Tag Archives: #riskoff

Stoke Some More Fear

Posted on by 
The word of the day is inflation
As data from many a nation
Appears, still, to show
It has room to grow
With fears this is no aberration

But are things as bad as we hear
From media outlets who cheer
More pain, as they make
Their case Trump will break
The nation, and stoke some more fear

It’s CPI day here in the US and similarly, we got readings from various nations around the world overnight.  To level set, expectations for this morning’s numbers are:

  • Headline – 0.5% M/M, 4.2% Y/Y
  • Core – 0.3% M/M, 2.9% Y/Y

On an annual basis, as you can see in the below chart from tradingeconomics.com, 4.2%, while much higher than some recent data and much higher than we would like, was seen as recently as April 2023 during the “transitory” phase from the Covid years.

And don’t get me wrong, I am as sensitive to inflation as all of you as I go to the supermarket or Costco and see prices and fill up my car’s gas tank as well.  In fact, speaking of gasoline, there is no question it is much higher than it was prior to the beginning of the Iran conflict.  Looking at the chart I drew from FRED data below shows that, nominally, it is back at levels from the immediate aftermath of Russia’s invasion of Ukraine in 2022.  But look at the other line on the chart, that is the price of a gallon of unleaded adjusted for CPI starting back in 1990.  It is remarkable that the latest reading, while still obviously higher than a few months ago, is just $1.635/gallon in real terms.

Somebody else pointed out that gasoline is one of the few things that seems rarely to be described in real terms, arguably because it hasn’t really risen all that much over time and those who describe things in real terms are frequently trying to make the point that inflation is far too high.  Arguably, though, this is further proof of famed economist Julian Simon’s thesis that commodity prices all head lower over time as the ability to produce them in abundance, and their relative abundance in the earth, drive those prices lower.

As to elsewhere in the world, last night China reported that CPI (blue bars) remained at 1.2% but PPI, which may be a better indication of price activity there, rose to 3.9%.  This implies that Chinese corporate profits are under increasing pressure.  It also represents a sea change in China as can be seen in the below chart where PPI (grey bars) was negative for the 3 years prior to April.  

Source: tradingeconomics.com

As with all inflation analysis, the real question is who absorbs the price pressures.  In the US, the recent experience from Covid, when the government helicoptered $5 trillion into the economy so people had money to spend, businesses raised prices and continue to believe they can do so.  Apparently in China, that is not the case.  To finish the discussion, below is a chart of 17 of the G20 nations and their most recent headline CPI readings (I left out Argentina, Turkey and Russia as I couldn’t fit them all on the screenshot).  Interestingly, only 11 of these 17 nations have seen CPI rise in the past month.  I wonder, is inflation the global phenomenon that some make it out to be.

Country Last. Previous Date

Ok enough on that.  Let’s move on to market activity.  For the past several days, the oil story did not seem quite as important as despite a few random missiles being fired, it appeared that the Iran conflict was quieting down.  This allowed the focus to turn to important things like AI and the SpaceX IPO coming tomorrow after the close.  For example, when I sat down this morning around 5:00, oil was around $87.50/bbl and had slipped slightly lower compared to yesterday’s close.  However, in the interim, President Trump tweeted out the following:

But despite these comments, while oil has jumped as per the below chart, it is just barely at $90/bbl, hardly a sign the market believes something dramatic is on its way.

Source: tradingeconomics.com

In the meantime, there continue to be multiple articles that we are heading to the cliff for oil inventories and prices will skyrocket soon.  You know my opinion on those as I take the market’s side things are not as dire as some believe.

But if things heat up in Iran and the Gulf, I expect that we will see a downdraft in equities and bonds while the dollar moves higher.  And that is what we are currently seeing.  Below is a screenshot of equity futures markets as of 7:45 this morning.

source: tradingeconomics.com

Not a lot of happy faces there.  As well, overnight saw weakness throughout most of Asia after yesterday’s modest US declines.

In the bond market, Treasury yields are backing up 3bps and European sovereign yields are also higher this morning, between 3bps and 5bps across the entire continent.  So despite my statements above that inflation may not be as big a deal as some explain, bond investors are at least a bit uncomfortable this morning.

As to the metals markets, that break below the 200-day moving average in gold is seeing real follow through as old long positions and new short momentum plays pile on with the barbarous relic (-2.5%) tumbling as well as silver (-1.9%) and copper (-1.2%).  The key here is that whatever the short-term price action is, I think the one unalloyed truth is that fiat currencies will continue to get printed like there is no tomorrow and precious metals will regain their form.  But it could take a while.  In that vein, there was a Bloomberg article this morning explaining that more government bonds have been sold at this point in the year, ~$504 billion, than the first half of 2020 with Covid.  If my short-term inflation thesis is wrong, this is the reason why.

Finally, the dollar has edged higher this morning but is generally little changed.  The noteworthy thing is that USDJPY is at 160.50, above the supposed line-in-the-sand for the MOF, but as you can see from the below chart, the movement has been extremely gradual, with very little volatility.  Remember, one of the things the MOF focuses on is that volatility, so if the dollar continues to creep higher, they are likely to hold off for a while before feeling the need to intervene.

Source: tradingeconomics.com

But otherwise, most currency movement has been modest overnight.

Aside from CPI, and the oil inventory data, we do hear from the Bank of Canada, which is likely to leave policy rates on hold.

It feels like the market is getting increasingly concerned over an uptick in activities in the Gulf, which will have a negative impact on financial assets but support the dollar.  We shall see.

Good luck

Adf

Changing the Fate

Posted on by 
With things in the Gulf getting hotter
And risk assets heading to slaughter
The question on lips
Can stocks e’er eclipse
Their highs, or ‘stead sink ‘neath the water
 
But really, the question I’d ask
Is Chairman Warsh up to the task
Of changing the fate
Of the Fed funds rate
And if so, what will he unmask?

It is very difficult to focus on the Gulf situation as not only is it fluid, but there is also no direction of travel whatsoever.  So, this morning I want to have a different conversation.  Let me start by explaining this isn’t my idea, per se, although the analysis is solely mine.  Listening to the Macro Voices podcast Sunday morning while walking the dog, (he’s the one on the left)

Michael Every was on and expressed a very interesting thought, one that I had not considered, nor heard anywhere else.  What if the Fed, as Chairman Warsh seeks to adjust how it works, decides that they are going to put their fingers on the scale with respect to the interest rates paid by different industries, not merely by differently rated credits.  The idea is that in conjunction with the Treasury, Warsh and Bessent would decide which industries needed to have the most cost-effective funding for the nation to be able to maintain and develop the industries necessary for national defense reasons.

Now, I know this is anathema to almost all of us having been raised on the idea(l) of free markets and that markets are better at allocating, well everything, but in this case credit, than any cabal of central bankers.  And in a world where markets were truly free and where everyone competed on a level playing field, I am 100% in agreement with that view.  Alas, I’m not sure if you noticed, but that is not the world in which we live.

If Covid taught us nothing else, it was that 40 years of globalization and creating the most efficient processes for manufacturing resulted in significant fragility in those very processes.  It turns out that while economists in the US, Europe, Japan, the World Bank and IMF all explained that this was a great outcome (the US prints paper notes and gets lots of stuff for it), that only works when there is peace on earth.  During this period, China chose to play by a different set of rules, explaining they were just a poor country so didn’t need to play by the G10’s rules, and massively subsidized numerous industries while essentially ignoring all environmental issues.  That tilted the playing field pretty aggressively, and while President Trump has been adamant about that very issue for a decade, he was largely ridiculed, right up until Europe recently figured out that China was eating their lunch too, and now they are looking to impose tariffs on China’s excessive exports.  There is an excellent Substack that comes out Sunday mornings called The Brawl Street Journal,written by an analyst in Germany.  This week’s, linked here, explains that very issue extremely well.

So, I’ve set the table here, and the key to understand is the table is tilted horribly, with China getting the benefit of the doubt for almost everything.

Now, let’s consider what Mr Every’s idea would mean.  Below is a chart showing current 10-year yields for Treasuries and a series of corporate bonds delineated by their credit ratings.

Data: streetstats.finance

Makes sense, less creditworthy names pay more.  That is how things have always been within a market system as the worse the credit rating, the higher the perceived risk of the investor and therefore the higher yield they demand.

But what if that were to change?  What if the Fed and Treasury decided that companies that manufactured products, be they semiconductors, automobiles, tractors, airplanes or flat panel screens, and mining companies that mined in the US (and Canada) and energy extraction companies that drilled in the US (and Canada) needed a lower cost of capital to be more competitive globally as those companies were the ones necessary for the US to maintain its global hegemon status.  But media companies, and retailers, non-bank financial institutions and home health services companies, for example, were not deemed as critical.  Perhaps the new “credit” curve might look like this instead (all hypothetical)

The point is, China has been subsidizing numerous manufacturing industries for decades with the goal of excess production designed to drive other nations’ competitors out of business and gain a strategic advantage in all those industries.  It is why President Trump’s tariffs were a problem for them, and the rest of the world, as the US had been the dumping ground for much excess Chinese production in the past, and now that stuff is going elsewhere.  

The world we once knew is no longer the world in which we live.  Mr Every’s term, economic statecraft, is much more applicable today than any time in the past 40 years, probably longer, since the end of WWII.  Statecraft implies nations will use all the power they have, economic, military and diplomatic, to achieve their desired goals.  For more than 70 years, the US did not play by those rules under the assumption that if they created a level playing field, and even tilted it in favor of weaker allies, peace would reign.  China doesn’t play by those rules, and that is how we have arrived where we are.  

This is all hypothetical, but remember, Chairman Warsh has talked about restructuring the Fed.  All the economists think he is talking about shrinking the balance sheet.  But what if he is talking about completely changing credit markets with Fed support?  I would argue that is not on many bingo cards.

So, briefly, let’s consider how markets would respond to this action by the ‘new’ Fed.  Here are my conclusions, I would love to hear yours.

  • Stocks – broadly lower, although clearly favored sectors would continue to perform well.  But overall leverage would shrink and that has been a huge part of this rally.
  • Bonds – a steeper Treasury yield curve seems certain as subsidies for those favored industries will weigh on the US budget.  Meanwhile, non-favored industries would find themselves with real difficulties in terms of financing.
  • Commodities – offsetting forces here as industrial metals would see increased demand, and getting supply on line takes years if not a decade, but energy may result in a glut sooner as drilling takes much less time to get going.  Precious metals would soar, I believe, on the basis of investors and central banks, seeking an asset with no counterpart.
  • FX – this is the toughest call as different nations will be impacted in very different manners.  Commodity producing nations (e.g., Chile, Norway, US) should see relative strength.  Consuming nations would likely suffer somewhat, although Japan and Korea, for instance, could essentially fall within the US umbrella as their key industries are the US focus.

Again, this is all hypothetical but is probably worth some thought.  In the meantime, a brief tour of markets overnight after Friday’s sharp declines in the US shows nobody is very happy this morning.  The tradingeconomics.com screenshot below shows futures as of 6:10am.

What sticks out to me is Italian equities are bucking the trend, although there has been no data and I cannot find a specific catalyst there.  Also, it is interesting that US futures are broadly higher this morning despite growing concerns that the situation in the Gulf is going to heat up again.  But Asia had a rough session and most of Europe is feeling a little pain as well.

In the bond market, after climbing on Friday, yields continue higher this morning across the board.  The below Bloomberg screenshot explains things well.  Recognize that Canadian and Mexican markets haven’t opened yet and Australian markets were closed last night for the King’s Birthday.  But net, there is growing concern over inflation on a worldwide basis it appears.  

Turning to the commodity markets, oil (+3.8%) is higher again, after falling on Friday as there were missile attacks by Iran on Israel in response for Israel’s ongoing attacks on Hezbollah in Lebanon. This situation remains fraught and frankly nobody has any idea when it will settle down into something a bit less volatile.  If we look at a chart of the past six months of oil price movement, I have drawn a line at $95/bbl, which to my eye offers a pretty good estimate of the average since things began.  There are still many doomsayers who believe $200/bbl oil is coming soon, but that has been their forecast since March.  Something to remember about commodity markets is that they do not forecast the future, they are the prices at which physical stuff clears, so it appears that so far, there is ample inventory available.

Source: tradingeconomics.com

Not surprisingly, given the recent relationship between gold and oil, the barbarous relic is lower this morning by -0.7% while silver, though unchanged on the day, suffered dramatically on Friday, falling $6/oz or about 8%.

Finally, the dollar is little changed this morning, but that is after a sharp rally on Friday in the wake of the much better than expected NFP data (+172K with revisions higher in the previous two months of +93K) which helped push yields higher as a rate hike this year has now been priced by the futures market as per the below CME table.

But more than just the futures market is thinking that way.  The below chart showing the 2-year Treasury vs. Fed Funds shows that not only have 2-year yields moved above Fed funds, but they are accelerating higher.  This is seen as another harbinger of a higher Fed funds rate.

Source: tradingeconomics.com

So, the DXY is back over 100.00, USDJPY breeched 160.00, and is right on that number as I type at 6:50am, and generally, the dollar is pushing the top of its recent ranges.  The one exception here is KRW (+1.6%) where the central bank and Finance Ministry both were actively jawboning the currency higher after it traded to yet another new low (dollar high).

As there is no data of note this morning, I will go through that tomorrow given how long things got today.  The world is changing rapidly and the most important thing, I think, is to recognize that old relationships may no longer be valid.  Nimbleness is critical, whether investing or hedging.

Good luck

Adf

The Strait’s Dead

Posted on by 
The president’s on his way home
And pundits with TD Syndrome
All say that the trip
Did not flip the script
And still see the world in a gloam

But markets, one thing, seemed to hear
That though China wants Hormuz clear
The President said
To him the Strait’s dead
And markets responded with fear

With President Trump on his way back home from his trip to Beijing and meeting with Chinese President Xi, we can now expect reams of stories about all the things that he either did or didn’t accomplish.  Much has been made of Xi’s opening comments about Taiwan and how it is a critical issue that cannot be mishandled or it would impact the relationship between the two nations.  But as I think about Taiwan and China, I certainly understand Xi’s interest in having the island reintegrate into China as it would bring an enormous number of technological skills and abilities in areas currently absent on the mainland.  And, of course, Xi will point to history and claim it has always been part of China, yada, yada, yada.

However, ask yourself why any Taiwanese would want to become part of China.  After all, per capita income in Taiwan is ~$42K annually compared to ~$14K on the mainland.  That is a serious reduction in living standards.  Add to that the ability to vote in free elections and the accompanying belief that one’s voice can be heard, and that is a powerful argument to remain independent.  Now, as TSMC builds out is fabs in Arizona and elsewhere in the world, it seems to me that the US will lose interest in the Taiwan independence issue overall because, especially for President Trump, who views almost everything transactionally, if the US can get its semiconductors from elsewhere with no problems, notably domestically, defending an island on the other side of the world, one that is decidedly not in the Western Hemisphere, seems far less critical. 

Here’s a forecast, by the end of Trump’s term, with TSMC fabs up and running in Arizona, Japan and even Germany, we can see a Taiwan deal similar to the Hong Kong deal, which will sound great but over time China will absorb it in the same way it has done Hong Kong, removing freedoms and its appeal as a manufacturing center.

On to the other part of the trip that has had a much larger impact on markets, when Mr Trump explained, “We don’t need the Strait of Hormuz open.”  While the comments from the trip were that China wants it open and agrees tolls are inappropriate, the last throwaway line is what has markets on edge this morning.  And on edge, they certainly are!

Thus, without further ado, let’s take a look with pictures serving their purpose.  As of 7:15 this morning, here are the major equity index futures from tradingeconomics.com

The caveats here are that Toronto’s TSX and Brazil’s IBOVESPA futures markets are not yet open, but I’m confident both will open lower.  Russia’s MOEX is irrelevant which makes the Swiss Market Index the only equity market anywhere that is not falling.  Perhaps more than the Swiss franc, their stock market has achieved some haven status.

The thing to remember about this sell-off, though, is that we have had a remarkably strong week overall, and so this feels more like a profit taking retracement than the beginning of a new move lower, at least to me.  

In the bond market, sellers are the dominant force with yields higher everywhere around the world as per the below Bloomberg screenshot.

Much has already been written about 10-year Treasury yields trading at their highest level in almost exactly a year, and 30-year Treasury yields now firmly above 5.0% and how that spells the end of the good times in the US.  Maybe that is the case, but I am not convinced.  My take of the biggest problem is in the UK, where PM Starmer is under even more pressure this morning after several moves where a key cabinet member, Wes Streeting, resigned to open his path to run for PM as well as where a Labour party member stepped aside so that the very popular Andy Burnham, who is Mayor of Manchester, can now run for parliament and be in a position to become PM.  The issue here is that since Starmer will do all he can to hold on to his seat, and the Chancellor, Rachel Reeves, is in his corner, we will see even more deficit spending there to try to help Starmer stay in power.  Apparently gilt investors are not impressed with that potential.  Of course, neither is anybody holding pounds as a position as is apparent in the FX markets.

While the pound (-0.25%) is only modestly lower this morning, since Monday, as you can see below, it has fallen 3 cents and does not yet seem to have found a bottom.

Source: tradingeconomics.com

But this is of a piece with the dollar writ large this morning, which is higher virtually across the board.  In fact, as you can see, in what may be my most frequently printed chart to dispel the idea that the dollar is dying, the DXY remains firmly in its range for the past year and is now heading toward the upper band.  If you look at the calculated mean/variance of the DXY, you can see the trend line (the black line in the center) is completely flat, i.e. the dollar is trending neither higher nor lower over the past year.

Source: tradingeconomics.com

Looking at specific currencies, AUD (-1.0%) and NZD (-1.45%) are the worst performers in the G10, although NOK (-0.9%) and SEK (-0.9%) are giving them a run.  Kind of surprising for NOK given oil is much higher this morning.  in the EMG bloc, ZAR (-1.0%), CLP (-1.0%), MXN (-0.8%), and KRW (-0.5%) are the laggards in their respective regions with ZAR suffering from the commodity movements, as is CLP with copper sharply lower this morning.  MXN seems to be reacting to the news that the US has been stepping up its aggressive tactics against the drug cartels there and concerns about how that will end up.

Finally, on to commodities where oil (+3.0%) has responded exactly how you would expect to the Trump comment about his cares about Hormuz.  Meanwhile, the metals are back in full negative correlation mode with oil as all of them are sharply lower this morning (Au -2.0%, Ag -5.9%, Cu -4.3%, Pt -4.0%).  The one thing you have to admit about the commodities markets these days is that they are living up to their reputation of extreme volatility.

On the data front, this morning brings Empire State Manufacturing (exp 7.5), IP (0.3%) and Capacity Utilization (75.8%), none of which typically have a big impact and given the oil/Hormuz fears extant this morning, will almost certainly be completely ignored.  There are no Fed speakers today but I do want to mention one from yesterday, Governor Michael Barr, who directly contradicted everything Chairman Warsh has been saying about the size of the Fed’s balance sheet, explaining that if they move away from their current ‘ample reserves’ model, it could have very negative impacts on the functioning of money markets.

There is an irony here as prior to the ‘ample reserves’ framework, there was a very active Fed funds trading market on an interbank basis and banks were able to borrow from each other whatever they needed for liquidity purposes.  The Fed has usurped that role ever since the GFC and are now clearly concerned (afraid?) about going back.  The thing is, it seems to me that there continues to be a tremendous amount of liquidity around and it would be quite feasible to create an intraday loan market to help alleviate those concerns.  In fact, cash rich corporates (Berkshire Hathaway anyone?) could be part of the market as it would be entirely interbank and those corporates would know the counterparties quite well.  Suffice it to say that Mr Warsh will have quite a time getting his way at this stage.

And that’s what we have going into the weekend.  Gloom and doom about the near future, or profit taking, I’m not sure which.  As I have said all along, play it close to the vest, in think.

Good luck and good weekend

Adf

A Bad Bet

Posted on by 
While nothing is terribly clear
It seems there’s more worry and fear
The war’s gonna start
To blow things apart
Once more, thus risk gets a Bronx cheer

At this point the navy is set
With carriers, three, as the threat
Meanwhile, Iran’s leaders
Are fighting seceders
It could be they made a bad bet

As the week draws to a close, there is no clarity regarding the potential for a peace deal to end the war as both sides continue to claim the other is the problem with respect to getting to talks.  There continues to be a massive amount of propaganda from both sides and maritime traffic remains at a standstill in the Strait of Hormuz.  Arguably the most noteworthy occurrence was that the USS George H.W. Bush has arrived in theater, bringing the navy armada up to 19 ships, I believe.  That is an enormous amount of firepower.  In fact, there is a theory that the entire purpose of the ceasefire was to allow the US to move all its assets into theater to ensure that the next action completes the process.  

But there has been a change amongst the views of market participants about how things are going to proceed as evidenced by the price of oil.  Arguably, there is no better barometer of the situation than that price and as you can see from the below chart, crude oil’s price (+1.6%) has traded higher consistently all week.

Source: tradingeconomics.com

Too, the fact that we are approaching the weekend has me thinking that the next step in this war is about to kick off.  President Trump has shown that he favors military action when markets are closed and I am pretty certain that view hasn’t changed.  So, keep alert for the news when you wake up tomorrow morning.

However, until such time that the situation on the ground there changes, we are left with a great deal of pontification (present company included, although I try to simply focus on the markets and how their price action offers indications of current events).  Beyond the war, there is precious little new news of market import, though, right now.  Data continues to be a secondary consideration for traders and investors as everything is being distorted by the sudden impacts of the sharp rise in energy prices.  Politics is always a long-term phenomenon, with the daily machinations rarely having a market impact.  Which leaves us with speculative activity, which never rests!

With that in mind, let’s look at the markets and see what they are telling us (or me at least).  Having already highlighted the fact that oil has been creeping higher all week, which I reiterate, implies to me that market participants have begun to believe further military action is imminent, we cannot be surprised that gold (-0.4%) and silver (-0.7%) are slipping as the correlation between the metals and oil has turned negative since the war began about 2 months ago.  Historically, this had almost always been a positive correlation, but right now, that relationship has clearly inverted as you can see in the below chart.

Source: tradingeconomics.com

It certainly remains an enigma that what many perceive to be the ultimate safe haven, gold, is performing so relatively poorly during the greatest strife we have seen in a number of years.  But there you go.

Of course, for risk appetite, the most consistent place to look is the equity market.  Yesterday saw US markets slip a bit, about -0.5% or so across the board, but they remain within spitting distance of their all-time highs.  Certainly, no panic yet.  And this morning, as I type (7:05), the futures markets show the NASDAQ firmer by nearly 1.0% while the DJIA is lagging, -0.2% and the SP500 is in between (+0.3%).  Last night, Tokyo (+1.0%) had a strong session after inflation data was released right at expectations and has not yet shown signs of running away higher.  At the same time, market participants are increasingly certain the BOJ will remain on hold next week, although there is now a 60% probability priced for a 25bp rate hike at the June meeting.  The rest of the region was mixed with China (-0.35%), India (-1.3%) and Indonesia (-3.4%!) all under pressure, the latter suffering after 4 major banks there were downgraded by Fitch, while Taiwan (+3.2%) soared after positive earnings data and economic data showing IP exploding higher by 28.7% in March.

In Europe, though, there are no happy faces with Spain’s IBEX (-1.4%) leading the way lower for the entire continent (CAC -1.1%, DAX -0.4%, FTSE 100 -0.6%).  It is a bit surprising as the only data of note was German Ifo Business Climate (84.4 and the grey line) and Expectations (83.3 and the blue line), both of which printed at their lowest levels since August 2023 and are both clearly trending lower.

Source: tradingeconomics.com

Bond yields are doing very little this morning, with Treasury yields lower by -1bp while European sovereign yields are all higher by between 1bp and 2bps.  Bond investors remain quite concerned about energy driven inflation but are also looking at the negative impacts on economic activity and so remain uncertain which way to go.  One thing to remember is that yields have really done very little over the past 6 months, at least, and that Treasury yields continue to be the global driver.  You can see the similarity in the shape of the price curves for both Treasuries and Bunds below, and both lines are pretty flat to my eye with one blip higher at the beginning of the war.

Source: tradingeconomics.com

Finally, the dollar is softer this morning, which is not in accord with its usual relationships to other assets.  Although it turns out that in the course of the hour I have been writing, things have changed and I cannot see a reason.  So, oil is now lower by -1.6%, gold is higher by 0.2%, and the dollar is softer across the board by 0.2% or so.  For me, I’m happy the relationships still hold, but I would love to be able to offer a catalyst for the change in sentiment.  And yes, US futures are higher across the board now.

Regarding the dollar, though, I couldn’t help but notice the Bloomberg article regarding the carry trade and how it has come back into favor as implied volatilies have fallen over the past month.  What this tells me is that there are no long-term views in the FX market despite all the dollar is going to collapse pap that comes from the FinTwit (FinX?) community.  Shorting yen remains the favored funding vehicle and the discussion is how BRL, MXN and TRY are the asserts favored to be held.  The thing about the carry trade is, it is great until it isn’t, but they don’t ring a bell before things change.  It is also a very different thing to short JPY and be long USD against it, with the USDJPY market amongst the most liquid markets in the world.  But if you are long BRL and short JPY, be prepared for a pretty wide spread on a forced exit because things have changed.  And if that is TRY or ZAR, the spread will be even wider!  Just sayin’.

On the data front, this morning brings Michigan Sentiment (exp 47.6) unchanged from the preliminary reading which was the lowest in the 84-year history of the series.  Are things really that bad?  Maybe, but that certainly doesn’t jibe with the Retail Sales and PMI data.  The problem with survey data is there is an element of politics that distorts the reading and President Trump is such a polarizing figure, it exacerbates the situation.  Nobody likes high gasoline prices, but it is hard to reconcile gasoline prices, which by the way, remain lower than what we saw in the immediate wake of Russia’s invasion of Ukraine as per the chart below, with such a dramatic decline in confidence, hence my view of the political angle.

Source: tradingeconomics.com

Personally, I am on the lookout for the next military incursion or a deal this weekend, with diametrically opposed market impacts on Monday morning.  Once again, my advice is risk mitigation is the way you stick around to play again next week.

Good luck and good weekend

Adf

Dumfound

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: Bloomberg.com

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

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

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

Good luck

Adf

Blow-By-Blow

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

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

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

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

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

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

Source: tradingeconomics.com

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

In the same order as above:

Oil 

Gold

10-year Treasury

S&P 500 Futures

DXY

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

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

A Slippery Slope

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Feeling the Blues

Posted on by 
Last night we saw two things of note
The first was exciting, not rote
The Artemis II
Launched higher and flew
Just like Jackie Gleason would quote

The other was Trump’s broad address
Regarding the Middle East mess
He said that the war
Was closing the door
So, Mullahs have no nuke access

For markets, though, this latter news
Was clearly at odds with their views
So, rallies we’ve seen
Have all been wiped clean
And bulls are now feeling the blues

I will start with the highlight of the evening, the successful Artemis II space launch, where NASA’s latest mission to send four astronauts to orbit the moon and come home began.  As a child of the Sixties, I well remember being at Camp Mah-Kee-Nac, in Lenox Mass, with the entire camp gathered around a small black and white TV to watch Neil Armstrong step on the moon.  A remarkable time and achievement that portends a great future.

The other story, though, was less optimistic, at least for markets in the short term.  The President’s address did not signal an end was near, at least not to the market’s collective ear.  Instead, Mr Trump made a series of statements and claims, many of which we have heard before, but here they were all gathered in one place.

  • *TRUMP: IRAN’S NAVY IS GONE, AIR FORCE IN RUINS
  • *TRUMP: MOST OF IRAN’S LEADERS ARE DEAD
  • *TRUMP: IRAN’S ABILITY TO LAUNCH MISSILES AND DRONES CURTAILED
  • *TRUMP: DON’T NEED OIL FROM MIDDLE EAST
  • *TRUMP: WILL NEVER LET IRAN HAVE NUCLEAR WEAPON
  • *TRUMP: CORE STRATEGIC OBJECTIVES IN IRAN NEARING COMPLETION
  • *TRUMP: THESE STRATEGIC OBJECTIVES NEARING COMPLETION
  • *TRUMP: MUST COMPLETE MISSION IN IRAN
  • *TRUMP: WE WILL FINISH THE JOB VERY FAST
  • *TRUMP: GETTING VERY CLOSE TO FINISHING JOB IN IRAN
  • *TRUMP: WE ARE ON TRACK TO COMPLETE ALL MILITARY OBJECTIVES
  • *TRUMP: WE WILL NOT LET MID EAST ALLIES GET HURT OR FAIL
  • *TRUMP: WILL HIT IRAN EXTREMELY HARD OVER NEXT 2-3 WEEKS
  • *TRUMP: WILL BRING IRAN BACK TO STONE AGE WHERE THEY BELONG
  • *TRUMP: NEW LEADERS IN IRAN LESS RADICAL, MORE REASONABLE
  • *TRUMP: IF THERE IS NO DEAL, WILL HIT IRAN’S ELECTRIC PLANTS
  • *TRUMP: WE HAVE NOT HIT THEIR OIL EVEN THOUGH EASIEST TARGET
  • *TRUMP: WILL HIT IRAN WITH MISSILES IF WE SEE THEM MAKE A MOVE
  • *TRUMP: WE HAVE ALL THE CARDS THEY HAVE NONE
  • *TRUMP: ON THE CUSP OF ENDING IRAN’S THREAT TO AMERICA

He also explained that the rising gasoline prices were a result of Iranian attacks on tankers but that the US was well supplied and would weather any storm in the short run with no problems.  However, this is not what markets were looking for, that is very clear.  So, the past two days of rainbows and unicorns are a distant memory this morning.  A look at the chart of the S&P 500 below shows the end of last week’s concerns grew into optimism right up until 9:00pm EDT last night when Mr Trump took to the podium.

Source: tradingeconomics.com

While futures are only lower by -1.0% at this hour (6:30), the response in both Asia and Europe was quite negative overall.  For instance, in Asia, Tokyo (-2.4%) led the way lower although weakness was virtually universal (China -1.0%, HK -0.7%, Australia -1.1%, Taiwan -1.8%) while the biggest loser was Korea (-4.5%) which has been in the process of unwinding what appears to have been a massive bubble there as per the below chart.

Source: google.com

European bourses are also lower across the board with the UK (-0.1%) the clear winner (least bad?), while the continental exchanges (Germany -1.85%, Spain -1.3%, Italy -1.2% and France -0.9%) are all faring poorly this morning.  It is very clear that the idea the war would be ending soon has been pushed back.  I have to say, that given the ongoing buildup in military assets in the Gulf region by the US, that always struck me as an odd belief.  I guess we will need to wait a few more days/weeks to see.

In the bond market, too, price action from the beginning of the week has reversed.  Treasury yields have rebounded 5bps this morning, although remain well below the recent peak of late last week, and you can see how Europe and Asia behaved in the Bloomberg screen shot below.

I expect that we will continue to unwind the price action from the early part of this week as the situation appears far closer to the market beliefs of last Friday than yesterday.

Turning to commodities, oil (+7.8%) has rebounded sharply as you can see in the below chart, actually trading now at its highest level since the initial spike move the evening the attacks began.

Source: tradingeconomics.com

Brent crude rose a similar amount and interestingly, the spread between Brent and WTI has collapsed to just $0.52, it’s narrowest level since May 2022.  That leads me to believe the market is pricing in a great deal more interest in US exports as oil supply will be curtailed for a while going forward.  In keeping with the unwinding theme, precious metals were sold off aggressively with gold (-3.4%) and silver (-5.5%) retracing much of their recent gains.  Both are still well above the spike lows seen two weeks ago, but I imagine that there is further to decline based on the current vibe.

Finally, the dollar has rebounded sharply against all comers this morning with the DXY (+0.6%) back above the 100 level as the euro (-0.7%) probes 1.15 again and the yen (-0.5%) trades back toward 160.00.  Nothing in the G10 has been spared, although CAD (-0.4%) and NOK (-0.4%) are the best performers as clearly oil’s rise is helping them both.  In the EMG bloc, it should be no surprise that ZAR (-1.1%) is the laggard given the move in gold and platinum (-3.4%).  But even CNY (-0.4%) has seen substantial selling while INR (-0.5%) and KRW (-0.2%) also continue to slide.  The CE4 are all weaker by -0.7% and CLP (-0.9%) is feeling the weight of copper’s decline.  The only outlier really, today, is Brazil (0.0%) which is unchanged as remember, they are a major oil producer and far away from the current problems.

On the data front, this morning brings Initial (exp 212K) and Continuing (1840K) Claims as well as the Trade Balance (-$59.2B), none of which seem likely to matter to markets.  Yesterday saw generally stronger than expected data with ISM Manufacturing ticking up to 52.7 while Retail Sales surprised a tick higher as well at 0.6%, 0.5% ex autos.  ADP Employment was also modestly better than expected.  As such, it continues to be difficult to call for a significantly weaker US economy, at least based on the data we continue to see.  However, the Atlanta Fed’s GDPNow reading was revised to 1.9% for Q1 yesterday, down a tick from the previous estimate.  Still, that is not a collapse.

Pulling it all together, the war in Iran is going to continue for at least 2-3 more weeks and there is no clarity on whether the US is going to attempt to take Kharg Island.  It still seems to be part of the discussion, but as I wrote yesterday, strategic ambiguity is a key part of President Trump’s method.  In the meantime, my take is we are much more likely to behave like the end of last week going forward, than the beginning of this week.  That means risk will be reduced and the dollar will benefit.

Good luck

Adf

No Longer Benign

Posted on by 
The war in the Gulf shows no sign
Of ending by any deadline
Some victims now bleeding
Are bonds, with yields speeding
To levels no longer benign

Already we’ve seen, efforts, great
By nations, impacts, to abate
So, price caps on gas
Worldwide came to pass
But will central banks raise their rate(s)?

Nothing of note has changed in the Iran war as the US continues to refrain from further attacks while negotiations to end the conflict ostensibly continue.  Both sides have made their demands, but from what I have read about them, neither side can accept the others wishes.  If pressed, my take is the ongoing US pause is simply allowing the Marines and 82ndAirborne to get into place for their attempt to take over and control Kharg Island and the other small islands in the Strait.  Frankly, I would not bet against their tactical success in that endeavor.  However, it is not clear how Iran will respond in that situation.  After all, if the US does control Kharg Island, that means Iran no longer controls their own revenue stream, and that is truly existential for the regime.  However, I could be completely wrong about this, which is why I am not a military strategist.

But I think it is worthwhile taking a peek at the bond market this morning.  For the first few weeks of the war, while yields edged higher, there was no indication that investors were getting terribly nervous about the longer-term impacts of the war.  However, that no longer seems to be the case.  I have several charts below showing US, UK and German 10-year yields over the past six months, and then a longer-term perspective showing those same yields over the past 20 years. 

Six months of yields

Source: tradingeconomics.com

Long-term charts (source marketwatch.com)

UK Gilts

German bunds

US Treasuries

As you can see from the first chart, yields across all three of these nations have risen sharply now in the past month.  In fact, the numbers are US (+52bps), UK (+83bps) and Germany (+47bps).  It is very clear that fixed income investors are getting worried, and reasonably so given the idea that inflation readings, at least in the short-term, are going to be much higher.  As to the longer-term view, though there is certainly a similarity amongst the movement of yields of all three nations, UK yields are currently at their highest level since the GFC, July 2008; German yields are at their highest level since the Eurozone bond crisis in 2011, but Treasury yields were higher at the beginning of this year, and 25bps higher in late 2023.  

This is not to dismiss the potential problems that may arise if government bond yields continue to rise, especially given the already extraordinarily high debt/GDP ratios that exist throughout the G10.  However, I am not prepared to concede that the US is going to collapse because 10-year yields are back at 4.50%.

What we have seen, though, almost everywhere in the world, is government attempts to cap prices on energy, whether gasoline, diesel or even electricity, to help moderate some of the obvious pain that higher energy prices are inflicting on their populations.  We have also heard a great deal from central bankers about needing to tighten monetary policy to combat the rising inflation, despite the fact that inflation is coming from a supply shock in energy rather than either excess demand or money supply.  I fear that will not work out that well if they do so, but as is often the case, central banks (and governments in general) feel they must “do something” when an exogenous event, out of their control, occurs.  Ultimately, history has shown that is when policy mistakes are made.  Here’s hoping the hostilities end quickly enough so nations don’t make those mistakes.

Away from bonds, with yields higher this morning across the board (US +5bps, Germany +5bps, UK +11bps, Japan +11bps) and the rest of the European sovereigns somewhere in between, if we turn to oil (+2.7%), WTI is pushing back up to $100/bbl this morning, which I take as an indication market participants are getting nervous things will last longer than they thought a few days ago.  You can see the chart below that oil has rallied steadily all week since the Tweet that things were going to be ending soon back on Monday.

Source: tradingeconomics.com

The more interesting price action to me, this morning, is that gold (+0.7%) is also higher this morning, which may be the first session since the first day of the attacks, where both have risen in sync.  There is a story around that Turkey sold 58 tons of gold right when things began, but even at $5000/oz, that is only about $9 billion of gold compared to average daily trading volumes of between $200 billon and $300 billion (according to Grok).  My point is that would not be enough to move markets like we have seen in gold, but it could well be a harbinger of what other nations did as well.  Again, there is no sense that the long history of gold’s role is changing here.

As to equity markets, yesterday’s weakness in the US has been followed across Europe (DAX -1.6%, CAC -1.1%, FTSE 100 -0.75%, IBEX -1.4%) but the picture in Asia was more nuanced.  While the Nikkei (-0.4%) slipped a bit, both China (+0.6%) and HK (+0.4%) managed to rally as did Malaysia, Singapore and Thailand albeit not very much.  On the downside, though, India (-2.2%) made up for the fact it was closed on Thursday, while Korea (-0.4%) and Taiwan (-0.7%) both slipped and the rest of the region edged lower by lesser amounts.  As to US futures, at this hour (7:30) they are lower by about -0.35%.

Finally, the dollar continues to be a major beneficiary of the war as the DXY is back above 100 this morning with several EMG currencies coming under greater pressure today.  We see CLP (-1.1%) feeling the pain of copper’s inability to rally at all, as well as INR (-0.6%) and MXN (-0.5%) suffering this morning.  NOK (+0.2%) continues to benefit from oil’s recent strength, and CAD (+0.1%) is holding its own on the same basis, but both the euro (-0.15%) and pound (-0.2%) are struggling as the energy problem there is a major detriment to their economies.

The only US data this morning is Michigan Sentiment (exp 54.0) while yesterday’s Jobs data continues to show that layoffs are not increasing in any meaningful way, which I believe is a result of the dramatic change in immigration policy as well as deportations.  Like so much of what is ongoing these days, old models regarding the labor market are no longer representative of the new reality on the ground.  I suspect this is true across large segments of the economy which just means that relying on econometric models will be a fraught exercise going forward.  Here is a reason to pity the central bank community as they are truly flying blind now.

And that’s all there is today.  To me, we are biding our time until the Marines land on Kharg Island and then we will see a new phase of the war.  It is a high risk, high reward venture as success would certainly reopen the Strait of Hormuz and oil prices would plummet quickly.  Failure, however, would leave Iran with greater control over that key chokepoint and potentially cause greater difficulties elsewhere in the world, not least because it would call into question the US ability to project power.  War is not only hell, but also incredibly risky.

Good luck and good weekend

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The Beating War Drum

Posted on by 
Each day it gets tougher and tougher
To figure out things that can buffer
Portfolios from
The beating war drum
And so, we are all set to suffer

Remember, too, I’m just a poet
And I do my best not to show it
But my Spidey sense
Says come some days hence
The end will be nigh and we’ll know it

Basically, as Herbert Stein explained back in 1986, “If it can’t go on forever, it will stop.”  The pressures on the global economy are increasing dramatically as not only markets in oil and natural gas, but also fertilizer and helium (critical for semiconductor manufacturing) markets are being significantly impacted.  And frankly, the world as we know it now cannot exist without a healthy supply, and supply chain, in all those things.  It is this pressure, which is building up on both sides of this war, that will ultimately push both sides to some resolution.  Iran cannot live without the oil and its revenues, but it can certainly destroy a lot of other nations in its death throes.  That is not the outcome we want to see.

And frankly, it appears to me that markets are pricing an off-ramp, because otherwise, I would expect the inelasticity of demand for oil would have driven oil prices much higher than we have seen.  But, while that may be the medium term (next several weeks) view, on a day-to-day basis, one never knows what’s going to happen.  Yesterday, there was a sense that things were going to deescalate.  But overnight, that sentiment changed and now risk is under pressure as oil heads higher once again.

Here’s the problem, if you read all the headlines about the situation in the Persian Gulf, you are no more well-informed than if you ignore them all.  We continue to be bathed in opinions and propaganda from both sides, and it is certainly not within my ability to determine what is truth, assuming any of it is.  Which takes us back to markets as our best indicator, because as it has been said, opinions are like a$$holes, everybody has one and they all stink.

So, let’s go to the tape.  Yesterday saw a positive outcome, but as you look at the chart of the S&P 500 below, you can count that from the beginning of March, when this all began, there have been 19 trading sessions including today.  Nine of those sessions saw green candles (higher) and 10 saw red candles (lower).  This does not strike me as a market where investors have capitulated in any serious manner.  As I mentioned earlier in the week, despite all the angst, right now the S&P 500 is lower by just 6.5% from its all-time high from late January.  That’s not even a correction by most definitions, let alone a war footing.

Source: tradingeconomics.com

As it happens, today is a down day, with US futures sitting lower by about -0.5% across the board as of 7:00.  And that is consistent with what we observed overnight with both major Asian (Tokyo -0.3%, HK -1.9%, China -1.3%) and minor Asian (Korea -3.2%, Taiwan -0.3%, Indonesia -1.9%, Australia -0.2%) markets all lower in the session.  Clearly, rising oil prices continue to weigh heavily on every nation in Asia as they are the primary recipient of Middle East oil and, as oil prices rise once again, it hurts all those nations.  I assure you that as much as we dislike rising gasoline prices, it is nothing compared to what those nations are feeling.

Europe, too, is lower across the board this morning led by Germany (-1.4%) which is not only suffering from general risk-off sentiment but has the added disincentive of declining consumer confidence as measured by the GfK indicator falling to -28.0, its lowest level in two years.  a quick peak at the chart of this indicator shows that while things have rebounded since the darkest days of the 2022 inflation problems, the downward trend is strengthening again.

Source: tradingeconomics.com

But the rest of European bourses are also under pressure with the UK (-1.1%), France (-0.9%), Spain (-0.9%) and Italy (-1.1%) all falling sharply.

As has been the case on days like this, bond prices are under pressure as well, with yields correspondingly rising.  So, after a 6bps decline in the 10-year Treasury yield yesterday this morning it has backed up by 4bps.  As to European sovereign yields, the picture is quite ugly as you can see in the below Bloomberg screenshot.

‘Nuff said.

Which takes us to the driving force in all markets these days, oil (+2.6%) which is rebounding with WTI back above $90/bbl and Brent above $100/bbl.  The one consistent thing I have seen on X this morning is that the propagandists on both sides seem to be preparing for a final outcome soon.  Whether it is the idea that the US is going to run away with its tail between its legs, or the Iranians are going to collapse, the timeline definitely seems to be shortening.  Hence my view that this will not be ongoing very much longer.

Turning to precious metals, as has been the case for the entire war, with oil rising, both gold (-2.0%) and silver (-4.2%) are under pressure.  I must admit the consistency with which this price action holds; oil up, gold down, is somewhat baffling to me.  My initial thesis was that we were seeing central banks liquidate gold to help pay bills, but why would they only do that on days when oil rose?  Something else is going on here and I have not yet been able to figure it out.  I do not believe that gold, after 5000 years as the safest of moneys, has suddenly lost that mojo.  I also know that the premium for physical metal in Shanghai remains substantial.  With this in mind, it is not hard to conclude that the futures market, where the price action is most visible, has seen a great deal of manipulation by someone trying to keep prices low, although to what end I cannot tell.  We need to watch closely.

Finally, the dollar, as has been its wont, is higher this morning alongside oil, albeit not dramatically so.  There are still numerous analysts who are calling for the dollar to decline sharply going forward, once the war premium is gone, but then they have been expecting that for a year and have not been able to explain its stability since early last year.  

Like the CME’s futures page, the ECB publishes its own market-implied probabilities for the deposit rate there as per the below from ecb-watch.eu

Now, I grant that if I look at the table at the bottom of the screenshot and compare it to the CME futures probabilities below, the market is pricing in more rate hikes in Europe than the US.

But I can never get over the actual interest rate involved as an important part of the interest rate parity decision process and mechanics.  Sure, if the ECB hikes 50bps over the next three months and the Fed only hikes 25bps, that is a marginal advantage to the euro but owning euros after that is still a negative carry trade.  Ultimately, the question is exactly how aggressively will central banks around the world address the initial bout of higher inflation that is coming alongside the higher oil prices.  In truth, I think the US has far more leeway to raise rates as the underlying economy is in far better shape than that of the Eurozone, but as we heard yesterday, Madame Lagarde will not be “paralyzed” by events, i.e. she will hike rates if someone whispers in her ear to do so.  I sincerely hope none of the central banks go down that road.

Elsewhere in the FX world, it is worth noting that USDJPY is pushing back toward the 160 level, although is unchanged this morning.  As to today’s trading, NOK (+0.5%) is the big winner on oil’s strength, with BRL (+0.2%) the only other currency showing strength vs. the greenback.  Otherwise, modest weakness (GBP -0.1%, AUD -0.2%, CNY -0.25, MXN -0.2%, ZAR -0.4%) is the order of the day.

On the data front, yesterday had some surprising outcomes with the Current Account ($-190.7B) falling to its lowest deficit in five years.  meanwhile, oil inventories showed a much large build of crude and even distillates, while only gasoline saw an inventory draw.  Perhaps that helped yesterday’s oil price decline.  This morning, Initial (exp 210K) and Continuing (1850K) Claims are on the docket and that’s really it.  There was an interesting article in the WSJ this morning describing how many cities are actually shrinking because of the change in immigration patterns we have seen since the border was closed.  The importance of this is that old expectations of how much job growth defines economic strength need to adjust to the new population realities and frankly, nobody knows the adjustments yet.  But the old idea that we need to see 200K new jobs each month seems to way overstate how to stabilize the Unemployment Rate.

And that’s really it.  Today is a risk-off session and likely to remain so unless we get a new headline about a potential end to the conflict.  But based on the recent pattern, tomorrow seems just as likely to be a risk-on session, although with the weekend coming, and the propensity for military action to start on the weekend, perhaps not.  As to the dollar, it ain’t dead yet!

Good luck

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