Tag Archives: #riskon

What They Most Fear

Posted on by 
For many, it seems very clear
That war is not what they most fear
But rather, for them
They need to condemn
Each Trumpian outcome and sneer

So last night, ere clocks all struck eight
The president said he would wait
Another two weeks
As peace that he seeks
Seemed closer than it had to date

As I’m just a poet in a room in New Jersey, I don’t have any intel on the situation in Iran, but boy oh boy, the number of takes out there is remarkable.  On one side are the naysayers claiming Trump chickened out again, that Iran won this war and the US is forever seen as a loser.  On the other side is Trump played it brilliantly, raising the stakes to a level where even the IRGC leadership decided that the destruction of their nation wasn’t worth the battle.

My observation is that whatever the actual rationale, the world is better off with the fighting stopped.  With that in mind, it is hard to look at the results of the war, where Iran saw both its Navy and Air Force obliterated, its senior leadership decimated and a large proportion of its missile launchers destroyed and feel like they won.  I think this would be called a Pyrrhic Victory.

But from our perspective here, the questions of note are how did markets respond?  You will not be surprised that much of the trauma that markets have felt over the past month has already been reversed.  Let’s start with oil, as that has been the keystone for all markets.  As per the below chart, it has plunged -16% overnight, back well below $100/bbl.

Source: tradingeconomics.com

While this is a picture of WTI, Brent (-14%) also tumbled as did the markets in gasoline (-10.0%) and all other products.  NatGas (-5.3%) fell to its lowest level since October 2024, as per the below chart.

Source: tradingeconomics.com

In Europe, TTF Gas (-14.7%) also tumbled but it remains far above its prewar levels as per the below.

Source: tradingeconomics.com

All told, as would be expected, energy prices have fallen sharply.  Of course, questions have rightly been raised as to whether this will remain the case because, remember, the cease fire is slated for only 2 weeks.  What happens if there is no agreement and the US resumes their attacks?  As well, the status of the Strait of Hormuz remains somewhat cloudy with mixed information about safe passage.  It appears that many ships in there may be able to exit, but will any go back in with the risk of getting stuck again?  My point is this may not be over, but for now, everybody is giddy.

In the metals markets, the rally has been similarly impressive with both gold (+1.6%) and silver (+5.4%) continuing their rebound from the March 23rd spike lows as per the chart below of gold.

Source: tradingeconomics.com

In fact, gold has retraced 16% from that low print and silver 26%.  But here, too, it will all depend on how the Iran situation evolves going forward.  Arguably, if the fighting starts again and oil rises, precious metals will head lower while if a long-lasting peace is secured, I would look for metals to head higher again.

In the equity markets, the all-clear has been sounded, as you would have expected.  The screenshot below from tradingeconomcs.com of futures markets shows that the only perceived loser from this deal is Russia.  Otherwise, every market is substantially higher (Toronto’s TSX is closed in the overnight session) or was so last night in Asia.

The thing we are likely to hear about a lot today is that the S&P 500 has traded back above its 50-day moving average, as per the below chart.  For the technicians, this will be seen as a key outcome and expect to hear much more about a test, and potential break, of the all-time highs of 7000 made back in January.

Source: tradingeconmomics.com

Moving on to bonds, Treasury yields are the big disappointment here, having only declined -5bps heading into the NY open, but as the Bloomberg screenshot shows, European sovereign yields have virtually collapsed, as have yields throughout Asia, although remain higher than a month ago.

It appears that all the fears about rising inflation have been virtually extinguished overnight!

Finally, the dollar has also reversed its recent gains, falling sharply across the board.  Using the DXY (-1.1%) as a proxy, it does seem to measure the average movement, but there have been some real outliers.  For example, ZAR (+2.3%) has benefitted from the combination of much higher precious metals prices and much lower energy prices as South Africa is a net energy importer.  SEK (+2.2%) has also exploded higher, although that looks more like a reversal of yesterday’s sharp decline, than any other news.  But, broadly speaking, currency gains on the order of 1% or more are the norm this morning.  However, as we have seen across almost all markets, this movement merely returns us to the middle of the previous trading range, it is not a signal for the dollar’s collapse.  Just look at the chart below of the DXY.

Source: tradingeconomics.com

So, across all markets, we have witnessed a major reversal of the war induced trauma.  It is not completely unwound nor are we confident it will exist in two weeks if no deal is reached.  But that’s the scoop for now.

While it certainly won’t have an impact today, it is worth looking at the Fed funds futures market to see how it has behaved.  While expectations for the meeting on April 29th remain for no change, as you can see from the aggregate probability table created by the CME, cuts are back in the thought process, although not until the end of this year.

On the data front, we receive EIA oil inventory data this morning and then the FOMC Minutes are released at 2:00 this afternoon, but I cannot imagine anyone paying close attention to those given the changing situation in the Middle East and its impact on markets, especially oil and the prospects for future inflation.

To recap, we all ought to be happy that the Iran war has stopped for now with prospects for a longer peace.  You can love Trump or you can hate Trump, but if he succeeds in eliminating the terror networks that Iran has long sponsored, that is a gigantic net benefit for the entire world.  Nobody has any idea how things will ultimately resolve, but certainly, as we wake up this morning, prospects for the future look better than they did twenty-four hours ago.  Of course, my advice had been to play it close to the vest because of unexpected outcomes like this.  Nobody has any edge trading markets like this, not even the algos.  Perhaps the one thing that will change is trading volumes will start to pick up and increase overall liquidity, and that would be a net positive.

Good luck

Adf

Quite Severe

Posted on by 
The current conclusion to draw
Which could be a huge, fatal flaw
Is war’s not deciding
For traders in guiding
Positions, as few hem and haw

But right now, a deadline draws near
Which ought, by all rights, instill fear
The war’s escalation
Will lead to stagflation
With outcomes in stocks quite severe

As I type some 14 hours from the latest Trumpian deadline for Iran to reopen the Strait of Hormuz or have their electricity and transportation infrastructure destroyed, investors appear to be quite sanguine about the entire process.  It seems very clear to me that market participants are quite certain the President will back away from this threat and extend the deadline or announce some other outcome.  That is the only conclusion I can draw from the fact that equity markets around the world are consistently higher this morning.  Investors clearly perceive this as an empty threat, which tells me that the pain trade is a sharp decline in equity markets if the US and Israel do destroy Iranian infrastructure.  I guess we shall all learn more sometime this evening in NY.

But that is the backdrop for markets this morning.  As I freely admit I do not know what the outcome will be, there is little point in hashing out the issue here.  However, I cannot help but laugh at this clip as a description of the President’s negotiating style.

Moving on, in brighter news, the 4 astronauts have circled the far side of the moon, setting the record for the furthest any humans have been from Earth, and are now starting their return trip after having sent some remarkable imagery of the moon.  

In truth, though, there’s little else to discuss so let’s look at markets.  Yesterday’s session in the US continued the rebound in share prices from the recent nadir on March 30th.  Since then, it has been four consecutive up days although futures this morning are little changed to very slightly lower.  But the US move has been mirrored around the world with essentially all of Asia and Europe back at it today.  

In Asia, while both Japan and China were essentially flat, Korea (+0.8%), India (+0.7%), Taiwan (+2.0%, catching up because it had been closed longer) and Australia (+1.7%) all had strong sessions.  Hong Kong (-0.7%) did slip, as did several of the other smaller regional exchanges, but the mood was pretty bright.  

In Europe, I’ll let the following Bloomberg screenshot do the talking, but you can clearly see that fear is not on the menu right now.  

In the bond market, Treasury yields are higher by 1bp this morning after a flat session yesterday while European sovereign yields have all risen about 3bps as they catch up from their long weekend with no trading.  JGB yields are unchanged this morning as their long, slow climb takes a day of rest.

In the commodity space, I first must correct an error I have made regarding the relative prices of WTI and Brent.  My go to source for oil pricing has been tradingeconomics.com.  Their methodology shows the front month of the futures contract, but they don’t list the month in question.  Due to the nature of the two different markets, currently, WTI’s front month is May while Brent’s front month is June.  Given the steep backwardation in the oil markets, that difference is enough to explain the anomaly that I had seen.  Below I have screen shots from barchart.com of the front contracts of both WTI and Brent and you can see the difference yourself.

If you look at the corresponding month in both contracts, you can see that Brent is consistently higher than WTI. (h/t Victor Adair, thank you Victor).

With that in mind, you can see that oil prices are a touch higher this morning, although they remain below the spike high seen at the beginning of the war.  The chart below of WTI is certainly ominous with respect to the strength of the trend higher, and I must believe that if the US does take out Iranian infrastructure, we will breech the spike high on the chart and go higher still.

Source: tradingeconomics.com

Turning to the metals markets, this is perhaps the least surprising headline one can imagine from Bloomberg:

China Ramps Up Gold Buying as Middle East War Dents Prices

With gold prices having fallen nearly 18% from their peak back in late January, and China continuing to diversify reserves out of USD directly, they saw this as a great buying opportunity.  This morning, the barbarous relic is little changed, although continues to trade lightly well above its spike lows.  Silver (-0.9%) is also doing little and it appears that commodity traders are a bit more uncertain how to move forward with the Trump ultimatum hanging over the Iranian’s heads.

Finally, as we might expect given the willingness for investors and traders to add to equity positions, the dollar is slipping a bit this morning, although as I type at 7:00, it has recouped most of its overnight declines.  Thus, the DXY is trading right at 100.00, the euro and pound have edged higher by just 0.1% and USDJPY continues to hover just below the 160 level, having touched it once on March 30, but not since.  The biggest mover today has been SEK (-0.8
%) which has fallen on the back of softer than expected inflation data which has encouraged traders to believe the Riksbank will be able to cut rates ahead of other central banks in the event economic activity slows sharply.  There is also a lot of discussion regarding INR (-0.3%) as the RBI has instituted policies restricting the size of short rupee positions local banks are allowed to maintain and forcing a lot of rupee buying to close those positions.  Thus, the rupee remains caught between the forced position closures and concerns about oil prices depending on how things evolve in Iran.

Source: tradingeconomics.com

The one other currency move of note has been KRW (+0.6%) which continues to rebound from its worst levels seen on March 30th, as it is trading far more in line with the equity markets than the oil markets.  If things escalate in Iran, I suspect the won is going to suffer greatly.

On the data front, this morning brings only Durable Goods orders (exp -0.5%, +0.5% -ex Transport) and speeches from two Fed members, Governor Jefferson and Chicago Fed president Goolsbee.  Services PMI data was released throughout Europe this morning and it was broadly weaker than forecast (Italy, Germany, UK) although both France and Spain managed slightly better outcomes.  

While I remain cautious and hedged personally, apparently my views are out of vogue.  However, it strikes me that today will see little in the way of large movement ahead of the deadline, unless, of course, the president changes something before then.  

Good luck

Adf

Beware

Posted on by 
While news from Iran shows the war
Continues apace, like before
On Wall Street it seems
It’s over, with dreams
Of stock market rallies galore

Now, I realize stocks look ahead
And discount the future instead
But wars tend to last
They don’t end so fast
Beware in which markets you tread

As March and Q1 ended, it appears that there have been some changes in opinions in the investment community.  At least that is what I glean from the following Bloomberg screenshot of major global equity markets including yesterday’s US session and the overnight activity.

As far as I can tell, missiles are still flying in the Middle East, the US and Israel continue to attack specific targets with B-52’s dropping significant amounts of precision guided bombs, the Strait of Hormuz continues to have extremely restricted movement and the UAE, according to the WSJ, is now ready to join the war directly.  None of that seems like de-escalation of fighting, but then I am not a military strategist, so perhaps I don’t understand the concept of de-escalation well.

One take I saw this morning was that equity markets are pricing in the increased likelihood that the US will be leaving the conflict.  On the surface, I liked that idea, and that would certainly explain some of the US rally yesterday, but that doesn’t explain why Asia soared and Europe has rallied as well, given they would have to deal with the rest of the process.  This evening at 9:00 President Trump will be addressing the nation, so I presume we will have a better understanding of things after that.  

One other thing to remember is that the president uses his Truth Social posts to add to the fog of war and create strategic uncertainty for all parties involved.  I read this morning that the administration has been speaking (not directly) with some Iranians and creating a plan for the future, but it is not clear if those people have sufficient power to unite the country there yet.  All in all, while anything is possible, it strikes this poet that things in Iran have not ended, nor will they until the Strait of Hormuz is back to full operational capacity regardless of the President expressing the view that the US (and Israel) have done the hard part and Europe and Asia can deal with the Strait themselves.

But that is where we stand this morning, with risk back in vogue across the board as oil (-1.5% and back below $100/bbl) slipping while gold (+1.5%) continues its rebound.  Bonds (-3bps this morning and down by 20bps from their peak on Friday) continue to rally and have taken European sovereigns along for the ride with most of Europe seeing yields slide between -7bps and -9bps although German bunds, which have held up the best, are only lower by -4bps.  Happy Days are here again!

With all that good news, let’s consider what else is going on, away from Iran, that may impact markets.  At this point, we know the Fed is on hold this month, and likely through the autumn, at least, given the short-term inflation impacts of the oil situation.  

Source: cmegroup.com

As an aside, there have been a number of analysts who are calling for a significant rise in food inflation but be careful on that front.  As @inflation_guy, Mike Ashton points out, [emphasis added]

“…secondary knock-on effects that will be felt eventually in CPI. One that has gotten a lot of press recently is that less oil means less fertilizer and less fertilizer means less crop production and less crop production means higher prices for food. I actually think that’s probably overblown in terms of what the consumer will see, because most of the cost of consumer food items is in the packaging and delivery and not the raw goods, and so as raw food commodity prices go up it will likely be partially offset by transportation prices declining.” 

In fact, I expect that most central banks are terrified of the current situation as they understand, intellectually, that the oil price shock will be temporary, but will feel significant pressure when inflation starts to rise to “do something about it”.  Australia already hiked rates, but that was assumed prior to the onset of the war.  The calculation they are all trying to make is will the negative impacts on growth outweigh the rising pressure on inflation and what will the timeline be like.  In the end, my take is very few will hike in response to this event, especially if the military activity ends before the end of April.  And that is why they get paid the big bucks, to get those decisions right.  Alas, their collective track record is not great.

And beyond that, I don’t see much news directly driving the narrative.  It is still the war, and all the individual takes there, and a much lesser role to the Fed and other central banks.  Economic data is decidedly not part of the current discussion in any meaningful way and given the impact the war is going to have on data for a while going forward, it will be very difficult to suss out underlying trends from headline numbers.  

I’ve already discussed most market segments, leaving just currencies untouched at this point.  Given the reversal in views, we cannot be surprised that the dollar, which has been a major beneficiary of the war, has reversed its recent price action as well.  In fact, using the euro as our proxy, we can see in the below chart that the reversal started at 7:00am yesterday morning and the single currency has rebounded by 1.25% since then.

Source: tradingeconomics.com

And while the euro (+0.5% today) has rallied this morning, it mostly lags other currencies with the pound (+0.7%), AUD (+0.8%), CHF (+1.0%) and SEK (+1.0%) all having very strong sessions.  As well, the yen (+0.2%) has backed away from the 160 level and even CAD (+0.2%) and NOK (+0.5%) are stronger despite the decline in oil prices.  It should be no surprise that the EMG bloc is also showing strength with CLP (+1.1%) leading the way followed by HUF (+1.0%) and ZAR (+0.9%). One disappointment is KRW (+0.2%) which has been one of the worst performers for the past month (-4.0%) and is barely rebounding.  Chile is intricately bound to the price of copper, which has rallied slightly (+1.0%) in the past week, but continues to lag the precious metals.  However, there is a story about the major copper company there, Codelco, which is supporting the currency this morning.  Net, the dollar is giving back some of its recent gains today and will likely continue to do so if risk appetite remains robust.

While data hasn’t had much impact, this morning we see ADP Employment (exp 40K) as well as Retail Sales (+0.5%, +0.3% ex autos) and then ISM Manufacturing (52.5) and Prices Paid (73.0).  Yesterday’s data was in line with expectations and did nothing to alter any perceptions about the economy or path of interest rates.

And that’s all we have.  US futures are rising this morning (+1.0% across the board at 8:00) and for now, risk is the way.  I guess we will have to hear what the President says this evening to consider changing views.

Good luck

Adf

No Death Knell

Posted on by 
While Friday, the world was on edge
And everyone wanted to hedge
This morning it seems
That Trump and his schemes
Have backed us away from the ledge

So, while Asian stocks mostly fell
In Europe, there’s been no death knell
And futures at home
Though not quite with foam
Are bubbling up, doing well

The bond market, though, is confused
With some analysts quite enthused
Recession is near
So, bond buys they cheer
Though holders, so far, have been bruised

The counter to this contestation
Is, soon we will feel more inflation
So, bonds are a sale
As Jay can’t curtail
That outcome, so short long-duration

Let me start by saying, we are still in a situation where nobody knows exactly what is happening in Iran and the Persian Gulf, although we continue to hear lots of propaganda from both sides.  It does appear that Iran’s military has absorbed a significant beating, but they continue to fire missiles in retaliation, albeit at a reduced pace.  It seems there are the beginnings of some discussions regarding ending the conflict, ostensibly with Pakistan taking the lead in speaking to both sides, but there have been no direct talks yet.  Time is still a critical issue as every day the Strait of Hormuz is closed, that adds further pressure to the global economy, especially in Asia and Europe which are the two areas most reliant on energy flowing through the Strait.

As I was considering the implications of oil prices at $100/bbl in the US, I realized that every fracking well in the US is going to be pumping at maximum capacity, and given how quickly DUC (drilled but uncompleted) wells can be brought on line, I expect that we will see US oil production rise from its recent 13.7 million bbls/day.  But alongside that, many, if not most, of these wells will be producing associated gas, i.e. natural gas that comes up with the oil, which is one reason, I believe, that Natural Gas prices in the US (-2.5% today) are essentially unchanged since the war began a month ago (green line).  Meanwhile, as you can see with the blue line on the chart, European Natural Gas prices have exploded higher.  In fact, this morning, US prices are just below $3.00/MMBtu while European prices are about $18.65/MMBtu.  (European gas is quoted in EUR/MWh, which is why the price looks so different.). Europe needs this war to end a lot sooner than the US from a pure economic perspective.

Source: tradingeconomics.com

Away from that stray thought, if we look at equity markets, you can see there has been a real turn.  Friday felt dreadful with every index falling and closing on its lows.  And Asia followed through with that thesis as virtually all bourses there were under real pressure.  Japan (-2.8%), Korea (-3.0%), India (-2.2%) and Taiwan (-1.8%) all fell sharply following the US lower.  Both China (-0.25%) and HK (-0.8%) also slipped, but not quite as aggressively.  The issue here is all these nations rely on energy transiting the Strait and are suffering accordingly.  My take is that not only will these equity markets have issues, but so, too, will their currencies until things in the Gulf are settled.

As to European equities, the story there is less dramatic this morning with a mixed picture as the UK (+0.5%) is higher along with Spain (+0.3%) and Italy (+0.3%), although Germany (-0.2%) and France (-0.1%) are slipping.  The big winner here, not surprisingly, is Norway (+2.0%).  We also saw the first March inflation data from anywhere in the world this morning from Germany, and not surprisingly, it was higher.  While the nationwide number has not yet been released, the individual Landers all show something between 2.5% and 2.9%, generally higher by 0.7% or more.  The market is looking for a 2.7% national reading, up from 1.9% February print.  US futures, meanwhile, are higher by 0.6% across the board at this hour (7:15).

In the bond market, though, inflation fears, which were all the rage on Friday, have abated somewhat with Treasuries (-4bps) seeing demand and European sovereign yields all softer by between -1bps and -3bps.  Even JGB yields (-2bps) have slipped, although the latter appears to be on the back of stories the BOJ is getting ready to hike rates in April and the question is how much, not if.  So, despite oil prices continuing to rise, and adding inflation pressure around the world, bond investors are relatively sanguine this morning.

In the FX markets, the story has been more mixed this morning with the dollar broadly firmer, but not universally so.  In the G10, the yen (+0.5%) is the outlier as having traded above the 160.00 level Friday, we heard more from Japanese authorities, specifically, the current Mr Yen, Mimura-san, that they did not welcome speculative trading and would address it if they believed that was driving the yen weaker than it should be.  Given the dollar is firmer vs. all its other G10 counterparts over the past month, it is surprising that is the case they are trying to make, but I guess they need to say something.  Otherwise, this bloc is mostly softer by about -0.2% or so across the board.  In the EMG bloc, INR had a little hiccup last night as per the chart below.

Source: tradingeconomics.com

It seems that the RBI reduced the size of positions that Indian banks are allowed to hold regarding short rupees every day, which forced a serious appreciation of the currency.  However, as you can see, it was relatively short lived and compared to Friday’s close, the rupee is weaker by -0.2% despite the new regulations.  Otherwise, ZAR (-0.3%) and KRW (-0.6%) are the weakest in the bloc with one outlier, MXN (+0.3%) rallying back from its close on Friday as it closed then at its lowest level since December.  In fact, this morning’s price action seems more like a trading reaction than a fundamental shift.

Finishing with commodities, oil (+1.1%) is back above $100/bbl in the US (above $115/bbl in Brent) although it is not really running away.  Traders are clearly uncertain what to believe with respect to the potential opening of the Strait.  We do get a lot of conflicting news from both sides, I must admit, and I find that reading either all the headlines or none of the headlines leaves you in exactly the same place, no idea what is reality.  The biggest change in the commodity space is in gold (+1.7%) and silver (+2.6%) as the past two days they have both risen alongside oil, rather than their behavior during the first month of the conflict.  It is easy to believe that the major downdraft in the precious metals was a result of liquidation during stress rather than gold’s loss of its haven status and I tend toward that view.  While I am no market technician, the little I do know is that the blow-off low last Monday at $4100/oz may well have defined the bottom of this move.

Source: tradingeconomics.com

Again, 5000 years of history tell me that people will still want to hold the stuff in times of crisis as a way to retain the value of their assets.

Turning to the data this week, while we start slow today (although Chairman Powell speaks at 10:30), we finish the week, on Good Friday, with NFP.

TuesdayCase Shiller Home Prices1.3%
 Chicago PMI55.8
 JOLTs Job Openings6.897M
 Consumer Confidence88
WednesdayADP Employment40K
 Retail Sales0.4%
 -ex autos0.2%
 ISM Manufacturing52.3
 ISM Prices Paid73.5
ThursdayTrade Balance-$59.2B
 Initial Claims212K
 Continuing Claims1825K
FridayNonfarm Payrolls55K
 Private Payrolls55K
 Manufacturing Payrolls0K
 Unemployment Rate4.4%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%

Source: tradingeconomics.com

So, plenty of information this week, but with a holiday weekend coming up next weekend as US equity markets will be closed Friday and European ones on Monday as well, it remains unclear just how important the data is these days.  We are still headline driven although as the Marines make their way to the Persian Gulf, it has the potential to be a relatively quiet week ahead of any increase in military activity, maybe next weekend.  We shall see.  For now, the dollar continues to hold its own, and risk appetite is not collapsing in any meaningful way, yet.  We have to see how long that can last if the war continues to drag on.

Good luck

Adf

Wound-Licking

Posted on by 
The clock to the deadline is ticking
And right now, most traders are kicking
All risk to the curb
But they won’t disturb
The hodlers who spend time wound-licking

The market focus right now is on the deadline that President Trump has imposed for Iran to reopen the Strait of Hormuz, which is at 7:45pm EDT this evening.  I have read several takes on the likely impact of a destruction of Iran’s power grid, all explaining the consequences would be calamitous for the nation and its people.  Within a week or two, the humanitarian crisis would be unprecedented.  And that is only on the Iranian side.  Almost certainly the Iranians would retaliate and seek to destroy as much Gulf and Israeli infrastructure as possible to inflict the same pain there.  Ultimately, I cannot believe anybody really wants to see this happen.  Alas, it is out of all of our hands.

We remain extremely fortunate that we live thousands of miles from the action and although there will be economic consequences, those are easier to adapt to then the destruction of your home and nation.  Beyond that, I have nothing to offer regarding the situation there and since I discussed the end of last week in my note last evening, let’s see how things are going this morning (spoiler alert, it ain’t pretty!)

As has been the case for the past several weeks, screens everywhere are red this morning and it is easier to show a screenshot than list them all here.

Source: tradingeconomics.com

This picture was taken of futures markets at 6:55 this morning but you can see that Asian markets and European markets are all meaningfully lower.  As has been the case since the beginning of the conflict, the rise in oil prices and its knock-on effects have been the driver.  It appears that there are two broad groups of investors right now, the leveraged ones who are being forced out of positions rapidly as every decline brings further margin calls, and the cash investors who are trying to stick it out, at least in the areas they feel will rebound.  But the pain is real, at least on a mark-to-market basis, if one is marking to market every day.

History has shown that declines of this nature tend to offer tremendous buying opportunities for those who have the means to do so.  Consider the chart below showing the S&P 500 from the year 2000 on.  

Source: finance.yahoo.com

It is easy to see the sharp decline from the GFC, as well as the Covid dip and then 2022, which was a particularly difficult year for both stocks and bonds.  But the direction of travel remains up and to the right and this dip will almost certainly be followed by significant gains going forward.  Of course, the timing of those gains remains uncertain, but absent a complete collapse of the economy, this seems the most likely outcome.  That doesn’t, however, mean it will be a painless trip.

Turning to bonds, yields everywhere are higher as inflation fears remain the feature topic throughout the world.  Here, too, a Bloomberg screenshot does all the work for me.  

However, I think it is worth stepping back and looking at how bonds have behaved over the past five years.  the chart below shows the percentage change in 10-year bond yields in the US and Japan since early 2021.  While I am using Treasuries, despite the rise in yields everywhere in Europe, the charts there would be similar.

Source: tradingeconomics.com

My point is that while there is great angst daily regarding each basis point of movement in yields, US yields have been pretty stable for a long time.  Of course, we all know the story of JGB yields, which had been stable at extremely low levels for a decade, and have now moved much higher.  The thing is JGB yields moved much higher long before the Iran events, so while at the margin, that is having an impact, there was a strong trend already.

Once again, I believe perspective on markets is important as unless you are a professional trader, the day-to-day can drive you crazy and there is little you can do to change it.  Long-term investors need to understand that reality.

Turning to commodities, I have to wait as things have changed dramatically based on the following post by President Trump.

You will not be surprised that the worst-case declines in both stocks and bonds have reversed as per the below screen shot taken at 7:34

Source: tradingeconomics.com

And bonds from Bloomberg:

Back to commodities, below is oil’s response to the Truth Social post, falling sharply from relatively unchanged prior to the comments.

Source: tradingeconomics.com

And while gold is still lower on the day, you can see how much it, too, has adjusted based on the post.

Source: tradingeconomics.com

You won’t be surprised that the dollar, which had been much stronger earlier this morning has reversed course and is slightly lower now.

It is extremely difficult to keep up sometimes and I apologize for the numerous charts, but they truly are worth thousands of words in this situation.

I would talk about data, but I cannot believe that will really matter right now.  The growing consensus was that central banks around the world were preparing to tighten policy as oil driven inflation was going to need to be addressed, even if history showed this to be a categorical error.   And the first inkling from the Fed funds futures markets is that the probability of a rate hike is being reduced somewhat compared to the end of last week.

Frankly, nobody knows how things are going to evolve from here.  Many will say that Trump TACO’d but it is not hard to believe that whatever Iranian leadership remains has looked around and decided they couldn’t take it anymore either.  

As I have maintained for a while, play it close to the vest for now, but I expect that there are many value opportunities around, just in tiny bites.

Said Trump, we have had some good talks
And so, we will set back the clocks
On when we attack
Iran’s power stack
As doves take the lead, not the hawks.

Good luck
Adf

Doesn’t Make Sense

Posted on by 
There’s something that doesn’t make sense
As stock market rallies commence
While word from the Strait
Just doesn’t look great
And politics worldwide is tense

Can every investor ignore
The risk of a much longer war?
Or will, sometime soon
They sing a new tune
And sell stocks whose risks they abhor?

One must be impressed with the way markets, in general, have handled the disruption caused by the ongoing conflict in Iran and the Persian Gulf.  The insouciance with which it appears most investors are treating the situation is remarkable.  There seem to be endless ways in which this can result in much greater damage to the global economy, mostly related to the impact on energy and food production going forward.  You’ve all heard the numbers, I’m sure, about the 20% of daily oil and LNG that traversed the Strait of Hormuz prior to the war.  Less well known was the amount of sulfur (~44% according to Grok) and nitrogen fertilizer (~30%-35% according to Grok) that regularly transited the Strait and has now been stopped.

The latter two matter greatly for global food production, but also for mining as sulfuric acid is a key part of almost all metals mining operations.  Too, one-third of global helium supplies went through the Strait, and that is critical in semiconductor manufacturing.

The point is, if the conflict continues for too much longer, it is quite possible, if not probable, that parts of the global economy could be impaired for a much longer term with real negative consequences for economic activity.  And while this may be a tail risk, the fact that the potential impact could be so large leads me to believe the market is underpricing potential damage from the war, at least economically.  Last night, Alyosha posted a very interesting piece regarding potential consequences for the Gulf region as a whole as well as oil markets.  His conclusion was that if things don’t end soon, there may be irreversible damage to the Gulf oil industry as well as the Gulf nations themselves as their cashflows are being completely starved for now.

I know that doomsaying is a losing proposition with equity markets over the long run, as the century long trend shows human innovation continues to advance economic prospects and outcomes.  But in the shorter term, interruptions of that trend are common and can be quite painful for those investing when they occur.  Recall how you felt when Covid shutdowns resulted in a 30% decline in two months in early 2020, as per the below chart.  How about the similar drawdown, along with the selloff in bonds, during 2022’s inflation led declines?

Source: finance.yahoo.com

All I’m saying is that markets can ignore things for a long time before suddenly repricing an outcome and I have a feeling that is what we are witnessing right now.  So, as we head into today’s FOMC meeting, which seems unlikely to have any impact whatsoever, I would play things close to the vest and am doing just that myself.

Ok, let’s tour the euphoria in markets, which remains puzzling to me.  You have to search far and wide to find an equity index that fell in the past twenty-four hours and here is a Bloomberg snapshot of major indices at 7:10 this morning,

Literally, every market in Asia rallied, some excessively so, Korea (+5.0%) and I could only find two markets in Europe that are down this morning, Denmark and South Africa, both of which have slipped about -0.3%.  Otherwise, it’s all green as prospects are, apparently, great. US futures are also higher as I type, up about +0.6% or so.  Certainly, there is little concern about potential long-term consequences of this war.

In the bond market, yields everywhere are slipping again with Treasuries (-2bps) falling back into that longer term range, while European sovereign yields are lower between -2bps and -3bps and JGB yields fell -5bps.  As per the below chart from tradingeconomics.com, we spent 5 days above the top of the trading range.  

Perhaps the market is starting to price in a recession and much weaker growth, although with oil prices firmly above $95/bbl, inflation is coming, at least in the near future.  Of course, the Fed response is going to be critical here, and while they will almost certainly make no policy changes today, all eyes will be on their forecasts via the dot plot and SEP.  We shall find out at 2:00pm.

Speaking of oil (-1.7%), perhaps its new home is $95/bbl, not $100/bbl like I mentioned yesterday, but for now, there doesn’t seem to be urgency in either direction.  The futures market remains in steep backwardation although in the US, there are ample supplies.  So, while gasoline prices at the pump are up substantially, there is no rationing here in the US, nor I suspect, will there be given we are pretty self-sufficient on that front.  But demand destruction can be real, as even though the short-term elasticity of demand for oil is limited, over time, substitutes will be found.  In fact, this is the biggest risk for the Gulf nations, the idea that substitutes can be found and their key resource loses value.  I don’t believe that is going to happen on any visible timeline, but stranger things have happened.  

In the metals markets, gold (-0.9%) is slipping this morning, but remains right near that $5000/oz level and silver is unchanged, just below $80/oz.  The price action in both precious metals and oil is remarkably similar, if offset by one month as metals spiked and dropped first, then found a new home in the middle of those extremes, and oil has done the same thing.  You can see the similarities in the two following charts:

Source: tradingeconomics.com

Source: tradingeconomics.com

Finally, whatever people are doing in financial markets, FX is not part of today’s equation.  The dollar is virtually unchanged vs. the euro, pound, yen, CAD or CHF.  In the EMG bloc, +/- 0.2% pretty much defines the range of movement.  There’s really no story here right now.

On the data front, we see PPI (exp 0.3%, 2.9% Y/Y headline and 0.3%, 3.7% Y/Y core) as well as Factory Orders (0.1%). The Bank of Canada will leave rates on hold this morning, and of course the Fed will do the same this afternoon.  We also see the EIA oil inventory data with a small draw expected in gasoline and distillates but a crude oil build.  Yesterday’s API oil data showed a 6.6-million-barrel build.  As I said above, there is no shortage of the stuff in the US.

The uncertainties of war remain the market drivers, but as we frequently see, markets have relatively short attention spans.  Absent a significant increase negative news from the Gulf (e.g. more Iranian destruction of other gulf assets) I’m not sure what will change this sentiment.  And if something happens that reduces the conflict, the initial view will be extremely bullish I believe.

Good luck

Adf

Designed to Ease Nerves

Posted on by 
The IEA, last night, proposed
That since, Hormuz Strait, has been closed
Strategic reserves
Designed to ease nerves
Ought be released and not opposed

But so far, it’s not been approved
Despite the fact it is behooved
So, oil is higher
As every supplier
Embraces their, margins, improved

It is somewhat ironic that the biggest story of the evening, the IEA’s recommendation that nations around the world release between 300 million and 400 million barrels of strategic petroleum reserves has not helped mitigate the rise in oil prices.  After falling sharply yesterday, this morning, WTI (+4.5%) is rebounding sharply again.  A look at the chart below reminds me of silver from late January, and certainly, as the following chart demonstrates, daily volatility in that market has made a significant step higher from its pre runup levels.

Source: tradingeconomics.com

One need only look at the size of the daily candles to understand that movement each day has increased substantially since then.

Source: tradingeconomics.com

Of course, the countervailing news that is driving oil higher is that Iran has begun to mine the Strait of Hormuz, which will make resuming transit more difficult when hostilities cease.  In fact, that appears to be the newest front in the war, with the US attacking the small boats Iran is using to try to lay mines.  It seems this is similar to the drug boat attacks the US carried out in the Caribbean late last year prior to the exfiltration of Venezuelan President Maduro.

Again, the interesting thing to me about Iran’s actions is that by closing the Strait, they cut off 90% of their own revenue, and as they are actively fighting a war, that seems a major hindrance.  After all, Iran is nowhere near self-sufficient in anything a nation needs to continue its existence.

But the fog of war is just that, a situation that prevents clear understanding of all that is ongoing in the area.  As we sit, fortunately, thousands of miles away from the action, and everything we read is spun by whoever is writing it, it remains extremely difficult to get a good understanding of the situation in Iran, either tactically or strategically.  All we have is the market price action as an indicator.  

But before we look at markets, it is worth mentioning that CPI is released this morning with the following expectations: Headline (0.3% M/M, 2.4% Y/Y) and Core (0.2% M/M, 2.5% Y/Y).  The problem with this data is twofold.  First, it continues to be polluted by the impact of the government shutdown last autumn, but more importantly, it is for February, and the Iranian action has been entirely in March, so there will be no impact from the dramatic rise in oil prices in the data.  Ultimately, in this case, the data is almost certainly going to be ignored by the Fed, to the extent they even look at CPI rather than PCE.  Of course, the PCE data will have the same problems.

So, let’s turn to markets now.  Yesterday’s nondescript price action in the US was followed by a more positive tone in Asia, arguably on the IEA news.  While there were some laggards (India -1.7%, Indonesia -0.7%, HK -0.25%), the bulk of the region did just fine with Tokyo (+1.4%) and China (+0.6%) both nicely in positive territory, although that was nothing compared to Taiwan (+4.1%).  Otherwise, the rest of the region was positive somewhere between +0.5% and 1.0%.  Europe, however, is having a less positive morning with most major bourses lower on the day (Germany -0.7%, France -0.3%, UK -0.6%, Italy -0.3%) with only Spain (+0.3%) managing a gain in the session.  Energy continues to be the biggest concern here although as I type at 7:25 this morning, we are getting the first word of SPR releases from several nations including Germany and Japan.  Perhaps there won’t be a coordinated release after all.  Meanwhile, US futures at this hour are basically unchanged.

In the bond market, yields rose yesterday afternoon in the US and have edged another 1bp higher this morning while European sovereign yields all catch up to yesterday’s US move with gains of between 5bps and 8bps on the continent.  It is important to remember that there is a strong correlation between oil prices and 10-year yields, as would be expected based on the direct connection between oil prices and inflation.  The chart below shows the past week’s movement in the two markets.  The long-term correlation averages +0.61% with a range of +0.5% to +0.7% according to Grok.

Source: tradingeconomics.com

Again, referring back to today’s CPI, we can expect that CPI next month is going to be higher than this month, even if the war ends today.

In the metals markets, weakness is the order of the day although gold (-0.1%) is just barely so.  However, those metals with industrial uses are faring worse this morning led by platinum (-2.4%) but both silver (-1.75%) and copper (-1.7%) are under pressure.  A potential explanation here is that continued high oil prices will weaken economic activity and therefore demand for these metals.  The counter argument is that war is inflationary at all times, and metals tend to do well in those periods.

Finally, the dollar is slightly firmer across the board, but movement has been de minimis overall.  The noteworthy exception is AUD (+0.6%) which has been rallying recently on concerns (hopes?) that the RBA is getting set to raise rates at their meeting on Monday (Sunday night here).  In fact, the Aussie has traded to its highest level in almost four years, although I have a hard time understanding the attraction given the softened state of economic activity there (recent GDP reading of 0.8% Y/Y) and an energy policy only the Europeans could love as they continue to prohibit nuclear power and shut down coal despite having abundant resources in both.  But, in the FX world, relative interest rates mean a lot, and the perception of a hawkish central bank is apparently enough to overcome bad fiscal and energy policy.

And that’s really all for today.  We do see the EIA oil inventory data, with a small net draw expected and Fed Governor Bowman speaks, although it is at the ABA’s Summit on Regulation, so there will likely be no monetary policy discussion as this is the quiet period.

Where do we go from here?  Your guess is as good as mine.  We are already seeing oil prices slip a bit with the announcement of the SPR releases, although they remain higher on the day.  The war continues to drive all the narratives so if you are trading, keep abreast of that news.  If you are not trading, though, avoid it at all costs, it will make for much happier days!

Good luck

Adf

A Bad Dream

Posted on by 
While yesterday’s moves were extreme
It seems like t’was all a bad dream
This morning there’s calm
And nary a qualm
Though things may not be what they seem

For now, oil’s price has retreated
And stocks, a round trip, have completed
As Trump has implied
Though not verified
Iran soon will have been defeated

One must be impressed with the price action yesterday, if nothing else.  It is a very rare occasion when the price of anything in a public market behaves like we saw oil behave yesterday.  From Friday’s closing price in the futures market of $90.71/bbl, we saw a $28.70 (31.6%) rally and a subsequent $34.35 (37.9%) decline in the first 24 hours of trading.

Source: tradingeconomics.com

With oil back to Friday morning’s, still elevated, prices, it’s almost as if nothing happened yesterday.  The two stories that appear to have driven the remarkable reversal early Monday morning were first, the discussion about the G7 potentially coordinating a release of strategic reserves, with that meeting slated for this morning.  The other catalyst apparently was a comment from President Trump that, having made significant progress on their objectives, the war could be over “very soon”.  Obviously, that would be a great outcome for all involved, although it remains to be seen if that will be the case.  

The upshot is that while oil saw the most dramatic price movement across markets, prices everywhere synchronized such that those that had declined (stocks, bonds and metals) rebounded, while the dollar, which rose, retreated.  And that’s where we are this morning.

As I read across news sources, there remains no agreement on any aspect of the ongoing war with each side of the argument maintaining their views.  There is a contingent that insists Iran is about to start a major retaliatory campaign that will devastate Israel and Gulf neighbors and a side that insists Iran’s military infrastructure has been so compromised they have nothing left but drones to fire.  As I’m not on the ground (thankfully) nor in any situation room on any side, I am completely in the dark like essentially all of us.  In fact, arguably, market price action is one of the best indicators we have, because institutions don’t invest on hope, but on the best information they have.  This tells me that the worst-case scenario has been priced out for now, meaning a prolonged conflict, but frankly, neither I nor anyone else really knows.

So, let us embrace our ignorance on the issue and simply observe market behavior to see what we can glean.  Starting with equity markets, the below chart shows the S&P 500 futures from Sunday night’s opening through this morning.  While the opening is obvious on the left, the huge green bar on the right at 3:15pm is the other major feature.

Source: tradingeconomics.com

The interesting thing to me is that Trump’s comment about the war ending soon were not made until 5:45pm.  This tells me that there was a major buy order that went through the market shortly before the close, a feature that we have seen more frequently of late.  My point is there is still much more to the markets than just the Iran conflict.  In fact, the cynical view is that the algorithms continue to control things completely and that there is a major effort to prevent a significant decline in equity markets overall, at least US equity markets.  That’s a little conspiratorial, but one cannot ignore the evidence.

At any rate, after positive closes in the US yesterday on the order of +1.0%, we saw gains across the board in both Asia (Japan +2.9%, HK +2.2%, China +1.3%, Korea +5.4%, Taiwan +2.1%,  India +0.8%, Australia +1.1%) as only New Zealand lagged, essentially unchanged on the day, amid concerns of rising inflation and a tighter RBNZ going forward.  Europe, too, is enjoying the session with strong gains across the board reversing yesterday’s declines as Spain (+2.9%) leads the way, but there is strength everywhere (Germany +2.4%, France +1.9%, UK +1.6%).  At this hour (7:10), US futures are also pointing higher, but just by 0.2% or so across the board.

Bonds also reversed yesterday, albeit not quite as dramatically.  So, in a picture remarkably similar to both oil and stocks, the yield on the 10-year gapped higher Sunday night and fell sharply enough to close lower yesterday as per the below chart.

Source: tradingeconomics.com 

Much of that retracement came after Europe closed, though, and so while this morning, 10-year Treasury yields have edged back up by 2bps, European sovereign yields are lower across the board with Italian BTPs (-6bps) leading the continent although UK Gilts (-7bps) have rallied further.  Other nations have seen a mix between -4bps and -5bps although Germany (unchanged) seems to be suffering on a relative basis after its Trade Surplus grew to €21.2B on the back of a substantial decline in imports.  Throughout all this, JGB yields (-1bp) have been the least impacted and show no signs of running away at this point despite much doomsaying for the nation.

Metals markets have reversed their decline from yesterday and are higher across the board (Au +0.9%, Ag +1.6%, Cu +1.0%, Pt +1.9%).  This is all part of the same story with price action virtually identical, although again, not quite as dramatic, as that of oil.

Finally, the dollar, which had significant support yesterday is giving back some of those gains as well.  But let’s face it, if we take a look at the dollar over the past year vs. the euro, it has largely traded withing a 1.1500 / 1.1900 range and doesn’t appear to be making a break in either direction.  

Source: tradingeconomics.com

The very messy chart below shows four key EMG currencies to demonstrate that there is no trend there either.  While CNY and MXN have both strengthened during the year, INR and KRW have both fallen.  All I’m saying is that the idea that the dollar is either collapsing or exploding higher is simply not true.  Different currencies have different drivers, and while sometimes there is a key dollar issue that impacts virtually everything, many times, you need to watch the currency in question.

Source: tradingeconomics.com

Turning to the data, this morning we just saw NFIB Business Optimism print a bit soft at 98.8, exp 99.7, and we are awaiting Existing Home Sales (exp 3.89M).  Tomorrow’s CPI will garner more attention, I think.  Too, the Fed is in their quiet period as they meet next Wednesday, so even though they have been drowned out by events lately, the FOMC meeting will still get a lot of attention.

But that is where we stand.  As has been the case since President Trump’s election, White House bingo remains the biggest risk to markets since one never knows what may come out.  The backdrop of the war continues to be front of mind for all market participants, so new stories will have market impacts.  With that in mind, short term forecasts are even more of a waste of time than they usually are.  The questions I am pondering are about the long-term implications when the military activity ends.  Certainly, any result where Iran gives up its terrorist interests would not only be welcome on the global stage but would open the door for much more oil flow around the world and lower prices across the board.  Of course, a more entrenched Iranian regime would likely see even stricter sanctions there with the need for other sources to help satisfy global demand.  I guess we shall see.

Good luck

Adf

A Different Scapegoat

Posted on by 
The war in Iran rages on
But markets are starting to yawn
Initial concern
Led traders to spurn
Risk assets each dusk until dawn

But now, just a few days have passed
And fear mongers all seem downcast
Most stocks have rebounded
And that has confounded
The bears who, gross shorts, had amassed

In fact, today’s story of note
Is China’s decision to float
A lower growth rate
To be their new fate
As Xi seeks a different scapegoat

This morning is the sixth day of the military action in Iran and depending on the source, the US is either kicking ass or setting up for the greatest collapse of all time.  Perhaps the most interesting statistic of this war is the number of casualties reported thus far, which when summed across all the theaters, appears to be somewhere between 1000 and 1200.  It seems to me that given the ferocity of the attacks on both sides, that is a remarkably low number.  I certainly hope it stays low, for everyone’s sake.

In the meantime, market participants have absorbed the ongoing information and much of the initial FUD has been ameliorated.  I only say this because yesterday and overnight, equity markets are almost universally higher, and in some cases, by substantial amounts.  Arguably, this is a bigger disaster for the Iranians than almost anything else.  If financial markets continue to motor along despite the war, it removes a potential pressure point on President Trump to deescalate.  In fact, the only market that is continuing to demonstrate any price concerns is the oil market, where WTI (+2.6%) and Brent (+2.2%) are both back close to the highest levels seen in the first days.

Source: tradingeconomics.com

The Strait of Hormuz continues to be effectively closed, and that remains a problem for both Europe and Asia, especially China.  In fact, this morning I read that China has ceased exporting refined products amid concerns of how long this war will continue.  

Now, permanently higher oil prices would definitely have severe negative consequences for the global economy if that were to be the outcome.  But I don’t see that as the outcome.  Rather, the world is awash in oil as the US and Canada and Venezuela and Brazil and Argentina continue to pump like crazy.  As well, Saudi Arabia has two major pipelines that ship oil to the Red Sea rather than require transit of the Strait, so I am not hugely concerned about a much higher price.  All of the fears of $100/bbl or higher oil in the event of a closure of the Strait of Hormuz have not come to pass, at least not yet, and I see no reason for that to be the case going forward.

But away from oil, things are remarkably ordinary in markets, so much so that the real story of the day, I believe, is that China has targeted GDP growth of ‘just’ 4.5%. – 5.0% for this year.  The WSJ had a very nice graph of the trajectory of Chinese GDP since 1985 showing a 4.5% outcome would be the lowest (excluding Covid) since 1991.

For a good explanation of things regarding the Chinese economy, it is always worthwhile to turn to @michaelxpettis on X and he didn’t disappoint this morning.  In a nutshell, his point is that while the statement claims they will be focusing more on domestic consumption in their effort to rebalance the economy, that has been the stated aim for at least 5 years, and we know that hasn’t happened.  President Xi’s problem is that if that goal were to be achieved, it would result in GDP growth somewhere on the order of 2%, and that is not acceptable.  For my money, nothing has changed there.  Chinese companies will still over produce, prices in China will still be pressured lower and the Chinese trade surplus will remain well in excess of $1 trillion.

And that’s really what we have today.  I am not a war correspondent, so will not be highlighting anything there.  Rather, let’s turn to the markets and see what happened overnight.  under the guise of a picture is worth 1000 words, I give you major equity market performance in the past 24 hours below from Bloomberg.

Of course, this doesn’t consider Korea (+9.6%) which was the biggest winner overnight, and recouped most of the previous day’s losses as per the below.

Source: finance.yahoo.com

But virtually every market in Asia rallied overnight with Taiwan, Indonesia and Thailand all higher by 2% or more.  As to Europe, the euphoria is not as high, but still fear is not evident and at this hour (7:10), US futures are flat to -0.15%, so basically unchanged.

The bond market is having a tougher time around the world with Treasury yields rising yesterday by 4bps and up another 2bps this morning.  European sovereign yields are all higher by between 6bps and 8bps as inflation fears start to get built into investment theses.  Remember, Europe is probably the worst hit regarding the oil/LNG supply disruptions and prices there are likely to climb further than in the US or Western Hemisphere.  Too, JGBs (+4bps) are feeling a little strain, despite (because of?) Ueda-san and his cronies expressing concern over the war’s impact on inflation in Japan and maintaining that a rate hike in April is still a possibility.

Speaking of inflation, the Fed’s Beige Book was released yesterday as well as a NY Fed survey on prices in their region and both pointed to much more underlying inflation than the CPI data currently implies.  Wolf Richter had an excellent write-up here, and the numbers are eye opening.

In the metals markets, gold (+0.6%) really has a remarkable amount of support under all conditions.  Whether I look at a mechanically drawn trend line or the 50-day moving average, the barbarous relic remains in demand and shows no signs of breaking lower.  I continue to believe that the recent volatility and liquidations were the result of leveraged traders in other products needing to sell something to make margin calls, and gold was available for the job.

Source: tradingeconomics.com

As to the other metals, silver (+1.1%) and platinum (+0.9%) are both modestly firmer while copper (-1.3%) is bucking the trend, although I see no good reason for it to decline.  One interesting thing to note is that silver in the COMEX vaults continues to decline which many see as a potential point of supply issues going forward.  Nothing has changed that story.

Finally, the FX markets are once again hewing toward dollars with the DXY (+0.15%) back around 99.00.  The worst performer today is CLP (-1.1%) which is feeling the pressure from copper’s struggles, but ZAR (-0.9%) is also under pressure despite gold’s rebound.  Interestingly, NOK (-0.2%) cannot seem to gain any ground despite oil’s rally, although arguably, the dollar itself has become a major petrocurrency with a positive correlation to oil.  This space is not that interesting right now.

On the data front, I neglected to mention ADP Employment yesterday, which wound up at a better-than-expected 63K.  Too, oil inventories in the US rose again last week.  This morning, Initial (exp 215K) and Continuing (1850K) Claims are due as well as Nonfarm Productivity for Q4 (1.9%) and Unit Labor Costs (2.0%).  But does the data really matter right now?  Perhaps tomorrow’s NFP will have impact, but with the war and higher oil prices, it is very difficult for me to see a scenario where the Fed will impose itself here, not where the market will care that much, at least not the stock market. Bonds would react I suppose.  But it ain’t gonna happen, so don’t worry about it.

Absent a change in the war’s current trajectory, I think investors are going to focus on trying to estimate how long oil prices will remain elevated as that is really the big question for most markets.  I can only hope it doesn’t take that much longer for a conclusion.

Good luck

Adf

To Excess

Posted on by

The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

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