and I’m confident that has nothing to do with Greenland!

Source: tradingeconomics.com

In fact, it appears that JGB holders are getting increasingly concerned that PM Takaichi is going to really run it hot, with more unfunded fiscal stimulus and are responding accordingly.  The latest Takaichi proposal for the upcoming election is that they are going to remove the GST (VAT tax) on food for 2 years to help alleviate inflation problems.  I certainly like that better than capping prices, but fiscally, it’s a tough road to follow.  

One other bond market story that is making the rounds is the idea that Europeans would attack the US by simultaneously unloading their US Treasury holdings.  We have heard this story before with respect to China, and if you look across all of Europe, between central banks and private investors, there are likely upwards of $2 trillion held there.  But the question I ask every time I hear something of this nature is…what will they do with the proceeds if they were somehow able to coordinate the sales?  First, in the worst case, the Fed would buy them to prevent the market from collapsing.  And second, now they would have a whole lot of dollars that need to be invested elsewhere.  Which markets can absorb that amount of flow?  US equities?  Sure, but would that achieve their goals?  I think not.  If they converted them into euros, a one-way flow of $2 trillion into euros in short order would pretty much render all European manufacturing uncompetitive right away as the euro rose to 1.50 or 1.60 or higher.  Gold?  Think $10k/oz or higher.  Ain’t gonna happen.

Let’s hit the dollar next, which is under pressure across the board.  As I type (7:20), the DXY has fallen -1.0% this morning, a very large move for that index, but remains within the trading range that we have seen since October.

Source: tradingeconomics.com

The sell-off in the dollar is almost universal, although interestingly, ZAR (-0.5%), MXN (-0.3%) and CLP (-0.3%) are all bucking that trend.  I understand the nervousness, but it strikes me that none of this conversation is a positive for Europe, excepting the idea they sell all their Treasuries and convert the dollars into euros and pounds, an idea I tried to squash above.  

Finally, let’s look at commodities where the metals, as discussed above are soaring while oil (+0.8%) is picking back up off its end of week lows and currently sits just below $60/bbl.  The Iran situation remains murky, at best, and my sense is we have not heard the last of the situation there, although from what I have seen on X, the rioting has been quelled to some extent.  However, I think there is still enormous pressure on the government there and would not be surprised to see some type of US intrusion. 

But I’m confident the one thing almost all of you are feeling this morning is the bitter cold that has enveloped most of the US as per the weather.com map below.

Given natural gas is the most common fuel for heating homes, we cannot be surprised that its price has skyrocketed today, jumping 24% in the session so far, although it is now simply back to where it was this time last year.  however, a key issue in this market is Europe, which since they virtually shut off Russian gas, is now highly reliant on US LNG to heat their homes.  It turns out that their storage has fallen to slightly less than 50% of capacity, well below their average storage level for this date of 60% – 65%.  European TTF gas, on a like for like basis, currently costs ~$12.25/MMBtu compared to $3.85/MMBtu in the US, even after the massive jump.  Again, Europe has some issues going forward.

On the data front, there is really nothing today or tomorrow of note although Thursday brings GDP amongst other things.  I will review them tomorrow because, after all, markets right now are far more beholden to President Trump and Europe than to data.

Fear is growing more widespread and will likely continue to do so until there is some type of resolution over Greenland.  But then, it will dissipate quickly as consider, two weeks ago we were all Venezuela experts and today, nobody even cares about that nation anymore!

As to the dollar, I expect that when the resolution arrives, the dollar will make up lost ground, but given we are in the midst of a White House bingo game, one needs to play things close to the vest.  Hedges are crucial here.

Good luck

Adf

The Temperature’s Rising

Posted on by

This morning the temperature’s rising
With Trump and his allies devising
An alternate way
For him to axe Jay
But this move is quite polarizing
 
The market response has been clear
It’s given the move a Bronx Cheer
Both stocks and the dollar
Are feeling a choler
But gold, everybody holds dear

 

The financial world is aghast this morning as last night, Chairman Powell revealed that the Fed has been served with grand jury subpoenas threatening criminal indictment regarding Chairman Powell’s testimony to the Senate Banking Committee last June.  The issue at hand is ostensibly the ongoing renovations at the Marriner Eccles Building, including their cost, and how that differs from Chairman Powell’s testimony.

Chairman Powell offered a video response last night explaining he will not be cowed into cutting rates because the President wants lower rates, but will continue their work of setting policy based on their assessments of the economy.  One cannot be surprised that this has raised an entirely new round of screaming about President Trump’s tactics, although what I did see this morning was that Florida House Representative Anna Paulina Luna took credit for referring the case to the DOJ.

While I have strong opinions on Chairman Powell’s effectiveness, or lack thereof, this is certainly a new level of pressure.  In fact, if you listen to the video above (it’s just 2 minutes) Powell explicitly claims that this is entirely about the Fed not cutting rates further.  But I am not going to discuss the legality, or tactics here, our focus is on the market’s response.

Starting with the dollar in the FX markets, it has fallen almost universally, and while it hasn’t collapsed, we are looking at a 0.3% to 0.5% decline pretty much everywhere.  Using the euro (+0.4%) as our proxy, you can see from the chart below that in the context of the past year’s price activity, this move is indistinguishable from any other move.

Source: tradingeconomics.com

This is not to imply that the Administration’s actions are insignificant, just that despite the rending of garments by the punditry, the market hasn’t determined it matters that much, at least not yet.  I have maintained my view that the dollar remains the best of a bad bunch of fiat currencies given the prospects for US economic activity compared to the rest of the world.  However, it is quite possible that foreign investors will view this action as far too detrimental to the structure of US financial markets and seek to exit, thus driving the dollar much lower.  I did not have this on my bingo card at the beginning of the year, so my views of dollar strength are somewhat tempered at this point.  It will certainly be interesting to see as we go forward.

One other thing to note is that CPI is released this week (exp 2.7% for both headline and core) and Truflation came out last week at 1.8%.  Now, I don’t put great stock in Truflation but there are many who do.  For that contingent, I assume they are aligned with President Trump in his views that Fed funds are too high.  After all, with Fed funds at 3.75%, that is nearly 200bps above the Truflation number.  I have always understood the “appropriate” relation to be closer to 75bps to 100bps above inflation, which if you believe Truflation, means you are looking for cuts.  (PS, this is not my personal view, I am simply highlighting part of the market thought process.)

At any rate, the dollar is under pressure this morning but remains well within its recent trading range.  Turning to commodities, though, that is where the real price action is, with precious metals exploding higher on this news.  We are looking at record highs for gold (+1.6%), silver (+4.6%) with platinum (+3.2%) also much richer, although not back to all-time highs.  If we look at a chart of both gold and silver below, we can see the parabolic nature of silver’s recent move, a situation which should make everyone uncomfortable as parabolic moves frequently signal the end of the line. 

Source: tradingeconomics.com

But perhaps what makes this more interesting is that there is a substantial amount of supply in both gold and silver due to enter the market as the BCOM index rebalancing began last Friday and continues through Thursday.  Given the dramatic rallies in both metals last year, there is a significant amount to be sold by those funds that track the index.  Estimates are for a total of nearly $7 billion of gold and silver to be sold for the rebalancing, and many expected the metals markets to decline under that pressure.  And perhaps they still will, but today’s moves are the clearest signal that there are many investors who are uncomfortable with the Fed situation.

Remarkably, Venezuela and oil markets have basically disappeared from the conversation at this point.  However, this morning WTI (-0.9%) is giving back some of last week’s gains, and remains well within its recent downtrend, but shows no signs of a sharp break in either direction.

Turning to the other risk spot, equity markets, while US futures are all lower by -0.5% to -0.6% at this hour (7:10), the Fed news has had a mixed impact elsewhere around the world.  For instance, Japan (+1.6%), HK (+1.4%) and China (+0.65%) all had solid sessions with that being the case throughout the region.  Even India (+0.4%) finally managed to go green last night.  And all of this occurred after the Fed news.  One possible explanation is that foreign investors are running home, hence bidding up local shares.  Of course, it is also possible that they don’t believe there is much there, there, and are simply ignoring the news.

In Europe, the situation is different with weakness the general trend as Spain (-0.4%), France (-0.3%) and Italy (-0.15%) all slipping although Germany (+0.3%) has managed to buck the trend absent any specific macro catalyst.  German defense stocks are modestly higher this morning and perhaps threats by President Trump to aid the fomenting Iranian revolution have investors looking for more gains there.  As I often say, markets can be quite perverse for no apparent reason at all.

Finally, bond markets are not really responding to the news in any substantial manner.  Treasury yields have backed up 3bps this morning, but at 4.19%, remain within that long-term trading range and are not signaling flight.  European sovereigns have seen yields edge lower by -1bp across the board, so while modestly better, hardly the sign of massive buying.  And JGB yields were unchanged overnight.  Bonds remain the least interesting space there is of all the markets.

Which takes us to the data this week.

TuesdayNFIB Small Biz Optimism99.5
 CPI0.3% (2.7% Y/Y)
 -ex food & energy0.3% (2.7% Y/Y)
 New Home Sales710K
WednesdayRetail Sales0.4%
 -ex Autos0.3%
 Existing Home Sales4.2M
 Fed’s Beige Book 
ThursdayInitial Claims219K
 Continuing Claims1918K
 Empire State Mfg1.0
 Philly Fed-2.0
FridayIP0.1%
 Capacity Utilization76.0%

Source: tradingeconomics.com

In addition, we get PPI data on Wednesday, but it is all old data, for October and November and, as such, I don’t think it will matter very much at all.  We also hear from 10 different Fed speakers, some several times, over the course of the week.  It will be very interesting to hear how they address the major news overnight regarding the subpoenas, or if they even touch on them.  I expect there will be oblique references to Fed independence at most.

And remember, none of this even considers the ongoing revolution in Iran, which appears to be gaining strength in its third week.  If the theocracy in Iran falls, that will have a very different impact on oil markets than the Venezuela situation.  First, they are currently producing far more oil.  Second, the removal of sanctions there would seemingly reduce the amount of ultra cheap oil that China can import, adding pressure to the Chinese economy, as well as help pressure oil prices lower in general, which would negatively impact Putin’s war chest.  (If Iranian oil is no longer black market, it raises China’s cost, but lower overall prices will reduce further Russia’s sanctioned sale prices).

As to the dollar on the FX markets, this move certainly gives me pause regarding my bullish view, but there seems to be a long way to go before anything really comes of it.  As well, grand jury testimony is secret, so we won’t know about anything that is said anytime soon.  Ultimately, nothing may come of this, no charges of any sort.  Remember, this is a Washington DC grand jury, and so many there disagree with everything that President Trump does, they may not indict for that reason alone.

I’m not willing to make a sweeping statement at this time, but caution in positioning seems like a sensible view.

Good luck

Adf

Remarkable Fragility

Posted on by

JGB yields have
Risen to multi-year heights
Is this why stocks fell?

 

Yesterday I highlighted that 10-year JGB yields had risen to their highest level since 2008.  As you can see below, the same is true for 30-year JGBs and essentially the entire curve there.

Source: tradingeconomics.com

Ostensibly, this move was triggered by comments from BOJ Governor Ueda indicating that a rate hike was coming this month.  However, the thing I find more interesting is that this move in JGB yields has become the bête noire of markets, now being blamed for every negative thing that happened yesterday.  

For instance, Treasury yields yesterday rose 7bps despite ISM data indicating that manufacturing activity remains sluggish at best.  In fact, the initial response to that data was that it confirmed the Fed will be cutting rates next week.  But the narrative seems to be that Japanese investors are now willing to repatriate funds, selling Treasuries to buy JGBs, in order to invest locally because they are finally getting paid to do so.  Certainly, looking at the chart above shows that Japanese yields had been tantamount to zero for a long time prior to 2024, and even then, have only started to show any real value in the most recent few months.  Of course, real 10-year yields in Japan remain significantly negative based on the latest inflation reading of 3.0%.  The upshot is, rising JGB yields are deemed the cause of Treasury market weakness.

Turning to risk assets, the story is the same for both stocks (which saw US equities decline across the board yesterday) and cryptocurrencies, notably Bitcoin.  Ostensibly, the rise in yields, and the prospect of a rate hike by the BOJ (to just 0.75% mind you) has been cited as the driver of an unwinding in leveraged trades as hedge funds seek to get ahead of having their funding costs rise thus crimping their margins.  

There is no doubt in my mind that the yen has been a critical funding currency for a wide array of carry trades, that is true.  In fact, that has been the case for several decades.  But is 25 basis points really enough to destroy all the strategies that rely on that process?  If so, it demonstrates a remarkable fragility in markets, and one that portends much worse outcomes going forward.  

If we look at the relationship between Bitcoin and 10-year JGBs, it appears that there has been a significant change in tone.  For the past two months, while JGB yields have continued to climb, BTC has broken its correlation with JGBs and has fallen dramatically instead. (see below chart from tradingeconomics.com). When it comes to crypto, I am confident that leverage levels are higher than anywhere else, in fact that seems part of the attraction, so it should not be as surprising to see something of this nature.  But again, it speaks to a very fragile market situation given there was no discernible change in the Japanese yield trend to drive a Bitcoin adjustment.

The upshot here, too, is that rising JGB yields are claimed to be the reason Bitcoin is declining.  In fact, nearly all the commentary of late seems to be focusing on JGBs as the driver of everything.  While I concede that Japanese yields are an important part of the USDJPY discussion, it is difficult for me to assign them blame for everything else.  I have seen numerous commentators explaining that the Japanese have been selling Treasuries because they don’t trust the US, and this has been ongoing for years.  I have also seen commentators explain that because Japanese surpluses had been invested internationally for years and funding so much of the world’s activity, now that they can invest at home, liquidity everywhere will dry up, and asset prices will fall.  

Responding to the first issue, especially with new PM Sanae Takaichi, I do not believe that is a concern at all.  If anything, I expect that the relationship between the US and Japan will deepen.  As to the second issue, that may have more import but the one thing of which we can be sure is that central banks around the world will not allow liquidity to dry up in any meaningful fashion.  Remember, the Fed ended QT yesterday and it won’t be long before the balance sheet starts to grow again, adding liquidity to the system.  One thing I have learned in my many years observing and trading in markets is, there doesn’t need to be a catalyst for markets to move in an unexpected direction.  Certainly not a big picture catalyst.

And with that, let’s look at how markets responded overnight to yesterday’s risk-off session in the US.  Looking at the bond market first, yesterday’s rise in yields was nearly universal with European sovereigns all following the Treasury market’s lead.  And this morning, across the board sovereigns are higher by 1bp, the same as Treasury yields.  While JGB yields didn’t budge overnight, we did see Australia and other regional yields catch up to yesterday’s rise.  I fear bond investors are stuck as they see the potential for inflation, but they also see weakening economic activity as a moderator there.  As an example, the OECD just reduced its US GDP forecast for 2026 to 2.9% this morning, from 3.2%.  Personally, I don’t think anything has changed the run it hot scenario.

In the equity markets, Asian bourses were mixed with Korea (+1.9%) and Taiwan (+0.8%) the notable gainers while elsewhere movement was much less substantial (Japan 0.0%, HK +0.2%, China -0.4%).  There was no single story driving things there.  As to Europe, things are brighter this morning led by Spain (+1.0%) and Italy (+0.5%) although there is no single driving issue here either.  US futures are edging higher at this hour as well, +0.2%, so perhaps yesterday was more like a little profit taking after last week’s strong rally, than anything else.

In the commodity sector, oil (-0.3%) is slipping after yesterday’s rally.  I suppose the potential peace in Ukraine is bearish, but that story has been dragging on for a while so I’m not sure when it will come to fruition.  In the metals markets, after a gangbusters rally yesterday, with silver trading to $59/oz, we are seeing a modest retracement this morning across the board (Au -0.6%, Ag -1.2%, Pt -2.0%) although copper (+0.4%) is holding its gains.  Nothing indicates that these metals have topped.

Finally, the dollar is little changed as I write, giving back some early modest strength.  JPY (-0.3%) continues to be amongst the worst performers, and although it has bounced from its recent lows, remains within a few percent of those levels.  My take here is we will need to see both a more aggressive Fed and a more aggressive BOJ to get USDJPY back to 150 even, let alone further than that.  If we look at the DXY, it is sitting at 99.45, and still well within its trading range for the past 6+ months as per the below.  For now, the dollar remains a secondary story.

Source: tradingeconomics.com

On the data front, here’s what comes the rest of this week:

WednesdayADP Employment 10K
 IP0.1%
 Capacity Utilization77.3%
 ISM Services52.1
ThursdayInitial Claims220K
 Continuing Claims1960K
 Trade Balance -$65.5B
FridayPersonal Income (Sep)0.4%
 Personal Spending (Sep)0.4%
 PCE (Sep)0.3% (2.8% Y/Y)
 -ex food & energy0.2% (2.9% Y/Y)
 Michigan Expectations51.2
 Consumer Credit$10.5B

Source: tradingeconomics.com

As the Fed is in its quiet period, there are no Fed speakers until Powell at the presser next week.  Given the age of the PCE data, I don’t see it having much impact.  Rather, ADP and ISM are likely the things that matter most for now.

Ultimately, I believe more liquidity is going to come to the market via central banks around the world, and that will support risk assets, as well as prices for the things we buy.  Nothing has changed in my view of the dollar either.

Good luck

Adf

A Latent Grim Reaper

Posted on by

The zeitgeist, of late, has been leaning
Toward welcoming gov intervening
Because costs have soared
So, folks once abhorred
Like Socialists, seem more well-meaning
 
Perhaps, though, the story’s much deeper
And points to a latent grim reaper
Elites on one side
Claim Trump’s only lied
While Populists serve as gatekeeper

 

Quite frankly, I feel like markets have become very secondary to an understanding of what is happening in the economy, and while there is intrigue over who may be the next Fed Chair, and correspondingly, if Mr Powell will resign from the FOMC when his chairmanship is up, I believe that pales in comparison to much larger macroeconomic issues with which we all have to deal on a daily basis.  Once again, my weekend reading has highlighted two key pieces that I believe do an excellent job of explaining much of what is going on, not just in the economy, but in the streets.

Last week, I highlighted Michael Green’s piece regarding a new estimate of what the poverty line looks like, putting paid to the idea that the official government level of $31,500 is appropriate, and that in suburban NJ (Caldwell to be exact) it is more like $140K.  Now, you will not be surprised that his piece garnered a great deal of attention given its premise, but I will not go into that.  However, he did write a follow-up piece which is worth reading and where he discusses the reaction.  In brief, whatever number is correct, it is clear that $31.5K is laughably low.   Ultimately, I believe this work has quantified the concept of the “vibecession” which has been making the rounds for a while.  People are allegedly making a decent living and yet are living paycheck to paycheck because the cost of living (not inflation) has risen so remarkably over time and priced many folks out of previously ordinary levels of attainment.

Which brings me to the second key piece I read this weekend, this from Dr Pippa Malmgren, which does a remarkable job explaining how the nation (and not just in the US, but we are more familiar here) has (d)evolved into two groups; Elites and Populists.  The former are the old guard politicians (both Democrats and Republicans), the global organizations like the World Bank, IMF, UN and WEF, and more perniciously in my mind, the so-called deep state.  The latter are personified by President Trump, but include NYC Mayor-elect Mamdani, AfD in Germany, Marine LePen in France and Victor Orban in Hungary, and their followers, to name a few.

The frightening conclusion Dr Malmgren drew was that there is no ability for a nation to continue to operate successfully if the population is split in this manner, and that eventually, one side is going to wind up victorious.  I would say this is the very definition of the 4th Turning and we are living through it.

So, we must ask, what are the potential ramifications from a financial markets perspective with this backdrop?  I have repeatedly highlighted that the Trump administration is going to “run it hot” going forward, meaning the goal will be to increase nominal GDP fast enough to outweigh the inevitable rise in prices.  The idea is if incomes rise quickly enough, people will be able to tolerate rising prices more easily.  

But the one thing of which I am increasingly confident is that prices and their rate of change are going to rise under this scenario.  As central banks leave policy easy, or ease further in an effort to support their respective economies, that is going to be the outcome.  A look at the chart below from the FRED data base of the St Louis Fed shows there is a very strong relationship between CPI and nominal GDP.  In fact, I ran the numbers and the correlation for the past 75 years has been 0.975!  Prices are going to rise friends, alongside M2.

What does this mean?  It means that the debasement of fiat currency is going to continue apace and so commodities, notably precious metals, but also base metals and property are going to be recognized as better stores of wealth.  If you wonder why gold (+0.9%) and silver (+2.2%) are continuing to rocket higher, look no further than this.  What about equities?  For now, I expect they will continue to perform well as all that liquidity will be looking for a home although this morning, not so much as US futures are lower by -0.5% across the board.  Bonds?  This is a tougher call, and I suspect that the yield curve will steepen further as central banks press short rates lower, but inflation undermines long duration fixed income assets.  Finally, the dollar remains, in my view, one of the best of the fiat currencies, but like all of them, will continue to degrade vs. gold and hard assets.

Keeping that in mind, there are two other stories of note this morning, only one of which is impacting markets.  The non-impactful one is that apparently President Trump has selected Kevin Hassett, currently the White House Economic Council Director, as the man to succeed Jay Powell in the chair.  He is a long-time political operative with deep ties in Washington and I presume will get through the vetting and be confirmed on a timely basis.  As I wrote above, it is not clear to me the Fed matters as much as other things in the current environment, although we will continue to hear about it.  In this light, the Fed funds futures market is currently pricing an 87.5% probability of a 25bp cut next week and is back to a 58% probability of a total of 100bps of cuts by the end of 2026 as per the below from the CME.

The other story of note, this one definitely impacting markets, is the news that Ueda-san hinted more definitively at a Japanese rate hike later this month, with Japanese swaps market raising the probability of that hike to 80% from about 60% last week.  The knock-on effects were that 10-year JGB yields jumped 7bps, to 1.86%, their highest level since 2008 and as you can see from the chart below, continue to trend strongly higher.  Of course, given that inflation in Japan remains well above target, it is not that surprising that yields are climbing.  

Too, the other outcome here has been the yen (+0.7%) gaining a little ground, as per the below chart from tradingeconomics.com, and perhaps we have seen a short-term low in the currency.  Certainly, the increasing probability of US rate cuts is weighing on the dollar overall, so that is part of the story, but it remains to be seen if there are going to be wholesale changes in investment allocations that would be necessary to completely reverse the yen’s remarkable weakness over the past nearly four years.

The move in JGB yields has been blamed for the rise in yields around the world with Treasury and European Sovereign yields uniformly higher by 3bps this morning while some other regional Asian yields climbed between 4bps and 6bps.  In the end, inflation remains a problem almost everywhere in the world and I think that is what we are witnessing here.

As well, the JGB move was seen as the cause for Japanese equities’ (-1.9%) very weak performance which also dragged down some other regional markets (Taiwan, Australia, Philippines) but was not enough to undermine the rest of the region.  The flip side of that weakness was China (+1.1%) and HK (+0.7%) where it appears that hopes for a Fed rate cut more than offset weaker than forecast PMI data from China.  Another interesting story from the mainland was that the monthly Housing price data that was compiled by two key private companies was squashed by the Chinese government after China Vanke, one of the largest Chinese property companies, explained they would be late on an interest rate payment.  One can only imagine what that data looked like!

Meanwhile, in Europe, red is the color led by Germany’s DAX (-1.5%) although with weakness across the board (CAC -0.8%, IBEX -0.6%, FTSE MIB -0.9%).  Apparently, the story that progress has been made regarding peace talks in Ukraine is not seen as a positive there.  After all, if there is peace, will European governments still be so keen to build out their military, spending billions of euros at local defense and manufacturing firms?  It seems after a very strong close to the month in November, there is a bit of profit taking underway this morning.

In the commodity space, oil (+1.3%) is bouncing back to its trend line after OPEC confirmed it will not be increasing production in Q1 next year at a meeting yesterday.  I would expect that a real peace deal would be negative for this market as some part of that would be the relaxation of sanctions, I would assume.  But maybe I’m wrong there.  However, I continue to believe the trend is modestly lower going forward as there is far more supply available.  As to the other metals, both copper (+0.6%) and platinum (+1.5%) are continuing their runs higher with no end currently in sight.

Finally, the dollar is softer overall this morning, and while the yen (+0.7%) is the leader, the euro (+0.3%), SEK (+0.3%) and CHF (+0.25%) are also nicely up on the day with the rest of the G10 little changed.  The real movement, though, has been in the EMG bloc with CZK (+0.75%), HUF (+0.5%), PLN (+0.5%), and CLP (+0.4%) all benefitting from the Fed rate cut story as well as Chile’s benefits from copper’s rally.  While a cut seems highly likely, I suspect the real dollar story will be about the dot plot and SEP as well as Powell’s presser next week.

I’ve already run too long so will just mention that ISM Manufacturing (exp 48.9) is due this morning and I will review the week’s data expectations tomorrow.  

The world is changing and I expect that we will continue to see volatility across markets as investors come to grips with those changes, whether simple central bank rate decisions or more complex social movements and electoral outcomes that lead to major policy changes.  Be careful out there.

Good luck

Adf

Markets Ain’t Fair

Posted on by

The pundits, when looking ahead
All fear that their theses are dead
‘Cause bitcoin’s imploding
And that is corroding
The views they have tried to embed
 
The thing is, it’s simply not clear
What caused this excessive new fear
But those with gray hair
Know markets ain’t fair
And force us to all persevere

 

It all came undone yesterday around 10:45 in the morning for no obvious reason.  There was no data released then to drive trader reaction nor any commentary of note.  In fact, most of the punditry was still reveling in the higher Nvidia earnings and planning which Birkin bag they were going to buy for their girlfriends wives.  But as you can see from the NASDAQ chart below, in the ensuing two hours, the index fell by 4% and then slipped another 1% or so from there into the close, the level that is still trading at 6:30 this morning

Source: tradingeconomics.com

As a member in good standing of the gray hair club, I have seen this movie before, and I have always admired the following image as a perfect example of the way things work in markets.  

And arguably, this is all you need to know about how things work.  Sure, there are times when a specific data release or Fed comment is a very clear driver of market activity, but I would contend that is the exception rather than the rule.  The day following Black Monday in 1987, the WSJ asked noted Wall Street managers what caused the huge decline.  Former Bear Stearns Chairman, Ace Greenberg said it best when he replied, “markets move, next question.”  And that is the reality.  While I believe that macroeconomics offers important information for long-term investing theses, on any given day, anything can happen.  Yesterday is a perfect example of that reality.

But let us consider what we know about the overall financial situation.  The Damoclesian Sword hanging over everything is excessive leverage across the board.  I have often discussed the idea that global debt is more than 3X global GDP, a clear an indication that there will be repayment problems going forward.  And something that seems to have been driving recent equity market gains has been an increase in margin buying of stocks and leverage in general.  After all, the fact that there are ETFs that offer 3X leverage on a particular stock or strategy is remarkable.  But a look at the broad levels of leverage, as shown by the increase in margin debt in the chart below from Wolfstreet.com (a very worthwhile follow for free) tells me, at least, that when things turn, there is going to be an awful lot of selling that has nothing to do with value and everything to do with getting cash for margin calls.

It is this process that drives down the good with the bad and as you can see in the chart, happens regularly.  I’m not saying that we are looking at a major reversal ahead, but as I wrote earlier this week, a correction seems long overdue.  Perhaps yesterday was the first step.

One last thing.  I mentioned Bitcoin at the top and I think it is worthwhile to look at the chart there to get a sense of just how speculative assets behave when times are tough.  Since its peak on October 6th, 46 days ago, it has declined ~45% as of this morning.  That, my friends, is a serious price adjustment!

Source: tradingeconomics.com

Ok, let’s see how other markets are behaving in the wake of this, as well as the recent news.  Remember, yesterday we saw a slew of old US data on employment, but it is all we have, so probably has more importance than it deserves.  After all, it is pre-shutdown and things have clearly changed since then.

Starting in Asia, it wasn’t pretty with the three main markets (Nikkei, Hang Seng, CSI 300) all declining by -2.40%.  Korea (-3.8%) and Taiwan (-3.6%) fared even worse but the entire region was under pressure.  The narrative that is forming as an explanation is that there is trouble in tech land, despite the Nvidia earnings, and since Asia is all about tech, you can see why it fell.

Meanwhile, the antithesis of tech, aka Europe, is also lower across the board this morning, albeit not as dramatically.  Spain’s IBEX (-1.3%) is leading the way down but weakness is pervasive; DAX (-0.8%), CAC (-0.4%), FTSE 100 (-0.4%), as all these nations also released their Flash PMI data which came in generally softer across the board.  But there is one other thing weighing on Europe and that is the publication of a 28-point peace plan designed to end the Russia/Ukraine war.  The plan comes from the US and essentially ignored Europe’s views as it is patently clear they are not interested in peace.  In fact, it appears peace will be quite the negative for Europe as it will undermine their rearmament drive and likely force governments there to focus on domestic issues, something which, to date, they have proven singularly incompetent to address.  In fact, if the war really ends, I suspect there are going to be several governments to fall in Europe with ensuing uncertainty in their economies and markets.  As to the US futures markets, at this hour (7:30) they are basically unchanged to leaning slightly higher.  Perhaps the worst is past.

In the bond market, yields are lower across the board led by Treasuries (-4bps) while European sovereign yields have slipped -2bps to -3bps.  Certainly, the European data does not scream inflationary growth, but I have a feeling this is more about tracking Treasuries than anything else.  I say that because JGB yields also fell -4bps despite the passage of an even larger supplementary budget than expected, ¥21.7 trillion, which is still going to be paid for with more borrowing.  That is hardly the news to get investors to buy JGBs and I suspect yields will climb higher again going forward.  I think it is worth looking at the trend in US vs. Japanese 10-year yields to get a fuller picture of just how different things are in the two nations.  Of course, there is one thing that is similar, inflation continues to remain above their respective 2.0% targets and is showing no signs of returning anytime soon.

Source: tradingeconomics.com

You will not be surprised to know that commodity prices remain extremely volatile.  Oil (-1.0%) had a bad day yesterday and is continuing lower this morning although as you can see from the chart below, it is off its worst levels of the session.  But the one thing that remains true despite the volatility is the trend remains lower.

Source: tradingeconomics.com

Metals markets also suffered yesterday and are under pressure this morning with gold (-0.4%) and silver (-2.5%) sliding.  One thing to remember is that when margin calls come, traders/investors sell what they can, not what they want, and given the liquidity that remains in both gold and silver, they tend to get sold to cover margin calls.  Too, today is the weekly option expiry in the SLV ETF and as my friend JJ (writes at Market Vibes) regularly explains, there is a huge amount of silver activity driven by the maturing positions.

Finally, the dollar continues to remain solidly bid, although is merely consolidating recent gains as it trades just above the key 100 level in the DXY.  Two things of note today are JPY (+0.5%) which responded to comments from not only the FInMin, but also Ueda-san explaining that a weak yen is driving inflation higher and might need to be addressed.  Step 4 of the dance toward intervention?  As to the rest of the G10, movement has been minimal.  But in the EMG bloc, INR (-1.1%) fell to record lows (dollar highs) after the RBI stepped away from its market support.  It sure seems like it is going to break through 90 soon and I imagine 100 is viable.  As well, ZAR (-0.7%) is suffering on the weaker metals prices, along with CLP (-0.5%) while BRL (-0.5%) slipped as talk of a more dovish central bank stance started percolating in markets.

Today’s data brings US Flash PMI (exp 52.0 Manufacturing, 54.6 Services) and Michigan Sentiment (50.5).  We hear from five more Fed speakers, with a mix of hawks and doves.  It will be interesting to see how the doves frame yesterday’s better than expected September NFP report as their entire thesis is softening labor growth is going to be the bigger problem than rising prices.

I, for one, am glad the weekend is upon us.  For today, I am at a loss for risk assets.  The case can be made either way and I have no strong insight.  However, the one thing that I continue to believe is the dollar is going to find support.  Remember, when things get really bad (and they haven’t yet) people still run to T-bills to hide, and that requires buying dollars.

Good luck and good weekend

Adf

Left For Dead

Posted on by

Takaichi’s learned
Her chalice contained poison
Thus, her yen weakens

 

If one needed proof that interest rates are not the only determining factor in FX markets, look no further than Japan these days where JGB yields across the board, from 2yr to 40yr are trading at decade plus highs while the yen continues to decline on a regular basis.  This morning, the yen has traded through 155.00 vs. the dollar, and through 180.00 vs. the euro with the latter being a record low for the yen vs. the single currency since the euro was formed in 1999.

Source: tradingeconomics.com

Meanwhile, JGB yields continue to rise unabated on the back of growing concerns that Takaichi-san’s government is going to be issuing still more unfunded debt to pay for a massive new supplementary fiscal package rumored to be ¥17 trillion (~$109 billion).  While we may have many fiscal problems in the US, it is clear Japan should not be our fiscal role model.

Source: tradingeconomics.com

This market movement has led to the second step of the seven-step program of verbal intervention by Japanese FinMins and their subordinates.  Last night, FinMin Satsuki Katayama explained [emphasis added], “I’m seeing extremely one-sided and rapid movements in the currency market. I’m deeply concerned about the situation.”  Rapid and one-sided are the key words to note here.  History has shown the Japanese are not yet ready to intervene, but they are warming to the task.  My sense is we will need to see 160 trade again before they enter the market.  However, while that will have a short-term impact, it will not change the relative fiscal realities between the US and Japan, so any retreat is likely to be a dollar (or euro) buying opportunity.

As to the BOJ, after a highly anticipated meeting between Takaichi-san and Ueda-san, the BOJ Governor told a press conference, “The mechanism for inflation and wages to grow together is recovering. Given this, I told the prime minister that we are in the process of making gradual adjustments to the degree of monetary easing.”   Alas for the yen, I don’t think it will be enough to halt the slide.  That is a fiscal issue, and one not likely to be addressed anytime soon.

The screens everywhere have turned red
As folks have lost faith that the Fed,
Next month, will cut rates
Thus, leave to the fates
A stock market now left for dead

Yesterday, I showed the Fear & Greed Index and marveled at how it was pointing to so much fear despite equity markets trading within a few percentage points of all time highs.  Well, today it’s even worse!  This morning the index has fallen from 22 to 13 and is now pushing toward the lows seen last April when it reached 4 just ahead of Liberation Day.

In fact, it is worthwhile looking at a history of this index over the past year and remembering what happened in the wake of that all-time low reading.

Source: cnn.com

Now look at the S&P500 over the same timeline and see if you notice any similarities.

Source: tradingeconomics.com

It is certainly not a perfect match, but the dramatic rise in both indices from the bottom and through June is no coincidence.  The other interesting thing is that the fear index managed to decline so sharply despite the current pretty modest equity market decline.  After all, from the top, even after yesterday’s decline, we are less than 4% from record highs in the S&P 500.

Analysts discuss the ‘wall of worry’ when equity markets rise despite negative narratives.  Too, historically, when the fear index falls to current levels, it tends to presage a rally.  Yet, if we have only fallen 4% from the peak, it would appear that positions remain relatively robust in sizing.  In fact, BoA indicated that cash positions by investors have fallen to just 3.7%, the lowest level in the past 15 years.  So, everyone is fully invested, yet everyone is terrified.  Something’s gotta give!  In this poet’s eyes, the likely direction of travel in the short run is lower for equities, and a correction of 10% or so in total makes sense.  But at that point, especially if bonds are under pressure as well, I would look for the Fed to step in and not only cut rates but start expanding its balance sheet once again.  QT was nice while it lasted, but its time has passed.  One poet’s view.

Ok, following the sharp decline in US equity markets yesterday on weak tech shares, the bottom really fell out in Asia and Europe.  Japan (-3.2%) got crushed between worries about fiscal profligacy discussed above and the tech selloff.  China (-0.65%) and HK (-1.7%) followed suit as did every market in Asia (Korea -3.3%, Taiwan -2.5%, India -0.3%, Australia -1.9%).  You get the idea.  In Europe, the picture is no brighter, although the damage is less dramatic given the complete lack of tech companies based on the continent.  But Germany (-1.2%), France (-1.3%), Spain (-1.6%), Italy (-1.7%) and the UK (-1.3%) have led the way lower where all indices are in the red.  US futures, at this hour (7:15) are also pointing lower, although on the order of -0.5% right now.

In the bond market, Treasury yields, after edging higher yesterday are lower by -4bps this morning, and back at 4.10%, their ‘home’ for the past two months as per the below chart from tradingeconomics.com.

As to European sovereigns, they are not getting quite as much love with some yields unchanged (UK, Italy) and some slipping slightly, down -2bps (Germany, Netherlands), and that covers the entire movement today.  We’ve already discussed JGBs above.

In the commodity space, oil (-0.2%) continues to trade either side of $60/bbl and it remains unclear what type of catalyst is required to move us away from this level.  Interestingly, precious metals have lost a bit of their luster despite the fear with gold (-0.25%), silver (-0.2%) and platinum (-0.2%) all treading water rather than being the recipient of flows based on fear.  Granted, compared to the crypto realm, where BTC (-1.0%, -16% in the past month) has suffered far more dramatically, this isn’t too bad.  But you have to ask, if investors are bailing on risk assets like equities, and bonds are not rallying sharply, while gold is slipping a bit, where is the money going?

Perhaps a look at the currency market will help us answer that question.  Alas, I don’t think that is the case as while the dollar had a good day yesterday, and is holding those gains this morning, if investors around the world are buying dollars, where are they putting them?  I suppose money market funds are going to be the main recipient of the funds taken out of longer-term investments.  One thing we have learned, though, is that the yen appears to have lost its haven status given its continued weakening (-3.0% in the past month) despite growing fears around the world.  

On the data front, yesterday saw Empire State Manufacturing print a very solid 18.7 and, weirdly, this morning at 5am the BLS released the Initial Claims data from October 18th at 232K, although there is not much context for that given the absence of other weeks’ data around it.  Later this morning we are due the ADP Weekly number, Factory Orders (exp 1.4%) and another Fed speaker, Governor Barr.  Yesterday’s Fed speakers left us with several calling for a cut in December, and several calling for no move with the former (Waller, Bowman and Miran) focused on the tenuous employment situation while the latter (Williams, Jeffereson, Kashkari and Logan) worried about inflation.  Personally, I’m with the latter group as the correct policy, but futures are still a coin toss and there is too much time before the next meeting to take a strong stand in either direction.

The world appears more confusing than usual right now, perhaps why that Fear index is so low.  With that in mind, regarding the dollar, despite all the troubles extant in the US, it is hard to look around and find someplace else with better prospects right now.  I still like it in the medium and long term.

Good luck

Adf