Tag Archives: #riskon

Leverage Doomsday

Posted on by 
Though oil continues to be
The lens through which most of us see
The current events
In dollars and cents
There’s more going on causing glee

For instance, as stock markets rise
It cannot be such a surprise
The narrative writers
Are pulling all-nighters
Adjusting their views to seem wise

But naysayers need to say nay
And here’s what they’re pushing today
The Bank of Japan
And their current plan
Will lead to a leverage doomsday

We might as well start off with oil this morning since it is still the top story in markets, and still the major catalyst.  It is lower again this morning, down a further -2.8%, and despite many questions as to whether the deal will hold, both sides appear to be moving toward a signing on Friday.  The below chart from tradingeconomics.com shows WTI prices for the last year.  As you can see, the current price is the lowest since March 10th, which was a reaction low after the spike high on March 9th when it touched its highs for the entire situation.

I eyeballed a line at about $65.00/bbl as an estimate of what prices were like prior to the Iran conflict.  Based on that, the current front month futures price remains about 20% above the pre-war price, certainly high, but it doesn’t seem crippling.  I believe it is very clear that the analysts who were calling for $150/bbl or $200/bbl are now working hard to determine what they got wrong.  Doomberg wrote an interesting piece this morning (it is paywalled, but their stuff is fantastic) describing two likely reasons for the fact that oil prices never rose that high.  First, the original estimates of how much oil was stuck behind the Strait were overstated as all the players there found ways to export some, whether through tankers going dark or via rail or truck or pipeline.  But the more interesting observation was that China was able to reduce its imports by between 3mm and 4mm bpd and things were just fine.  China has altered their energy mix such that oil, while still important, can be substituted out as necessary.  That is a very interesting outcome with respect to one of China’s greatest perceived weaknesses, its lack of natural energy capacity.  If they don’t need as much oil to run their economy (which by the way based on overnight data is struggling) then they have less geopolitical weakness.  

Enough on oil, but while I’m here, it is not surprising that as oil slides, metals prices rise so gold (+0.9%) and silver (+0.8%) are continuing to benefit as is copper (+0.1%) although the latter not so much today.

Turning to the other story that has tongues wagging, the BOJ raised their base rate to 1.00% last night as had been universally expected by markets.  Now, the interesting thing here is that there is a group of analysts who believe that this will lead to net position liquidation by leveraged fund managers (i.e. hedge funds) as their funding costs will have risen.  I disagree, and so far, markets are on my side.  This is evident by the fact that equity markets continue to perform well, and USDJPY has shown no inkling of reversing its multi-year trend of rising.  Below is a table of the base interest rates of the G20 nations.  While Switzerland does have a lower rate, and Singapore is the same, if you are thinking about borrowing in a currency to lever up positions, Japan, given the yen’s depth and liquidity, remains the currency of choice by a long shot.

Source: tradingeconomics.com

Ask yourself if your borrowing costs rose 0.25% but you were still earning a net 13.5% return on your BRL deposits, would you flee the trade?  And if you have been buying equities, you are even less likely to get out.  Japan’s problem is not specifically that their base rate is low, it is that they currently are fighting a terrible demographic position of a shrinking population and they have a massive debt/GDP ratio.  They cannot afford to raise rates enough to have a meaningful impact on the yen without bankrupting the country and decimating the yen.  It is not clear to me how they get out of their current situation, but despite concerns elsewhere in the world about the yen’s weakness being a competitive advantage, I think it has further to go.  Basically, there needs to be another Plaza Accord type agreement to change things, and that doesn’t seem likely right now.  After all, in Evian, it doesn’t sound like things are going smoothly.

So, how have markets behaved overnight?  Well, risk is still in vogue.  Following yesterday’s strong US performance, where the DJIA made another all-time high, there were far more gainers (Korea, India, Taiwan, Malaysia, New Zealand, Indonesia) than laggards (HK -1.4%, China -0.2%) while Tokyo was little changed.  As I mentioned above, the Chinese data was pretty lousy as per the below table:

So, the housing market continues to suffer, and the domestic economy along with it, although the export economy continues to grow.

In Europe, the decline in oil prices is clearly helping as all major indices are higher between 0.4% and 0.75%.  As to US futures, at this hour (7:20), they are pointing slightly higher, about 0.15% across the board.

In the bond market, yields continue to decline with Treasuries (-3bps) back below 4.5% which had been seen as a real problem just a few weeks ago.  European sovereigns are also lower by between -3bps and -4bps, duly following both Treasury yields and oil prices.  The outlier here is JGB yields (+6bps) which responded to the rate hike by rising, perhaps an indication that investors don’t believe the BOJ is doing enough.  However, my wager would be the BOJ is done.

Finally, the dollar is a touch softer, as one would expect given the movements in other markets, but there is very little excitement in the FX markets.  Using the DXY (-0.05%) as proxy, you can see things are little changed.  The biggest movers are BRL (+0.4%) and KRW (+0.4%) both of which are seeing capital inflows supporting the currency.  But otherwise, +/-0.2% defines the session in both G10 and EMG currencies.  Note that despite the BOJ rate hike, USDJPY sits at 160.32 showing no sign of heading lower, even in an environment where the dollar is modestly softer.

On the data front, this morning brings Housing Starts (exp 1.43M) and Building Permits (1.42M) and that’s really it.  With the FOMC tomorrow, and Iran ostensibly solved, Mr Warsh and his press conference will get a great deal of focus.  Until then, I don’t see any reason for recent trends to change absent a complete collapse of the Iran deal, which seems unlikely at this point.

Good luck

Adf

Many Malign

Posted on by 
Said Trump, come next Friday I’ll sign
A deal, and though many malign
The war with Iran
It’s all gone to plan
As they’ve lost their arms and their spine

Thus, oil has fallen in price
While gold and stocks rose in a trice
With bears in retreat
For Trump’s next great feat
Some midterm success would be nice

This is a look at the major energy futures markets according to tradingeconomics.com at 5:15 this morning

Sharp declines on the session in the wake of the announcement, confirmed by the Iranians, that a deal had been struck and that the Strait of Hormuz would be reopening by Friday after the mines are cleared.  And while there has been much discussion over the past week, as you can see in the far-right column, energy prices are still largely higher year-to-date with only NatGas the exception.

To my mind, the question becomes, just how quickly prices continue to decline, and can gasoline prices, the one that matters most to the US consumer, slide back to the $2.00/gallon level that we saw prior to the war?

As you can see from that chart below, it still has a long way to fall, but if the Strait remains open, I suspect it will round trip by the end of the summer, just in time for people to start considering their voting habits.

Source: tradingeconomics.com

Remember this, as well, how much have you heard about Venezuela lately?  Back in January, less than six months ago, the US captured and remanded Nicholas Maduro into custody and the world was up in arms.  I would wager that most people don’t even remember it happened!  Memories are very short for global events like this (consider the fact that the Russia – Ukraine war continues and it never even makes the proverbial papers anymore).  For President Trump, the outcome of this situation will be a massively degraded Iranian military with pretty much the rest of the GCC aligned against everything they stood for, an economy that continues to demonstrate remarkable resilience, high stock prices and the likelihood that inflation, as oil prices slide, will be heading back closer to the theoretical 2% target.

There once was a time central banks
Were saviors, and we would give thanks
For all of their aid
When, problems, they slayed
And bankers, they all would close ranks

But last week the ECB raised
Tonight, Ueda-san will be praised
For hiking rates too
So, what will Warsh do?
On Wednesday when his trail is blazed?


Meanwhile, we are in the midst of the monthly central bank onslaught as last week, Madame Lagarde and the ECB raised their base rate by 25 basis points, blaming the ongoing rise in oil prices for leading to inflation.  Of course, 96 hours later, with the announcement by both sides of a deal to end the Iran conflict, this is likely to be seen as an error, the full Trichet as it were.

Tonight, the BOJ meets and all signs are that they, too, are going to be hiking rates by 25bps tonight, to 1.00%, which you will have heard is the highest in more than 30 years.  It’s funny, the official inflation data from Japan is showing a reading of 1.4%, below their target, and now that the prospect of oil prices falling more sharply has increased, it feels like they may be on the cusp of an error here as well.  Consider that of all the governments around, the Japanese with a debt/GDP ratio of about 250% is the nation least able to absorb higher interest rates.  

Which takes us to Wednesday’s FOMC meeting, the first under Chairman Warsh.  There is a long Nick Timiraos article this morning in the WSJ ostensibly explaining that Warsh would like to see less Fed communication, including killing the dot plot, and have the cacophony of Fed speakers shut up.  First, Timiraos has real skin in this game because while he was Powell’s go to, I doubt he will be Warsh’s, thus Timiraos’s status is about to be hit hard.  In fact, the article read as though Powell was writing it to make it seem as though Warsh’s ideas are all wrong.

Personally, I am in favor of less communication by the Fed as policy uncertainty will result in significantly reduced positioning in the speculative community and that is a net benefit for the rest of the market.  Plus, if there is a hiccup, there is less reason for a bailout.  We shall see.  It seems highly unlikely that they move on Wednesday, but we should at least get an inkling of how things may evolve going forward.

So, let’s turn to the markets.  It is no surprise that risk is on everywhere this morning after the Trump announcement so briefly, here is a screenshot from 6:40 this morning showing equity futures markets higher across the board.

Source: tradingeconomics.com

While these are just the major markets, the reality is that markets are higher everywhere except Oslo, as the decline in oil prices hits the Norwegian stock market.  But otherwise, it is universal.

Bond yields are lower across the board as well, with Treasuries (-4bps) leading the way and all of Europe seeing sovereign yields decline by between -4bps and -6bps as the inflation story follows oil lower.  JGBs, too, slipped -4bps overnight and are down -17bps in the past week!

But oil remains the story because its movement is what is driving the narrative.  And, interestingly, there is still strong support from one side of the argument that we are close to hitting tank bottoms and prices are going to shoot higher.  We have heard from both Chevron and Exxon that it is a dangerous situation and even the reopening of the Strait may not happen in time to stop it.  But consider if you are Exxon or Chevron, high oil prices are what you need as you sell your inventory rich and drilling is much more profitable.  And one thing they have is a lot of inventory in their refinery systems.  It hardly seems likely they would be out touting the deal as great and talking prices down.  We have heard throughout the conflict that in a few weeks, prices would spike higher as shortages developed, but that has never happened.  I go back to my view that ignoring market prices in favor of the narrative is a mistake.  At this point, with WTI at $80/bbl, I will argue we will see $50 long before we ever see $100 again.

As to metals markets, based on recent price action, it should be no surprise that gold (+2.75%), silver (+4.3%) and copper. (+0.7%) are all rallying on the lower inflation => lower interest rates => increased commodity demand.

Finally, the dollar is under pressure generally as the DXY (-0.25%) is a pretty good proxy for most things.  In truth, we are seeing some larger movements (INR +0.7%, SEK +0.8%, ZAR +0.6%, CHF +0.6%) all responding to the lower oil price, and in the case of the rand, the higher gold price.  However, there are two outliers here.  NOK (0.0%) is, not surprisingly, unable to show any traction, as like the Norwegian stock market, declining oil prices are a drag here, and JPY (+0.1% and still above 160.00).  The latter must really be concerning to Ueda-san as in a broad dollar decline, if the yen can’t gain traction, that is a real problem.

On the data front, there is a bunch of stuff, but other than Retail Sales on Wednesday, all of it is second tier.

TodayEmpire State Manufacturing14.0
 IP0.3%
 Capacity Utilization76.2%
TuesdayRBA rate decision4.35% (unchanged)
 Housing Starts1.44M
 Building Permits1.41M
WednesdayRetail Sales0.5%
 -ex autos0.5%
 FOMC rate decision3.75% (unchanged)
ThursdayInitial Claims232K
 Continuing Claims1790K
 Philly Fed10.0
 Leading Indicators0.1%

Source: tradingeconomics.com

In addition to all that, the G7 meets this week, starting this evening in Evian, France with French President Macron leading the group.  

As always there is a great deal of naysaying out there as the joint announcement of a deal between the US and Iran has upset the applecart for many narrative writers, and they are committed to their positions.  Personally, I am very happy to see the deal, although it was early as I had anticipated a July 4th outcome, but in this case, a much better result.  I guess it will take some time before it is clear if things are truly operating more normally again, but market pricing is demonstrating a willingness to believe.

With this in mind, the dollar should remain under some pressure for now, as prospects for a Fed rate hike are going to fade, although they haven’t yet according to the futures market, but if anything, that will simply mean that the US will suck in more global capital as the US economy continues to outperform elsewhere.  Ultimately, that will benefit the greenback.

Good luck

Adf

Change Their World View

Posted on by 
The markets are trading like peace
Has come, hence the stock price increase
While crude prices fall
And risk, overall
Is favored like summer in Greece

But can we trust this time it’s true?
Or will, once again, this fall through?
I guess time will tell
If this will compel
The doomers to change their world view

It is certainly a hopeful morning today as risk rallies around the world while oil prices tumble.  At $84.72/bbl, down -3.4% on the session, oil is trading at its lowest level since April 17.  

Source: tradingeconomics.com

While President Trump had once again threatened to destroy Iran’s oil infrastructure, shortly thereafter he reversed that call with news that Iran was back at the table with both sides closing in on a peace deal.  Frankly, despite the absolute certitude that so many pundits seem to have, the reality is nobody really knows if this time is the charm or not.  In fact, I would argue that the Iranians themselves, as well as President Trump, are not certain, as though I’m confident both sides would like to stop this, there are many political calculations that go into the process, and the punditry is simply not party to those conversations.  We shall see.

Of course, markets trade the rumor, not the news, or at least they initiate positioning on the rumor, so with that story making the rounds, it is also no surprise that equity markets have shaken off their early week blues and rallied strongly pretty much everywhere around the world.  The below chart of futures markets shows just how widespread the gains are with only Russia’s MOEX under pressure (is that really even a market still?) and although Toronto, Mexico and Brazil have not yet opened, all rallied yesterday alongside the US.

Source: tradingeconomics.com

Of course, there is another equity story and that is SpaceX, which IPO’d last night at a price of $135/share, and which, like so many things these days, has a seen a huge disparity between the pros and the cons.  Many analyses have been performed showing that the company is not “worth” anywhere near the $1.8 trillion market cap at which it is starting.  But those same folks have consistently explained that Tesla is not worth the $1.5 trillion, and yet there Tesla sits.  There was a huge amount of interest with more than $75 billion of retail orders to buy the IPO.  My observation is that Elon Musk is somebody who gets things done, and usually better than anyone else.  But markets are, as I always say, perverse, so this will be an interesting ride.

Other than the end of the war and the SpaceX IPO, the two stories that made a brief appearance were yesterday’s PPI data, which depending on the analyst were either hot or cold, and the fact that Madame Lagarde and the ECB raised their base rate by 25bps yesterday, right as energy prices started falling dramatically.  This is not the first time the ECB has made a mistake of this nature, one need only look back to the beginning of the GFC when then-president Jean Claude Trichet controversially raised interest rates in July 2008 and reversed course 3 months later after Lehman Brothers failed.

And that’s what the setting is as we head into the last trading session of the week.  So, let’s see how other markets are behaving.

It should be no surprise that bond yields are falling.  While Treasury yields are unchanged this morning, they fell about -7bps across the board yesterday.  But the Iran news was after the European close so sovereign yields are lower by between -4bps and -7bps this morning.  I presume some investors are happy that the ECB is fighting inflation, but I think most are responding to the idea that the end of the war means lower oil prices and therefore a significant reduction in inflation pressures.  Last night in Asia, we also saw yields fall sharply across the board with JGBs down -6bps and every other market (Australia, Singapore, Korea) slide by a similar or even greater amount.

In the metals markets, while gold (-0.1%) is little changed this morning, it did manage to rally more than $100/oz yesterday, or more than 2%.  Silver (-0.5%) is also slipping a bit today but that is after a 6% rally yesterday.  My take is these are short term profit taking trades.

Finally, the dollar is, overall, little changed this morning.  it was very modestly weaker during yesterday’s session with the DXY slipping back below 100 (currently 99.75), but USDJPY remains above 160, still in a danger zone although there has been precious little discussion on the topic for the past several sessions.  You will not be surprised that NOK (-0.5%) is under pressure as it is probably the currency that tracks most closely to oil prices.  But other than that, not much to say in this market either.

On the data front, this morning brings only Michigan Sentiment (exp 46.0), which continues to hug the lows of the series as a contradiction to the highs in equity markets.  But now, with CPI/PPI out of the way, all eyes will turn to next week’s FOMC meeting.  If we look at the Fed funds futures curve, it is still forecasting a rate hike by the end of this year.

Source: cmegroup.com

But I have to wonder, if the fighting stops and a deal is reached such that the Strait is reopened and the blockade is lifted, the one certainty is that oil prices will fall much lower, probably below the levels seen prior to the war began.  Given all the talk about secondary effects of high oil prices, I would expect that talk to disappear.  History has shown that every shortage of a commodity is followed by a glut.  Will economists be explaining why persistently low energy prices in the future are going to undermine inflationary expectations?

Markets are still beholden to the headlines so if this deal falls apart, you need to expect all these moves to reverse course with oil higher alongside yields and the dollar while stocks and precious metals fall.  But if this is the end of the Iranian engagement, I suspect that risk is going to be in vogue for quite a while, investment will be flowing into the US and the dollar will hold its own, even as yields decline.  (Going back to my flows as a key driver, not just interest rates.)

Good luck and good weekend

Adf

No Black Swan

Posted on by 
For all of the angst that Iran
Has ended the talks and moved on
The market for oil
Has come off the boil
As risk takers see no black swan

So, stocks keep on making new highs
And it cannot be a surprise
That bond yields have slipped
While in today’s script
Elections will garner all eyes

Once again, I am having a hard time reconciling the narrative and the price action.  Yesterday saw a sharp rally in oil as the talks between the US and whoever is representing Iran apparently collapsed.  Yet, as you can see from the below chart, while that was worth nearly $5/bbl early in yesterday’s session, those gains dissipated over time and this morning, oil (-1.2%) continues that slide.

Source: tradingeconomics.com

One thing I saw on X this morning claimed Iran was done talking, had received a nuclear bomb from a third party (Pakistan? North Korea?) and was going to detonate it somewhere.  Another was that the talks are still ongoing.  I do find it interesting that so many are willing to take statements from the Iranian news agency, TASNIM, a body that has lied repeatedly for 47 years, and assume their claims are gospel.  Propaganda is always an ongoing project on both sides (in truth from every government everywhere) and thus every claim must be seen for what it is, speaking to a specific audience to achieve a response, not an unbiased description of reality.  Thus, it seems many folks see what they want to see to confirm their prior beliefs.  I come back to the market as the most unbiased arbiter, and it continues to point to an end to the conflict on a relatively short timeline.

Which takes us to the other story today, US primary elections, notably in California where there is a gubernatorial primary and a mayoral one in LA that has garnered the most attention based on the seeming outstanding performance of former reality-TV star (?) Spencer Pratt running against the incumbent Karen Bass.  This race seems like it may be quite important nationally as it would offer the possibility that the deepest blue of cities may finally have had enough incompetence in the mayor’s office and wants to change directions, at least a little bit.  Of course, NY just elected an incompetent mayor, as did Seattle and Chicago before them, so maybe the people in these cities like the situation.  I’m hopeful that is not the case.

But otherwise, it is hard to get too excited about much this morning.  equity markets in the US made yet another set of new highs yesterday across the major indices as no matter the news, it appears there is a bullish spin.  So, let’s turn to markets this morning.  Asian equity markets were mixed overnight with Tokyo (-0.3%) slipping slightly although HK (+2.5%) and China (+1.5%) both rallied nicely on the back of the US tech rally.  Net, there were far more winners in the region (Korea, India, Taiwan, Philippines, Thailand, Singapore, Indonesia), than laggards (Australia, New Zealand, Malaysia) with the laggards barely slipping at all.  So, despite all the angst over Asian nations running out of oil and oil products, equity investors are all in there!

In Europe, it’s happy days as well as per the below Bloomberg screenshot.

This is despite Eurozone inflation rising to 3.2%, its highest level since September 2023, and, as per the below chart, certainly looking like it is beginning to trend higher on the back of 3+ months of higher oil prices feeding through the entire economy.

Source: tradingeconomics.com

Of course, given Eurozone GDP is indistinguishable from zero (see below chart), and has been for 3 years, it is fair to wonder if this is setting up to be a particularly egregious central banking error by Madame Lagarde.  

Source: tradingeconomics.com

Too, while short-term inflation expectations have unsurprisingly risen, a look at the 5-year result shows limited concern by consumers.  As an aside, there is good reason to believe that inflation expectations are irrelevant in future inflation readings, at least according to the academic literature, but it is a driving force in current central banking models, so needs to be considered.

In the end, though, the ECB is going to hike rates next week, on that you can depend, and if when economic activity declines, they will blame Putin or Trump or Elon or anything but their own failed policies.

As to US futures at this hour (7:10), they are modestly lower, maybe -0.2% or so across the board.

In the bond market, Treasury yields have fallen back -3bps this morning after round-tripping 5bps higher yesterday and finishing the day unchanged.  European sovereign yields are having a better day, with declines of -6bps to -7bps across the continent and JGB yields (-11bps) are really falling.  My conclusion is that investor concerns over runaway inflation simply do not exist despite the narrative pushing that story.  The ostensible crises in May apparently never arrived, at least not yet.

In the commodity market, it can be no surprise that metals prices (Au +1.0%, Ag +1.8%, Cu +1.0%) are higher this morning given the overall risk environment.  The negative correlation between metals and oil remains largely intact for now.  The interesting thing to note, though, is that despite the daily gyrations, in reality, neither oil nor the precious metals have gone anywhere in a while.  The same is not true for copper which is at new all-time highs.

Finally, the dollar is modestly softer this morning, on the order of 0.1% against its G10 counterparts with AUD (+0.3%) the best performer.  In the EMG bloc, ZAR (+0.6%) is responding to the combination of lower oil and higher gold prices and MXN (+0.4%) is also having a pretty good session, but that seems more like beta vs. the dollar than anything else.  I would be remiss if I didn’t spotlight JPY (0.0%) which continues to edge closer to the 160.00 level as per the below chart, but was also the subject of much discussion as FinMin Katayama was out explaining that, “As for foreign exchange, we continue to maintain our stance that we stand ready to take appropriate action at any time, as needed.”  However, while the market expects a 25bp rate hike in two weeks, that is already in the price.  In order to stop the yen’s slide, they will need to really change policy, something which I maintain is not in the cards for now.

Source: tradingeconomics.com

On the data front, this morning brings only the JOLTs Job Openings (exp 6.88M), essentially unchanged from last month.  Yesterday’s ISM Manufacturing data was quite solid across the board except for the employment subindex, which remains lackluster as companies expand with more automation.

I think it is fair to say nobody knows what will happen in the Iran conflict nor the timing.  While markets can be completely wrong, and forced to reprice suddenly, that is an extremely rare occurrence.  Too, the one thing on which we can count is if something hugely negative occurs, central banks around the world will step in, add liquidity and cut rates, to ameliorate the slide.  My point is, I will not bet against the market view that this will end sooner rather than later.

Good luck

Adf

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

Adf

Quite Sublime

Posted on by 
Though skeptics do not yet believe
That Trump, a peace deal, will achieve
The markets are saying
This sunshine they’re haying
And fading this move is naïve

So, oil continues to fall
And stocks are just having a ball
It’s peace in our time
And all quite sublime
To many, though, this tale is tall

It is not clear what else to say about the current situation other than the markets are starting to believe that the Iran conflict is coming to a close.  The headlines from the administration and news from Pakistan seem to indicate a deal is near, something we all should welcome.  Certainly, the market is ready to accept this as gospel, at least based on the current risk appetite being demonstrated across all markets.  So, this morning, oil (-2.8%) continues its rapid decline, down more than $18/bbl from its highs just one week ago.

Source: tradingeconomics.com

The commentariat refuses to accept that the conflict is ending and I cannot tell if that is because they hate President Trump so much, they cannot stand the idea of him concluding things having achieved objectives, or because if the conflict is over, they will need to find the next thing to prove their ‘expertise’ and they don’t know what that is yet (hantavirus anyone?)  Regardless, markets are on board with this narrative as the moves we saw yesterday are simply extending this morning.  

Meanwhile, the data from yesterday showing that ADP Employment was a stronger than expected 109K and the JOLTs quit numbers rose, meaning more people are willing to quit their jobs for a new one, indicating a growing confidence in the labor market, point to a continuation of the US equity rally, and by extension, the global rally.  (As an aside, I chuckled at the article in the WSJ this morning about how the next target of taxes should be ‘compute’ since AI is going to replace human workers.  My comment here, which has been confirmed by my time this week at the Consensus 2026 cryptocurrency conference, is that machines are great, but people still want to deal with people they can trust!)

Anyway, with the conflict ostensibly coming to a close, there is not much else to discuss outside actual market activity, so let’s see how things responded to this news.

By this time, you have all checked your PA’s and saw the green from yesterday there.  Overnight, Asian markets were also quite positive with Japan (+5.6%) exploding higher after their Golden Week holidays ended.  Excitement on tech as well as a market that is looking forward to Treasury Secretary Bessent’s visit were the drivers.  But we also saw strength in China (+0.5%), HK (+1.6%), Korea (+1.4%) and Taiwan (+1.9%).  In fact, looking across the region, you are hard pressed to find a true laggard, as India (0.0%) was the worst performer of note.  European markets, though, are not quite in as fine a fettle with most of them essentially unchanged this morning although the UK (-0.7%) is lagging after some underwhelming earnings reports as it appears profit taking is today’s motive.  As to US futures, at this hour (6:45), they too, like Europe, are essentially unchanged

In the bond markets, yields continue to slide with Treasury yields lower by -2bps and virtually all European sovereign yields slipping -1bp.  Overnight, JGB yields fell -3bps as markets there reopened and essentially all Asian government bonds saw yields decline as well.  Apparently, fears over rampant inflation are ebbing.  You may recall on Tuesday I discussed the 30-year Treasury as it traded above 5.0% on Monday and stayed there for about a minute.  That had engendered a great deal of apocalyptic discussion.  However, here we are this morning with 30-year yields slipping another -2bps, and now 10 bps below that little spike, and back below 5.0%.  But I think it is worthwhile to offer a little perspective on the 30-year bond and the idea that 5.0% is deadly.  Here is the chart of 30-year Treasury yields since 1985.  Perhaps the anomaly was much lower yields, not 5.0%!

Source: finance.yahoo.com

Precious metals are continuing to benefit from the peace initiative and oil’s delice with gold (+1.0%) and silver (+4.0%) both stronger again after big gains yesterday.  In fact, I am starting to read more about why silver is set to make massive gains because of shortages, a narrative that was set aside for the past two months but seems to be reawakening.  Now, I am no technician, but I am given to understand that if you look at this trend line in silver from its January peak, we have broken above the line and that portends a massive move higher.  (full disclosure, I am long silver so would be happy to see that but have not spent the extra money yet!)

Source: tradingeconomics.com

Finally, the dollar is softer again this morning, which should be no surprise based on the overall market zeitgeist this morning.  So, the DXY (-0.15%) is a pretty good approximation of what is happening, although we have seen some larger moves, notably NOK (+0.8%) which seems to be responding to the fact that the country is going to reopen some shuttered oil and gas drilling sites in the North Sea as Europe tries to figure out where to get energy from.  As to the yen (0.0%) after a series of what appeared to be modest interventions by the BOJ during Golden Week, it appears the market may be explaining that the fundamentals are still pointing to yen weakness and while the BOJ may be able to cap the dollar for a short time, establishing real JPY strength will take a lot more effort, and real policy changes (i.e. much higher interest rates).

Source: tradingeconomics.com

Turning to the data this morning, we get the weekly Initial (exp 205K) and Continuing (1800K) Claims data, which continues to hover near historic lows despite the angst over the labor market.  We also see Nonfarm Productivity (1.4%) and Unit Labor Costs (2.6%) and hear from several more Fed speakers, although most of their comments are back page news.  Of course, tomorrow we will see the NFP report, and that will certainly garner all the attention.  Personally, I will be focused on the Manufacturing Payrolls outcome as a proxy for the reshoring initiative and the potential for continued strong economic activity going forward.

And that’s really it.  Despite the ongoing narrative of the dollar’s demise, it remains well within its recent trading range, and I keep reading about other nations issuing dollar debt as that is the market with the most liquidity.  Over time, I continue to see the dollar as the best fiat around, although I still like stuff more than paper.

Good luck

Adf

Greatly Vexed

Posted on by 
For weeks it appeared that the war
Was something we all could ignore
As equities rallied
And most people tallied
Their gains as those prices did soar

But yesterday, things took a turn
And suddenly, stocks, folks, did spurn
While oil went higher
As missiles did fire
And UAE oil did burn

The question today is what’s next?
Will Hormuz soon wind up annexed?
Or will Iran’s forces
Back up their discourses
And keep Mr Trump greatly vexed?

For nearly two weeks, it appeared that the market was completely willing to accept the narrative that the Iranians were on their last legs and that the Strait would be reopened soon, thus relieving the pressure on the oil markets, and global markets in general.  After all, US equity markets, as well as those in Korea and Taiwan, were making new all-time highs regularly despite the ongoing stress in Iran.  

But yesterday, those happy thoughts were called into question as evidenced by the equity markets’ collective sharp decline throughout Europe and the US.  Of course, most of Asia was closed on Monday, but the few markets that were open performed well then.  Alas, last night was a different story with more losers (HK, India, Australia, New Zealan, Singapore) than gainers (Malaysia, Indonesia).  Even if markets don’t decline much further, there has been a distinct change in sentiment about things, at least in my view.

The timing of the progress in potential negotiations and the question of potential escalation of fighting again are suddenly weighing more heavily on investor perceptions than they had for the last several weeks.

In the meantime, if we turn our attention to economic data, yesterday’s Factory Orders came in much stronger than expected, just the latest in a line of “surprisingly” strong data points from the US.  If we look at the chart below from macromicro.me, showing the Citi Surprise Index and their earnings index, we can see that both the economic indicators and US corporate earnings results are moving higher.  This seems at odds with the narrative of imminent collapse that is still making the rounds but is likely the cause of the equity market’s resilience.

In fact, this morning, markets are once again pointing in a more favorable direction as yesterday’s skirmishes in the Gulf have been quickly forgotten, it seems, and European bourses are all higher (Germany +1.0%, France + 0.6%, Spain +1.1%) recouping yesterday’s losses although UK equities (-1.0%) are suffering on a combination of yesterday’s concerns as well as a surprisingly negative HSBC earnings report.  And US futures are also higher at this hour (5:45) by about 0.4% across the board.  It is difficult to get markets downbeat for very long these days, which is remarkable given the sentiment indicators which have consistently been reading quite poorly.

This dichotomy is quite interesting to me as I am currently reading “Narrative Economics” by Robert Shiller, where he describes how social narratives have, throughout history, led to economic outcomes, whether positive or negative.  His implication is that the data tends to follow the current zeitgeist, and then almost regardless of any government efforts to change that narrative, the zeitgeist is what drives the economy.  For those of us who have been observing markets for any extended length of time, I don’t think this is a surprising revelation, although Shiller does a great job highlighting all the different times the narrative drove the bus.  

And that is what makes the current situation so remarkable, the narrative is that things are terrible with the nation dramatically split politically while gasoline prices have risen so much and inflation is a major problem.  You can see that in the Michigan Sentiment Survey and the political polls.  Yet Retail Sales remain firm and we just saw those strong Factory Orders, two things which one would expect to soften given the current narrative.

Perhaps what we have seen is the impact of social media and ‘influencers’ whose goal is to show the good life and why/how you should live it.  Given they only maintain their followers if they show an ideal situation, there will be no shaming for ostentatious consumption, that is their stock in trade.  So, while during the Great Depression, social pressures were such that buying anything new, like cars or houses, was seen as inappropriate, today, buying new cars is seen as a requirement, the more expensive the better.  Or going on an expensive holiday, or some other extravagance.  I wonder if the gloomy narrative will end up overcoming the influencers.  I suppose much will depend on just how much longer the war in Iran continues, as a clear end soon would almost certainly see a major sentiment change and another wave higher in risk assets while the longer it drags on, the more likely negativity overwhelms.

But this morning, having already looked at equity markets, we see a key piece of that story is oil (-2.0%) having slipped back.  Perhaps the fact that there have been no new skirmishes has people back to a brighter outlook.  Or perhaps, as the conspiracy theorists would explain, governments are in manipulating the price lower again.  As I look at the chart, though, it remains remarkable to me that despite the Strait having been closed for two months now, oil prices have not risen further.

Source: tradingeconomics.com

The question at this point is how quickly things can return to any semblance of normal when the hostilities end.  From what I have read, and I am not an expert, it almost seems like every day the Strait remains closed will require one and a half days more before things get back to the pre-war situation.  Of course, even if that is the case, if the war ends, the zeitgeist will change far faster and that will likely be overlooked.

Meanwhile, given the current gold/oil relationship, we cannot be surprised that gold (+0.6%) and silver (+1.3%) are higher this morning.

In the bond market, after yields rose sharply yesterday (Treasuries +8bps), this morning, things are less dramatic with 10-year Treasury yields slipping -1bp and European sovereign yields all softer with Greece and Italy (-5bps) seeing the largest declines although German bunds (-1bp) were more in line with Treasuries.  There has been much discussion lately about 30-year Treasuries and how they have traded back above 5.0% again, indicating it is a sign of the apocalypse.  However, if you look at the chart below, you can see we have been at or above that level several times in just the past year.  I understand 5.0% is a big round number, but I don’t see this as an imminent disaster because of the move. (Don’t misunderstand, the US fiscal situation is a major problem with many potential problems going forward, I just don’t think this is the final straw.)

Source: tradingeconomics.com

Finally, turning to the dollar, after modest gains yesterday, it is little changed this morning.  The RBA raised rates by 25bps, as expected and AUD is unchanged, as are the euro and pound.  With the BOJ on holiday, JPY (-0.2%) is slipping slightly, but not showing any major activity.  However, we have seen several EMG currencies improve with MXN (+0.3%) and BRL (+0.4%) both benefitting from the increased risk appetite we are seeing in overall markets.  The thing about the dollar is it has not been interesting for quite some time, trading within a fairly narrow range.  However, while we continue to hear many pundits describe the dollar’s ultimate demise, there is an interesting story in the FT about the dollar’s dominance in global markets as can be seen in the chart below from Kobeissi on X.

This is not a demonstration of the world shunning dollars, just sayin!

On the data front, this morning brings the Trade Balance (exp -$60.5B) along with ISM Services (53.7) and JOLTs Job Openings (6.83M).  We also see New Home Sales (668K) and hear from two Fed governors, Bowman and Barr.

But it is all still about the war and oil, and until something definitively changes there, I expect we will chop with every headline.

Good luck

Adf

Disconcerting

Posted on by 
The third time, it wasn’t a charm
As thankfully, Trump saw no harm
But it’s disconcerting
The left keeps on flirting
With killing Trump by firearm

But absent more news on the war
Investors, most stocks, still adore
And there’s still a call
The dollar should fall
Though so far, they’re down on that score

It is certainly disconcerting that there have been three bona fide assassination attempts on President Trump in the past two years, something I fear speaks loudly about his opponents.  Fortunately, this one also failed.  Interestingly, as this occurred at the White House Correspondents Dinner, the entire Washington press corps, who largely detest the man, were there.  I wonder if this experience will alter their rhetoric, which I would argue has been the key driving force behind these attempts.  Alas, I fear that will not be the case, at least not for more than a few days at best.  

But that was a far more exciting weekend than anybody imagined as there is no new news regarding the Iran war with potential talks never occurring over the weekend.  Neither have the marines moved in on Kharg Island, so the status quo, a US naval blockade, remains the primary situation.  This leads to two questions; first, how long can Iran withstand the lack of revenue with the government, or more accurately the military, still operating effectively? And second, how long before Iran’s oil wells need to be shut in, which is likely a death sentence on those wells, and by extension, on Iran’s long-term revenue stream?

Frankly, that’s what the weekend brought, so let’s turn to markets.  While the DJIA lagged on Friday, both the NASDAQ and S&P 500 rallied to yet further new all-time highs as US corporate earnings remain robust and the market looks ahead to this week where 5 (MSFT, GOOG, AMZN, META, AAPL) of the Mag7 report earnings this week on Wednesday and Thursday.  As well, Wednesday brings the FOMC decision, with no change expected.  As to US futures this morning, as I type (6:50), they are essentially unchanged.

Overnight, Asia’s session was mixed with Japan (+1.4%) putting in a nice performance along with Korea (+2.15%), India (+0.8%) and Taiwan (+1.8%) although there were laggards (HK, Australia, Indonesia, Singapore) as well, with much smaller declines.  China was basically unchanged.  Perhaps the biggest news was that an oil tanker from the US arrived in Japan for the first time, although certainly not the last time.  European bourses are all a bit firmer this morning, seemingly responding to decent earnings throughout many nations there.  Thus, Germany (+0.6%) is leading while Spain, France and Italy (+0.5% each) lag slightly and the UK (+0.1%) brings up the rear as King Charles prepares to visit President Trump and the US starting today, ostensibly trying to resurrect the once special relationship that has deteriorated over time.

In the bond market, nothing continues to happen with Treasury yields higher by 1bp this morning and similar price action across all of Europe.  JGB yields (+4bps) were the big mover as market participants await three key central bank meetings this week, the Fed, ECB and BOJ.  But here’s the thing, of all the major economies around, Japan’s is the only one where the bond market is offering any real signal.  The below chart from tradingeconomics.com shows US (blue line), German (tan line) and Japan (green line) 10-year yields over the past 5 years.

While we all remember the pain in markets when the Fed, and then all other central banks, figured out that the Covid policy inflation wasn’t going to be as transitory as they hoped and pushed rates up at a historically fast pace in 2022, since then, it is pretty easy to make the case that neither US nor Germany (and by extension the rest of Europe) have seen any substantive change in their bond markets.  I am speaking in a big picture reference here, not the day-to-day noise that we see.  Meanwhile, Japan has finally begun to feel the pressure of a massive debt/GDP ratio and rising inflation.

Contrary to popular belief, Treasury bonds remain the reserve asset of choice around the world as every nation needs to hold a certain amount of USD simply to function in the world today (which is why there is so much recent discussion regarding USD swap lines for numerous countries).  While it sounds great for the panican set to discuss how Chinese “official” holdings of Treasuries have collapsed and that is a signal they are selling bonds, the reality is they have switched their custodians from the Fed to Clearstream and Euroclear in Brussels and Luxembourg while many of those assets are now held in large Chinese ‘private’ banks rather than on the PBOC’s balance sheet.

Source: @Brad_Setser

Notice the large grey bar at the right, foreign assets of the state banks.  Which brings us to the central bank meetings this week where no major central bank is expected to change policy.  Japan seems the diciest call, but the word was put out last week that June is the likely date. As well, the ECB’s own market watching website is now looking at June as a probable rate hike as per the below from ecb-watch.eu.

For the FOMC, no change today and now that the DOJ has referred the cost overrun investigation to the IG at the Fed, the hold on Kevin Warsh by Senator Tillis has been lifted.  I expect he will be confirmed in time for Powell to leave on his scheduled date.  It remains to be seen if Powell will stay on the FOMC (his term technically runs until January 2028), but historically, once a Fed chair leaves that role, they step away completely.  Ultimately, until the markets begin to understand that inflation is going to be structurally higher than in the past, I suspect bond yields are going to remain range bound.

In the commodity space, oil (+0.7%) is a touch higher as the market seems to be becoming increasingly concerned that the impacts of the closure of the Strait of Hormuz are going to be longer lasting than previously assumed.  However, the futures curve remains steeply backwardated as per the below chart form tradingview.com.

Personally, I see this as confirmation of my own view that oil prices are likely to decline over time as more and more supply becomes available with new projects.  If anything, this war has accelerated that process.  Meanwhile, metals prices are essentially unchanged this morning, biding their time for the next big piece of news.

Finally, the dollar is under modest pressure this morning, down about -0.2% across the board as risk appetites continue to build with the war receding in traders’ collective mindset.  But here, too, just like in the bond market, it is difficult to make the case that anything of note has happened to the dollar, writ large, over the past year.  I know I show this chart frequently, but it is simply to hammer home the idea that the dollar is not collapsing.  It has basically had a 3.5% range 96.50 – 100.00 for the past twelve months.  I’m sorry, that is not a death omen!

Source: tradingeconomics.com

On the data front, there are a total of 5 central bank meetings with no changes expected anywhere, and then PCE data later on.

TonightBOJ Rate Decision0.75% (unchanged)
TuesdayCase-Shiller Home Prices1.1%
 Consumer Confidence89.2
WednesdayHousing Starts1.4M
 Building Permits1.39M
 Durable Goods0.5%
 -ex Transport0.4%
 Goods Trade balance -$86.0B
 BOC Rate Decision2.25% (unchanged)
 FOMC Rate Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 ECB Rate Decision2.0% (unchanged)
 Q1 GDP2.2%
 Personal Income0.3%
 Personal Spending0.9%
 Initial Claims215K
 Continuing Claims1820K
 PCE0.7% (3.5% Y/Y)
 Core PCE0.3% (3.2% Y/Y)
 Chicago PMI53.0
 Leading Indicators-0.1%
FridayISM Manufacturing53.0
 ISM Prices Paid80.0

Source: tradingeconomics.com

It remains difficult to get too excited about the data, though, as war stories remain top of mind.  Until something changes there, I suspect we will see equities continue to rally on earnings data with the rest of the markets doing very little overall, data be damned.

Good luck

Adf

Completely Reversed

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Humbling

Posted on by 
The ceasefire seemed to be crumbling
And stocks all around started tumbling
Then late in the morning
Trump issued a warning
To Bibi that clearly was humbling

So, Lebanese fighting decreased
Though, so far, it has not yet ceased
The door’s now ajar
For peace near Qatar
Thus, risk appetite rose like yeast

Which takes us to data today
With March CPI on the way
It surely will show
That prices did grow
But how long will increases stay?

As you can see from the below chart showing oil (inverted) and the S&P 500, about 11:00 yesterday morning, the news hit that Israel was going to stop its ongoing fighting against Hezbollah in Lebanon, which the Iranians claimed was a violation of the ceasefire and had undermined general, and market, belief that the ceasefire would hold at all.  The impact was instant with a substantial rally in the S&P, 1% within an hour, while oil prices tumbled about 6% in the same span (given oil’s volatility is so much higher, that discrepancy is not surprising at all.)

Source: tradingeconomics.com

This is the lead-in to the first face-to-face talks between the US and Iran that are due to occur today in Karachi, Pakistan.  Hopefully, they will lead to a lasting peace with the upshot that Iran will no longer be a sponsor of terrorism, but I must admit, I’m not holding my breath for that outcome.  The overnight market reaction was pretty much exactly what you would have expected with a generally positive view of risk almost everywhere in the world.  Obviously, if the talks lead to a peace and a reopening of the Strait of Hormuz, the strong belief is that things will eventually revert to the prewar stance, at least from an energy and economic perspective.  We shall see.

Which takes us to the other piece of news that markets are going to need to absorb this morning, the March CPI data.  Yesterday we saw the February PCE data and while it was released at expected levels, those levels (2.8% Headline, 3.0% Core) are already far above the Fed’s 2.0% target.  In fact, as you can see from the chart below, it has been a full five years since Core PCE was at or below their target.

Source: tradingeconomics.com

And now, we get March CPI this morning which will include a substantial rise in oil prices as the average in February was $64.51/bbl vs. March’s $93.58/bbl.  Obviously, that is going to have a major impact on headline CPI, but the question is just how much of an impact will it have on core?  Expectations are for Headline to rise 0.9% M/M and 3.3% Y/Y, while the Core rises just 0.3% M/M and 2.7% Y/Y.  Now, we are coming halfway through April and oil prices have not retreated yet, so we are likely going to see continued upward pressure on core prices going forward as those high oil prices feed their way into other things.  But that is for the future.  For today, all eyes are on the data to see if it will be enough to concern central bankers.

In fact, next week is World Bank / IMF week in Washington DC and Kristalina Georgieva, the IMF’s Managing Director, expressed concern that the global economy is going to slow down because of the impact of higher oil prices, but implored central bankers around the world to be patient and not hike rates right away, while asking governments not to subsidize fuels and increase demand.  It is, of course, much easier for her to make these comments as she doesn’t face an electorate that is angry about rising prices.

At any rate, other than the virtually infinite number of takes on the Iran war and the CPI data, there’s not much else to discuss, so let’s see how markets have responded to the latest and where they sit ahead of the data.

Yesterday’s early declines in the US were reversed, as per the chart at the top with all three major indices rallying more than 0.6%.  in Asia, weirdly just Australia (-0.15%) and New Zealand (-0.7%) were the outliers on the downside with the rest of the region all in the green, some substantially so.  Tokyo (+1.8%), China (+1.5%), Korea (+1.4%), Taiwan (+1.6%) and India (+1.2%) all had very strong sessions.  Arguably, the weakness Down Under may be a reflection of their energy policies heading into the Iran war as neither nation has a substantial reserve (fossil fuels were deemed bad so their governments didn’t want to buy them) and both economies could suffer far worse than anyone else because of those decisions.  

In Europe, markets are higher across the board although the gains are far more muted with France (+0.5%) the leader followed by Germany (+0.4%) and Italy (+0.4%) then the UK (+0.2%).  While, certainly better than losses, they are hardly inspirational.  As to US futures, at this hour (7:15), they are also pointing slightly higher, about 0.2% or so.

In the bond market, yields are backing up this morning with Treasuries (+2bps) the least impacted while European sovereign yields are higher between 5bps (Germany) and 8bps (Italy) with the rest of the continent somewhere in between.  It is difficult to ascribe a particular story here other than rising concerns about general inflation being higher due to elevated energy costs.  The market is pricing about 59bps of rate hikes by the ECB this year, perhaps a sign that investors don’t believe energy prices in Europe are going to decline as much as they will elsewhere.  Given the continent-wide energy policies they have in place, I believe they are correct.

Turning to commodities, oil (0.0%) is unchanged this morning after sliding on the Lebanon news yesterday morning.  The truly interesting thing is to watch NatGas (-0.6%) which continues to slide. Back toward its multi-year lows as it continues to be produced as an associated product alongside all the oil drilling that is ongoing.  

Source: tradingeconomics.com

I cannot look at the above chart and reconcile the massive energy advantage the US has with basically the rest of the world and conclude that the US economy is going to be at any disadvantage with other economies going forward, and hence the dollar seems very likely to remain in good stead going forward.  Meanwhile, metals, too, are little changed this morning (gold 0.0%, silver +0.4%, copper +1.3%) with the latter a bit of a surprise after Argentina just passed legislation that will allow for more drilling in the Andes where Chile’s major copper deposits lie.  That is a long-term prospect though, I must admit.

Finally, the dollar is mixed this morning, with very few significant movers in either direction.  In the G10, +/-0.2% is the name of the game with the most noteworthy thing, I think, the yen (-0.25%) which is back above 159 this morning, although not yet threatening the perceived line in the sand of 160.  In the EMG bloc, KRW (-0.6%) and ZAR (-0.4%) are the laggards although it is hard to ascribe specific news to either move.  Rather, looking at the recent trading action, where both currencies have been rebounding sharply, these moves look like position squaring ahead of the weekend.

In addition to CPI, we also see Michigan Sentiment (exp 52.0) and Factory Orders (-0.2%) at 10:00.  There are no Fed speakers so today is shaping up to be data dependent unless we hear something from the talks in Pakistan.  However, it seems far too early for anything of substance there.  I imagine if core CPI is firm, that could be an equity negative as that would encourage more thought of the Fed hiking, but I have a feeling that despite the broader importance of the number, markets are not going to do much today.

Good luck

Adf