Tag Archives: #silver

Leverage Thumbscrews

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The President said that today
He’d let us know who’ll replace Jay
The favorite is Warsh
But that could be harsh
For markets, or so people say
 
But really, this morning, the news
Is silver and gold have the blues
It turns out their prices
Were causing a crisis
For players with leverage thumbscrews

The big news this morning, is that President Trump is ostensibly going to announce former Fed governor Kevin Warsh as his selection for the next Fed Chair.  His history has been as someone who has disagreed with many Fed decisions, and he skews to the hawkish side of the spectrum, which seems odd for Trump who everyone expected would nominate a dove. He is clearly quite capable of doing the job and brings a significant amount of intellectual firepower to the role.  It remains to be seen, if he is nominated, how the confirmation process will proceed, as well as what Jay Powell will do when his Chairmanship is up (his term runs until 2028).

The interesting connection for me is the number of stories that have linked this rumor to major market moves overnight, especially in the precious metals space.  So, let’s jump in and look at a few charts to offer some perspective on things.  

As we all live in the moment, it is often difficult to consider history in its fullness.  Look at the three charts of gold (from tradingecomomics.com) that follow, each over a different timespan, 1week, 1year and 5 years.

1 week:

1 year:

5 years:

What do you notice:  there is no question that gold (-4.7% or $250/oz) has fallen sharply overnight.  that is evident in the first two charts.  However, a look at the first chart shows you that despite a decline of that magnitude, the barbarous relic is still higher THIS WEEK!  While gold has been exploding higher, it only crossed above $5000/oz for the first time on Sunday night in Asian trading.  Now, I expect the bulk of the discussion will center around the 1-year chart which shows the dramatic decline as that is the newsworthy story, the ‘collapse’ in the price.  But if we zoom out further, to the 5-year perspective, which has weekly candles, the last down week was in December.  Market technicians will point to the shape of the most recent weekly candle, which is typically referred to as a hammer candle, and explain it signals a reversal in trend.  And maybe it does.  But the fact is volumes on the way up were much higher than those overnight, which does not portend panic selling.  Trees don’t grow to the sky, and a reversal was always expected.  Here we are.

The price action in silver overnight was almost identical, albeit more violent as has been the case with the rally as well.  Platinum too.  A couple of other things to consider about this:

  • Today is month end, a time when positions are typically adjusted and rebalanced, so given the tremendous rally seen this month in the metals, selling is what rebalances things.
  • China has not changed its policy regarding gold purchases nor its policy on license restrictions for the export of silver, so to the extent that those were driving forces in the rally, they still exist
  • There is no evidence the world is a safer place this morning than it was yesterday morning.  There’s no peace in Ukraine; the Ayatollah has not relinquished power; Cuba and Venezuela remain in the status quo, and Europe continues to try to figure out how to power themselves without relying on the two largest energy exporters in the world, the US and Russia.

It beggar’s belief that this is entirely a reaction to the rumored naming of Kevin Warsh as the next Fed chair.  As I type early this morning, the prices of precious metals are already bouncing nicely off their lows.  I do not know what drove this move specifically, but I do not believe that the big picture story has changed.

This segues nicely into another key narrative this week, the dollar’s massive break lower.  Earlier this week I had written about how the DXY was approaching a double bottom on the charts and many in the market were convinced that if we traded below that level, and more importantly, closed below the level, which was 96.22, that it opened the door for a much more significant leg lower.  I addressed this, pointed out that the dollar was still in the broad middle of its long-term trading range, but acknowledged that a move lower was quite realistic.  Well, as of yet, we have not closed below the key level, and this move is shaping up as a potential bounce back into the range.  As you can see in the chart below, the baseline is still holding on.

Source: tradingeconomics.com

Now, the dollar is stronger across the board this morning (EUR -0.2%, GBP -0.2%, JPY -0.5%, CHF -0.4%, ZAR -1.1%, CLP -0.6%) although these declines are abating in a similar fashion to the precious metals price action this morning.   Here, too, portfolio rebalancing would indicate that traders would be buying dollars given its decline this month.  Has anything really changed in the FX markets overnight?  All the recent policy decisions were exactly as expected.  Data overnight showed that European GDP continues to muddle along at just 1.3%, hardly a rationale to invest aggressively on the continent.  Is this dollar rebound just a response to the Warsh story and his presumed hawkishness?  Or is it the normal ebb and flow of markets.  I am not yet willing to concede the dollar is breaking lower, I need more proof for that, but I certainly cannot rule out that outcome, regardless of who the new Fed chair is.  

How about other markets?  Equities in the US yesterday were hampered by Microsoft’s earnings release Wednesday, with its decline dragging down the NASDAQ, although the DJIA managed to recoup all its early losses and finish in the green (barely).  But Asian bourses had a more difficult time.  While Japan (-0.1%) was little changed, both China (-1.0%) and HK (-2.1%) fell sharply, and I don’t believe those markets were responding to the Warsh rumor.  It appears that HK, especially, was the victim of month end profit taking and rebalancing as it has had quite a good run this month.  The other key laggard in the region was Taiwan (-1.45%) while the rest of the markets in the time zone were +/-0.5% or so, or less.  

European shares, though, are all firmer this morning led by Spain (+1.6%) after GDP data there was a tick better than expected at 2.6%.  But gains are universal (DAX +0.85%, CAC +0.7%, FTSE 100 +0.4%) as earnings results were enough to offset the generally lackluster data.  Perhaps the idea of another ECB rate cut is entering the collective consciousness, although according to the ECB’s own forecast tool, there is a 10% probability of a 25bp rate HIKE.  I’ll believe that when I see it.  As to US futures, they are softer this morning as I type (7:10), with declines on the order of -0.3% across the board, which is also a rebound from levels earlier this morning.

Bonds:  nobody seems to care.  Yields have edged higher by 1bp virtually across the board this morning and still remain within the recent trading ranges.  It is quite interesting how little financial markets are focusing on this key source of information.  

And before I leave, oil (-0.5%) has backed off its recent top, although remains higher by 6.5% this week as concerns over a possible US action in Iran continue to haunt traders.

On the data front, this morning brings PPI (exp 0.2%, 2.7% Y/Y) for headline and (0.2%, 2.9% Y/Y) for core as well as Chicago PMI (44.0).  Too, we get the first Fed speaker, Governor Bowman, but the only Fed news that is going to matter today is the mooted announcement about the next Chair.

What have we learned this week?  Volatility is alive and well in the commodity space, and, although not quite to the same extent, in the equity space.  Bonds are boring and the dollar continues to refuse to stick to the narrative that its days in the sun are over.  Regarding the dollar, remember that despite all the talk of the dollar’s collapse, the only thing we have heard from ECB members is that if the euro rises too much (i.e. the dollar falls sharply) that is a problem and they will need to respond.  It’s been an eventful month in the markets.  I suspect that this may be a map for at least the first half of the year.

Good luck and good weekend

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Commodities Blazing

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According to Jay and the Fed
The ‘conomy’s moving ahead
So, rates are on hold
With rallies in gold
And stocks and the dollar instead
 
But really, the thing that’s amazing
Is nobody cares about phrasing
Or Dot plots or pressers
‘Cause now all the stressors
Are Trump and commodities blazing

Once upon a time, the FOMC meeting was THE story for markets during the week leading up to the meeting and through the Chair’s press conference explaining the many virtues of what they did and why they did it.  Of course, this has not always been the case.  If we head back to the pre-Alan Greenspan days, the FOMC was peopled by 18 anonymous members and the Fed Chair, at that time Paul Volcker, and nobody ever spoke to the press and only grudgingly to Congress, they simply managed the money supply to the best of their ability to achieve their mandates.  The biggest data point of every week was the Thursday afternoon M2 release, and there was an entire subculture of ‘Fed watchers’, similar to ‘Kremlin watchers’ whose job was to read the tea leaves based on market behavior and data in trying to determine how the Fed would behave going forward.

Almost the only time Chairman Volcker spoke in public was at the semiannual Humphrey-Hawkins testimony to Congress, but he basically never answered any questions and clearly didn’t care what either Senators or Congressmen asked.

But then we got the “Maestro”, Alan Greenspan, who after Black Monday in October 1987, created the first Fed put.  At that time, the rest of the FOMC was still largely anonymous, but Greenspan craved the limelight, if only to try to show how much smarter he was than everybody else.  Famously, he explained in Congressional testimony in 1996, “If you understood what I said I must have misspoken.”  Greenspan was more available to the press than Volcker, but the rest of the committee remained in the background.

However, that simply set the table for the ensuing Fed chairs, Bernanke, Yellen and now Powell, all of whom give press conferences and clearly encouraged their minions to get out there and deliver the message.  As so many struggling leaders explain, it’s not the substance, it’s the messaging that’s the problem.  This is what we have all been dealing with since Bernanke sat down in 2006, mandated press conferences and pushed the narrative as a critical part of policy.

Then, along came President Trump’s second term, and times, they are a-changing.  While Trump rails on Powell to cut rates and lambastes him regularly, it turns out, the combination of new fiscal and economic policy is driving monetary policy into the background, at least from the perspective of market participants.  The result is that while FOMC members still get out there and give interviews regularly, they are never newsworthy.  In fact, my suspicion is that the reason Chairman Powell made his little video announcing the Fed received subpoenas was as an effort to get back on the front page, a place he and his committee members have clearly grown to enjoy, and from which they are increasingly absent.

Which brings us to the meeting yesterday where…nothing happened.  Policy rates remain unchanged, as universally expected, two voters wanted 25bp cuts (Miran and Waller), and they admitted that economic activity moved up from “moderate” to “solid”.  In the most stinging rebuke, the market virtually ignored the entire process.  In fact, the discussion about the next Fed chair is ebbing into the background.  My take is this is a better situation for all involved.  I only hope it stays this way.

So, what did happen?  Stocks were flat, bonds were flat, the dollar rebounded a bit, and commodities continue to rocket higher.  Let’s take a turn around markets overnight and start with commodities as that is where all the action is.

Copper (+6.1%) is the overnight star, soaring in Asia to record highs.  As with virtually all commodities right now, blame is laid at the feet of the weakening dollar (it didn’t move overnight) and with uncertainties about President Trump’s next actions and the potential risks attendant to those actions when they occur.  As we have seen with both gold (+1.9%, +27.1% in the past month) and silver (+1.3%, +54.6% in the past month), there is no doubt that fiat currencies are losing their status as a store of value, regardless of the interest rates they pay.  While copper’s movement has not been as extraordinary as that of either gold or silver, the trend, as you can see in the chart below, remains clearly higher.

Source: tradingeconomics.com

The underlying reality for all these metals is that the financialization of economies all around the world has resulted in far more market activity than was necessarily warranted by the physical markets.  And physical markets need ounces and pounds of stuff, which have very long lead times to get out of the ground.  As a trader, I look at these moves in precious metals and am very concerned they are overdone but as somebody with a basic understanding of physics, I see no reason to believe that the demand for these metals is going to slow down anytime soon.  The below chart shows just how extraordinary the silver move has been, and the table below it really tells the tale.

Source: tradingeconomics.com

As to oil (+2.6%), it is heading higher this morning on increasing fears that the President is going to initiate a military action to depose the Ayatollah in Iran.  Concerns are rising about Iran closing the Strait of Hormuz as well as its ability to respond via missile attacks.  Remember, though, a market that moves on a political issue will revert once that issue has either occurred, or clearly won’t occur, so do not mistake this move for the beginning of a new trend.  Consider what happened to oil after Russia invade Ukraine and after they invaded Crimea in 2014.

Source: finance.yahoo.com

Turning to the equity markets, yesterday’s US blahs were followed with a bit more price action in Asia as though Japan (-0.7%) slipped a bit, China (+0.8%), HK (+0.5%), Korea (+1.0%) and Taiwan (-0.8%) all so more significant movement, albeit not offering a larger theme given the relative gains and losses.  Elsewhere in the region, the smaller exchanges showed more red than green.  In Europe, Germany (-1.15%) is the dog, falling on idiosyncratic weakness in SAP and Deutsche Bank following weak earnings and forecasts, but the rest of the space is performing well (UK +0.4%, France +0.65%, Spain +0.4%) as earnings there have been relatively solid.  And, at this hour (7:10), US futures are pointing higher by about 0.25% or so as earnings numbers have been strong so far this week, highlighted by Meta last night.

In the bond market, activity is less frenetic with Treasury yields unchanged this morning, European sovereigns catching a bit of a bid as yields slip -2bps across the board and JGB yields (+2bps) rising after the latest poll showing PM Takaichi increasing her odds of getting an LDP majority in the Diet next week.  Something to watch closely going forward is the shape of the yield curve as there is growing concern that long-end rates may rise regardless of the Fed (yet another sign the Fed is losing its sway).  In fact, I suspect if that is the case, that we will see yet another bout of QE, although they will find an alternate name.

Finally, in the FX markets, despite all the pearl clutching about the end of the dollar, there is no movement of note in any currency today, with the entire screen showing gains or losses of 0.3% or less with one exception, CLP (+0.5%) following the remarkable jump in copper’s price.  The linked article is quite funny as they explain all the negatives of a weak dollar and then also explain that ECB members are concerned about a too strong euro.  I am frequently confused by whether a strong currency is good or bad for a nation, but I guess it depends on the narrative you are trying to push.

On the data front, weekly Initial (exp 205K) and Continuing (1860K) Claims come at 8:30 as does the Trade Balance (-$40.5B).  We also see final Nonfarm Productivity (4.9%) and Unit Labor Costs (-1.9%) which if those numbers are met indicate quite positive economic activity.  Then, at 10:00 we see Factory Orders from November (1.6%), but that is such old data I don’t think it matters.

Remember, it is Trump’s world (and Bessent) and we’re just living in it.  The White House is the source of all the news so let’s all be happy that the Fed is fading into the background.  With that in mind, based on President Trump’s goals, a weaker dollar is clearly his desire, at least in the short run, although I continue to see scope for longer term strength.

Good luck

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No One Can Kill

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Remarkably, metals are still
The story that no one can kill
The rally refuses
To stop, as gold cruises
And silver gives traders a thrill

The funny thing about financial markets is that it goes through periods where a single story dominates the narrative so completely that everything else gets viewed through the lens of that story.  We have seen this happen many times with recent situations like tariffs, the Fed, Covid, Brexit, Russia, etc.  Well, these days, precious metals are the story through which everything else is defined.

Consider, for those who are inherently bearish the dollar, the remarkable rally in precious metals serves as proof positive of the theory.  For those who have been antagonistic to the equity rally, and let’s face it, there has been a huge amount of discussion about the equity bubble and overvaluation of the Mag7 stocks, it is a huge relief that precious metals have now outperformed equities on numerous timescales, whether looking over the past week, month, quarter, year or decade.  You see, they will claim, metals have been the best investment.

Source: tradingeconomics.com

In the above chart, I have randomly selected Oct 2, 2022, as it appeared to be a local low over the past 5 years in both the S&P 500 and gold.  Since then, while the S&P has gained very impressive 190%, gold is up an even more remarkable 300%.

The bond story is more interesting as, usually, throughout history there has been an inverse relationship between yields and metals as higher yields foregone were an additional ‘cost’ of holding metals and traders generally sought to prevent that outcome.  Yet, if we go back to that same random date, the relationship has essentially broken down.  In fact, as you can see from the chart below, yields have edged modestly higher while gold has exploded.  And if we turn to JGB yields, which we all know are rising sharply, they are almost following gold’s trajectory directly.

Source: tradingeconomics.com

My point is, these days you cannot read an analysis about anything, whether the markets or the global economy, without the framework entailing the price of gold and silver.

As such, the major question facing all market participants is what is driving this extraordinary performance.  At this point my take is gold, and silver, have essentially become a Rorschach test for the viewers investing and political framework.  So, we are going to see a lot of different explanations as to the cause of this movement.

FWIW, my take, which is all that you get here, is there are a few things combining to juice this move.  First, the overriding theory of fiat currency debasement continues to gain adherents, not that economists are moving from the Keynesian to Austrian school of economics, but with M2 around the world growing at 12% while global GDP grows at 3%, the fundamental of too much money chasing too few goods has even broken through the Keynesians’ armor.  This leads to the natural next step that, those who are aware and are charged with maintaining the real value of their holdings, see gold as a better long-term investment given its history.  Enter central banks, who were, of course, further encouraged once the US froze Russian assets after their invasion of Ukraine.

This has bled into an increasing discussion of the overall geopolitical situation, notably tensions driven by the US interdiction in Venezuela, the uprising in Iran and the ongoing stress between the US and Europe and Canada over trade.  All these things have forced many to consider that traditional haven assets, notably Treasuries, may not be so haven-like after all.  Yet another reason to like gold.

And when any story gains traction like this has, we then get inundated with the ‘tourists’ who flood social media with their views, especially as to whether this is a blow-off top and the move is over, or whether there is much further to run.  I particularly like the below chart as an encapsulation of the market.

It is remarkable to me that the same folks who have demonstrated their expertise on Venezuelan oil production and the legality of Trump’s tariffs are now so clearly expert on the price of gold and silver, why they haven’t moved like this in the past and whether this is, or isn’t the top of the market.  Thank goodness we have them all!!

In the meantime, let’s turn to the market price action to see how things have behaved overnight.  starting, sensibly, with the precious metals, despite a late day pullback from its highs yesterday, gold (+1.3%) and silver (+6.7%) show no signs of stopping yet.  Personally, I remain in the camp that structural industrial shortages combined with China’s gating of exports of silver are likely to maintain a bid under the stuff for quite a while yet.  The fact that the US has listed it as a strategic metal is something not widely discussed nor remembered but is quite important as a demand signal.  Copper (-2.1%), however, is backing off its recent highs, although remains within spitting distance of its recent all-time highs.  As to oil (-0.15%) which used to be the belle of the commodity ball, it is stuck around $60/bbl with no obvious driver in the short-term in either direction.  Don’t forget NatGas (-4.8%), which is higher by 65% this week on the back of the polar conditions forecast to remain at least through the end of the week.

Turning to equities, yesterday’s US gains were followed by gains almost everywhere else in the world.  Tokyo (+0.85%), HK (+1.35%), Australia (+0.9%), Korea (+2.7%), India (+0.4%) after they signed their FTA with Europe, and Taiwan (+0.8%) were all in fine fettle last night.  Only China (0.0%) missed the boat, although there was no obvious reason for that outcome.  In Europe, too, we see almost all green on the screen with only Germany (0.0%) not taking part in the fun.  Otherwise, modest gains of 0.3% are the order of the day elsewhere in the UK and on the continent.  As to US futures, they are also pointing higher, about 0.5% at this hour (7:35).

In the bond market, JGB yields (+5bps) are the story, as the leadup to the election and its potential outcome dominate discussion.  My take is higher yields implies the market is anticipating PM Takaichi to win and improve her margin in the Diet, thus allowing more unfunded spending.  But in the US and Europe, yields have edged higher by 1bp to 2bps amid lackluster trading.

Finally, the dollar is under pressure yet again with the DXY (-0.3%) slipping, and as you can see in the below chart, now approaching a double bottom, a break of which seems likely to open up a more substantial decline.

Source: tradingeconomics.com

The dollar weakness is broad based this morning, with most currencies gaining by that 0.3% amount and only CHF (+0.75%) showing real leadership.  The yen (+0.4%) has been hanging around the post ‘rate check’ levels and I would contend today’s movement is about the dollar writ large rather than the yen in particular.  I did read that option traders are bidding up short-dated USD puts across numerous currencies as either fear is growing, or they think that DXY break is going to open a major move.  We shall see,

On the data front, yesterday say a huge Durable Goods print, another sign of economic strength.  This morning, we see Case Shiller Home Prices (exp 1.2%) and Consumer Confidence (90.9).  As well, the FOMC meeting starts with current expectations of no policy change at tomorrow’s meeting.

Gold and silver continue to dominate the conversation and I freely admit, I have been along for the ride and am getting nervous, at least in the short term.  As to the dollar, it does look awful right now, and if DXY breaks that line at 96.22 with any impetus, we could be in for another sharp leg lower.

Good luck

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Six or Seven?

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History has shown
It takes seven steps before
The BOJ acts
 
Inquiring minds ask
Was last night six or seven?
FinMin’s lips are sealed

 

I must admit, when I went to bad last night, I thought this morning’s lead discussion would be about gold as it crested $5000/oz given it was trading at $4967 and nothing seemed likely to stop it.  But something did, probably some profit taking into the weekend, given it has rallied more than 7% this week.  

Thus, since there are no new geopolitical stories of note, with everyone still trying to figure out what the past several days means, we look toward the East this morning and start with Japan.  The BOJ left policy rates on hold, as widely expected, but Ueda-san also raised the BOJ’s forecasts for inflation (see below from BOJ policy statement).  

The latter move has been interpreted as offering more flexibility for the BOJ to hike rates further with expectations for a hike next month rising above 60%.  But of more interest was the price action seen in the immediate wake of the Ueda comments as seen in the below chart.

Source: tradingeconomics.com

While some have asked if the BOJ intervened last night, I would categorically answer, No.  The fact that the dollar’s decline was so short lived indicates that something else was likely the catalyst.  On the 7-step road to intervention, step 6 is checking rates.  This occurs when the BOJ calls the FX trading desks at banks in Tokyo and asks for prices where they could buy yen, but don’t actually execute the transaction.  However, it is a powerful signal that the BOJ, on behalf of the MOF, is growing concerned.  The thing is, historically when this happens, it is widely circulated within the market that the BOJ is checking rates.

Thus far, we have not heard that at all from either the banks or the MOF.  Rather, FinMin Katayama once more explained, “We’re always watching with a sense of urgency.”  (As an aside, I assume this comment is a result of a translation of Japanese that doesn’t fit the English language well as I do not understand how one can watch something ‘urgently’).  But that urgency is classic step 5, not step 6, so it is not clear that we are closer to intervention at this point.  After all, the dollar’s high last night was not as high as we had seen just 9 days ago, when they first took step 5, and historically, a new high is needed before the next step is taken.

But, getting away from the minutiae of their intervention process, I believe last night’s activities tell us that there is growing concern about the yen’s level and its impact on rising inflation.  If Governor Ueda is priming markets for a rate hike sooner than previously anticipated, it tells me that inflation data coming up is going to be higher than previously forecast, and he wants to be prepared.  Interestingly, JGB markets did not see the same type of price behavior as you can see below.

Source: tradingeconomics.com

My conclusion is there was no rate checking, but FinMin Katayama’s comments were sufficient to convince some that it was coming soon to a screen near you.  Remember, last month, Japanese CPI slipped to 2.1%, its lowest level since March 2022.  Given the next release is still nearly a month away, there is no clear consensus as to its reading, but I suspect a rebound is in order.   If forecasts start indicating a substantial rise, I expect the yen to initially weaken, and perhaps that will be sufficient for the BOJ to take the 6th step.

But other than that, there seems very little new news to discuss.  WEF is over and while there are still numerous analyses about what happened, and how things will evolve from here, consensus conclusions are few and far between.  So, let’s see how the rest of the financial markets fared overnight.

Yesterday’s solid US equity performance was followed by a generally solid one in Asia as well.  Tokyo (+0.3%) was nonplussed by the intervention discussion, while HK (+0.45%), Korea (+0.8%) and Taiwan (+0.7%) all followed the US higher.  However, there were some laggards with China (-0.45%) and India (-0.9%) suffering on what appeared to be some profit taking on the previous day’s gains.  Overall, there were more gainers than laggards here.  In Europe, the picture is also mixed as the IBEX (-0.4%) and CAC (-0.3%) both suffer after weaker than expected Flash PMI data was released while Germany (+0.1%) and the UK (+0.2%) are benefitting from modestly better numbers there.  We continue to hear German Chancellor Merz explain all the things that Germany is going to do to make things better going forward, but the nation has so totally hamstrung itself with its energy policy of the past decade, it is not clear to me they have any opportunity to be successful in the short run.  As to US futures, at this hour (7:40), they are pointing slightly lower, -0.15% or so.

In the bond market, yields around the world are within 1 to 2 basis points of yesterday’s closing levels with France (-4bps) the outlier after the weak data and the news that PM LeCornu has survived the first of two no-confidence votes and appears set to get a budget passed, albeit with a 5% deficit forecast.  Otherwise, not much here with yesterday’s PCE data unable to move the needle given it was right on forecasts.

In the commodity market, oil (+1.9%) is rallying after President Trump hinted at further Iranian activities when he indicated an armada of US naval vessels is heading there.  That has traders nervous, but, of course, with President Trump, it is always difficult to determine his strategy, even if we know the end game is to remove the theocracy if possible.  NatGas (-1.6%) is giving back some of its recent gains but given the forecast for a massive arctic blast this weekend, with single digit temperatures and up to two feet of snow on the East coast, I suspect it will maintain its recent gains for a few more days.

In the metals markets, gold is unchanged on the session, although continues to sit tantalizingly close to $5000/oz.  Just as remarkable is that silver (+3.1%) is now trading above $99/oz and certainly seems like it is going to crest $100/oz in the very near future.  This has helped all metals with both copper (+2.5%) and platinum (+5.2%) to rally with the latter now trading at an all-time high as well.

Finally, the dollar is…doing nothing.  While the DXY has sipped -0.07%, we are seeing a mixed picture with the euro slightly softer while the pound (+0.2%) has rallied on the stronger PMI data.  In fact, scanning my screens, nothing has moved more than 0.3% (NOK, AUD on the plus side, PLN, INR on the minus side), but indicative that FX remains an afterthought for now (except for the yen).

On the data front, we see the Flash PMI data (exp 52.0 Mfg, 52.8 Services) and Michigan Sentiment (54.0) and that’s it.  Given all the excitement from the president’s WEF visit, I think most traders and investors will be happy if we have a quiet session to head into the weekend.  As well, if the weather forecasts prove correct, I expect that Monday will be very quiet as many traders will be unable to get into the office.

I don’t know about you, but it is certainly exhausting trying to keep up with the world these days.  Hedging remains an important strategy regardless of your asset class, but right now, both equity and metals trends do not appear to be breaking while the dollar and bonds remain trendless.

Good luck and good weekend

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Tired

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Though recently there’s been a ton
Of news, which has led to much fun
The markets today
Have little to say
Though recent trends ain’t been undone
 
Sometimes traders simply get tired
And find, in a rut, they’ve been mired
But you needn’t worry
‘Cause soon they will scurry
To come back with ideas inspired

 

As much activity and new news that has been part of the process over the past several weeks, today is one of those days when it appears we may be able to step back and catch our collective breath.  One thing I have observed throughout my career on trading desks is that no matter the underlying news, narrative or data, traders, even algorithms, can only remain in a frenzy for so long.  Consider it has been nearly two weeks of nonstop news since the US exfiltration of former Venezuelan president Maduro, yet some markets have exploded.  Silver is probably the poster child for this price action and as you can see below, since markets reopened after that news, gold’s little brother has risen nearly 25%, including today’s modest -2.3% retracement.

Source: tradingeconomics.com

But all the precious metals, and base metals as well, have had massive runs and the narrative regarding supply constraints and increased strategic purchases by China along with the US labeling many as critical national defense requirements, has been enough to bring retail into the mix.  But a 25% move in less than two weeks is really exhausting for the folks who are in those markets every day.  

At the same time, the amount of energy that has been consumed regarding Greenland, Iran and Minneapolis (which even though it is not a market related issue, is so widespread in its reporting takes up space in one’s brain) seems to have reached a peak yesterday, at least a local maximum.  I don’t, for a minute, believe that these trends have ended.  But a few sessions of modest net movement as positions are adjusted is a normal response to dramatic movement.  We should welcome the rest!

Reading through as much as I could find this morning, there really is no new story on which to hang your hat, so without further ado, I will review overnight market activity and perhaps ponder how things may evolve going forward.

A key sign of the slower activity was yesterday’s US equity markets where modest declines were the order of the day.  That was followed by a mixed session in Asia with some gainers (China +0.2%, Australia +0.5%, Korea +1.6%) and some laggards (Tokyo -0.4%, HK -0.3%, Taiwan -0.4%, India -0.3%).  Other than Korea’s strong session, which was inspired by central bank and government efforts to get investment to come back home to support the won, it appears traders are now biding their time ahead of the next major event.

European bourses are also mixed (Germany -0.1%, France -0.3%, Spain -0.1%, UK +0.4%) with the UK benefitting from a stronger than expected GDP report where growth jumped to 0.3% on the month, well above expectations of a 0.1% increase.  But a look at the chart below indicates one ought not get too excited about the economic growth in the UK with 14 negative months in the past 3 years.

Source: tradingeconomics.com

As to US futures, at this hour (7:10) they are pointing higher, currently almost exactly offsetting yesterday’s declines.

In the bond market…ZZZZZZ is the story of the day week month past four months as evidenced by the chart below.

Source: tradingeconomics.com

There are a number of conflicting narratives here with one story that the economy is going into a tailspin as a look beneath the headline data shows weakness everywhere (housing, employment, manufacturing) and the result is rates will fall along with inflation because of the coming recession.  Another narrative is that the ongoing debt expansion to fund unending budget deficits in the US is going to lead to the collapse of the dollar and much higher long-term rates as investors require far more payment to hold this much riskier than previously assumed asset.

Right now, neither of these seem to be living up to their promises.  Yesterday’s Retail Sales print was much stronger than expected at +0.6%, which hardly portends a recession.  Now, the CPI data has been polluted by the missing October numbers and is biased downward based on the BLS methodology, but you can be confident that it will recoup those losses in a few months’ time.  Meanwhile, there is no indication the Fed is going to do anything in two weeks, and my take is there is significant uncertainty over the future direction of the economy, with both positive and negative pieces.  Until we get indications that growth is either truly cratering along with rises in unemployment, or that things are exploding higher, remaining in the range seems the most likely outcome.  Remember, too, the OBBB is going to goose economic activity right away and running it hot remains the mantra.  

As to European sovereign yields, they have edged higher by 1bp this morning with one outlier, Portugal (+13bps) which seems to be reacting to the prospect of a runoff in the presidential election this Sunday, in the race between a populist outsider and a Socialist party insider, with the populist seen a slight favorite.  As to JGB yields, they have slipped back -2bps as the market becomes accustomed to the idea of the snap election.

In the commodity space, oil (-3.6%) has ceded most of its recent gains after President Trump indicated that there would be no bombing by the US, and the Mullahs ostensibly promised no executions of protestors.  Added to that was a massive build in inventories reported yesterday and supply concerns have abated.  In the metals markets, we are seeing that breather across the board (Au -0.25%, Ag -2.3%, Cu -0.8%, Pt -0.6%) which is very clearly profit taking after we saw record highs in all metals yesterday.  Nothing has changed the fundamentals here, so higher is still the way, IMO, but a few days of chop ought not be surprising.

Finally, the dollar appears to have found a comfortable home at 99.00 in the DXY.  There has been limited movement across the board with even JPY unchanged on the day as traders wait before trying to push the currency lower again.  KRW (-0.3%) is the worst performer today as it has been weakening steadily for a year.  Adding to the discussion above, the Korean government is trying to internationalize the won to some extent in their effort to get Korea taken out of the emerging market bucket for markets.  This relaxing of restrictions has seen capital outflow, but my take is this will be temporary as the country remains in very good fiscal and economic condition and will attract investment in my view.  Otherwise, there is nothing of note.

On the data front today, we get the weekly Initial (exp 215K) and Continuing (1890K) Claims as well as Empire State Manufacturing (1.0) and Philly Fed (-2.0) all at 8:30.  We hear from 3 more Fed speakers and it seems the hymnal now contains a single talking point, Fed independence is crucial and the subpoenas to Powell are lawfare and inappropriate.  Only Steven Miran is not singing that tune, but given he is Trump’s appointee, that is no surprise.

As commodities, and really metals, have driven the entire narrative lately, if they are going to have a quiet day, look for quiet all over.  Longer term, nothing has changed, but nothing goes up in a straight line, and that is what we are witnessing today.

Good luck

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The Temperature’s Rising

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

 

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

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

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

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

Source: tradingeconomics.com

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

Which takes us to the data this week.

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

Source: tradingeconomics.com

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

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

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

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

Good luck

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Spinning More Heads

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The speed of the change underway
In global relations today
Is spinning more heads
And tearing more threads
Than ever before, one might say
 
For markets, the question of note
Is how will investors all vote
Are bulls still in charge
Or bears now at large
Who seek, excess profits, to smote

 

It is becoming increasingly difficult to focus only on market activity given the extraordinary breadth of important, non-market activities that are ongoing.  When I think back to previous periods of significant market volatility and uncertainty, it was almost always driven by something endogenous to finance and the economy.  Going back to Black Monday in 1987, or the Thai baht crisis in 1997 or the Russia Default in 1998, the dot-com crash in 2000, and the GFC in the wake of the housing bubble (blown by the Fed) in 2008-09, all these periods of significant market volatility were inward looking.

But not today.  Trump 47 has become the most significant presidency since Ronald Reagan with respect to changing both domestic and international realities.  The key difference is that Mr Reagan worked within the then consensus view of international relations, merely pushing them to the limit while Mr Trump sees those views as constrictions needing to be removed.

In fairness, the world was a very different place in the 1980’s, notably for the fact that China was not a major player in any sphere of economic activity and was essentially ignored.  That is no longer the situation, and the entry of another power player has complicated things.  Arguably, this is why the president sees the old rules as obsolete, they were built for a different time with a different cast of characters.  Regardless, for those of us paying attention to markets, it is imperative to widen our view to include international relations as well as international finance.

With that as preamble, a look at today’s headlines reminds us that keeping up with the news is not for the faint of heart.  Starting with Venezuela and the impact on oil (+1.6%), news sources are littered with articles explaining why the US acted as we did and the potential implications for energy markets and energy producing countries.  From what I can tell, Venezuela recognizes that they are completely beholden to US demands at this point with respect to their oil industry (mining as well I presume although that gets less press).  And you can be sure that means they will be expected to pump more, with US corporate help, and direct their sales to the US, as opposed to Cuba, China and Iran.

Despite today’s rally, it remains my strong opinion that the price of oil has further to decline.  The trend continues to be sharply lower, as per the below chart, and the domestic political demand of reducing gasoline prices is going to keep this particular trend intact, I believe.

Source: tradingeconomics.com

News overnight indicated that two more shadow fleet tankers have been apprehended which is simply all part of the same plan, bring Venezuela back online legitimately with a focus to sell to the US.  The other global issue that is going to weigh on the price of oil are the ongoing protests in Iran which if ultimately successful at overthrowing the Ayatollah’s theocracy, will almost certainly bring Iran back into the brotherhood of nations, and see the end of sanctions on Iranian oil.  While that is bad news for China (and India) who buy a lot of cheap sanctioned oil, it will increase production and weigh on market prices.

The other sector of the commodity markets, metals, have been their own roller coaster of late, with far more volatility than any other product, cryptocurrencies included.  It cannot be a surprise that we are seeing prices retrace after the extraordinary price action over the past several months.  The silver (-4.4%) chart below is the very definition of a parabolic move and history has shown that moves of this nature tend to see, at the very least, short-term sharp reversals, even if the ultimate trend is going to continue.  

Source: tradingeconomics.com

The underlying features in these markets remain supply shortages, meaning that there is more industrial demand for utilization than there is new supply that comes to market each year.  In silver, the number apparently is ~100 million ounces, and deliveries of physical metal remain the norm these days.  That is a telling feature of the market as historically, cash settlement was sufficient.  Given the recent run, it is no surprise that gold (-0.8%) and platinum (-6.5%) are also declining sharply, but nothing has changed my view that these will trend higher this year.  One last thing about silver (h/t Alyosha), the Bloomberg commodity index (BCOM) is rebalancing next week and given the huge moves in precious metals, along with the lack of change in percentage allocation, there will be significant selling over the course of the next week, upwards of 70 million ounces of silver, which will go a long way to satisfying the shortage this year.  It will be interesting to see if demand remains intact. 

If we turn to the dollar, rumors of its death remain exaggerated.  Certainly, the price action thus far this year, and even over the past six months, points to gradual strength (see chart below from tradingeconomics.com).

Again, I have a hard time understanding the argument that the dollar will decline this year based on the fact that the US economy continues to outperform the rest of the G10, there are substantial inward investment promises that are beginning to be seen (shipbuilding, semiconductors, steel) and the US interest rate structure remains higher than the rest of the G10.  While I understand markets look forward, it is becoming increasingly difficult for me to see the benefits of European monetary policy as a driver for owning the euro, and given their industrial/energy policies are disastrous, I don’t see the rationale.  The same can be said for the pound, I believe.

In today’s session, while the movement is mostly marginal (EUR 0.0%, GBP -0.1%, SEK -0.3%, AUD -0.4%), the trend remains intact and the movement is broad with almost all G10 and EMG currencies slipping a bit further.  Money goes where it is best treated, and I am hard pressed to find other nations that treat money better.  Although…

The equity markets are a bit shakier this morning after two presidential tweets yesterday regarding institutional ownership of housing (he wants to end that for single family homes) and defense company spending priorities (he wants defense companies to end stock buybacks and dividends and invest in R&D and production).  It is not clear to me whether he can successfully force these actions, but his bully pulpit is significant.  These resulted in sharp declines in directly impacted companies, but regarding defense, he also came out of a meeting with Congressional leaders and said he wants to budget there to grow to $1.5 trillion.  

The upshot is confusion here which was evidenced by more weakness than strength in the US session and similarly, declines in Asia (Japan -1.6%, China -0.8%, HK -1.2%).  Elsewhere in the region, India (-0.9%) continues to be the laggard, but there was more red than green overall.  In Europe, red is also today’s color, albeit not as bright as in Asia.  The DAX (-0.2%), CAC (-0.25%) and FTSE 100 (-0.3%) are emblematic of the situation as investors dismissed better than expected German Factory Order data (+5.6%) although the rest of the data released was mostly at expectations.  I guess the question is does Europe treat money better than the US?  I would argue not, but that’s just my view.  Meanwhile, at this hour (7:55), US futures are down slightly, about -0.1% across the board.

Finally, the bond market remains an afterthought almost everywhere.  Perhaps the most amazing thing President Trump has accomplished is to remove the focus on the latest tick in the 10-year bond as a key metric for the economy.  So, this morning, its 1bp rise just leaves it right in that 4.0% – 4.2% range that has existed for months.  Most European sovereign yields edged higher by about 3bps with Germany (+7bps) the outlier here after that strong Factory Orders data.  Also worth noting is that JGB yields slipped -5bps overnight as the market prepares for the first 30-year JGB auction of the year.  Recent 10-year auctions have been received quite well, hence the anticipation of something good here.

On the data front, Initial (exp 210K) and Continuing (1900K) Claims lead the way along with the Trade Balance (-$58.9B) and then Consumer Credit ($10.0B) this afternoon.  Yesterday’s ADP data was a touch softer than expected but the JOLTS data was much worse, showing a decline in job openings of 300K and falling well short of expectations of 7.6M.  At this point, though, to the extent that people are paying attention to the data, tomorrow’s NFP is of far more import I believe.  

The hardest thing about these markets is the White House bingo card and its surprises that can change working assumptions.  Absent something new there, I see the dollar drifting higher helped by both its recent trend and the short-term pullback in metals.  

Good luck

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Overrun

Posted on by

We’ve not even gone through a week
Yet Trump, so much havoc did wreak
This poet will claim
That in this ballgame
It’s top first, one down, so to speak
 
The impact of what has been done
Is widespread and hits everyone
So, please understand
Whatever you’ve planned
May, by events, be overrun

 

Venezuela continues to be the primary discussion point in both the media and the markets.  Mostly along political lines there are calls that the weekend’s action was illegal or not, and as Brent Donnelly, a very good follow on X (@donnelly_brent), explained after reading voluminous material, the raid was either all about the oil or had nothing to do with the oil. I feel like that sums things up pretty well.

While this poet has views on the ongoing issues, they are set from afar with no inside knowledge so keep that in mind.  But ultimately, my take is the opportunity for real change has come to Venezuela, something that did not exist while Maduro was still there.  If nothing else, the ability for the US to exfiltrate him must have made a strong impression on acting president Rodriguez and the generals overseeing the army and police forces there and ought push decision making in a positive direction, at least for a while.  What seems abundantly clear, however, is that most of the population is ecstatic at his removal and have hope for a future, something missing for decades.

As to the oil, it is heavy, sour crude, something Gulf coast refineries are tuned to use, but the infrastructure there is a disaster.  My take is the one thing that is underestimated is just how remarkable the technology of oil exploration and production has become, and its ability to solve problems in efficiency to reduce the cost of extraction.  I will take the under on the time it takes to increase production there, although a key bottleneck is the electric grid which must be addressed as well.  Nonetheless, despite the rise in oil prices during yesterday’s session, I maintain my view that the trend is lower.

Other than domestic political news there seems little else to discuss but market activity, so let’s go there.  A strong session in the US yesterday was followed by plenty of strength in Asia with Japan (+1.3%), China (+1.6%) and HK (+1.4%) all having excellent outcomes.  Too, Korea (+1.7%) and Taiwan (+1.6%) had strong showings with many more gainers than losers in the region.  The one market that has not partaken in the early year rally is India (-0.4%), which I can only ascribe to the fact they may be losing a source of cheap oil.  Or perhaps, more accurately, all the buyers of sanctioned oil may find themselves in more difficult straits, paying full price, as the dark fleet of tankers is suddenly having more trouble making the rounds.

On this note, one other place to watch is Iran, where it appears that the regime may be set to collapse as protests grow and some cities may have been completely taken over by the protesters.  If the theocracy falls, I would expect that, too, will pressure oil prices lower, as sanctions could be swiftly lifted.

Turning to Europe, does anybody really care anymore?  No, seriously, markets there are mixed this morning with France (-0.4%) lagging while the UK (+0.7%) is gaining on the back of BP and Shell and the general euphoria about the oil majors now.  Meanwhile, other major markets have seen modest gains (Italy +0.4%, Spain +0.3%, Germany +0.2%) but there is one outlier, Denmark (+2.1%) which, given all the talk of the US seeking to take control of Greenland, seems odd to me.  I can find no specific news either for the economy or any companies (Novo Nordisk being the only one of note), but something is going on.  As to US futures, at this hour (6:50) they are little changed.

Turning to the bond market, the below chart of the 10-year offers a great picture of what it means when traders say nothing is going on.  Since early September, the bond has been trading within a 20 basis point range despite all the huffing and puffing of the punditry and the FOMC’s rate cuts.

Source: tradingeconomics.com

If bond investors are the “smart” money, I would argue that right now they have no opinion, or perhaps their opinion is that the economy is going to continue to tick along at a decent rate, with limited extra inflationary pressure.  To that last point, an article in the WSJ this morning explained that several recent studies, one by the SF Fed, demonstrated that tariffs have virtually no inflationary impact.  That probably doesn’t help Powell’s talking points.  While I continue to be concerned that inflation will maintain a 3+% level, I also believe the Fed is going to suppress interest rates going forward, net, bonds don’t seem that exciting.  As to the overnight price action, Treasury yields backed up 2bps, while European sovereigns slipped between -1bp and -2bps.  I couldn’t help but also notice that yesterday saw a massive issuance of USD bonds by non-US corporates, over $60 billion, an indication to me, at least, that calls for the death of the dollar are somewhat premature.

Commodities continue to be where all the action is, or perhaps more accurately, metals markets.  After massive rallies yesterday, we are seeing follow through with gold (+0.4%), silver (+2.4%), copper (+1.0%) and platinum (+3.2%) all strong again.  Unlike the bond market, and truly FX, which is also dull and boring, the below chart shows just how much things in the metals space have changed over time. 

Source: tradingeconomics.com

My take is that investors are still trying to figure out the implications of the fact that old relationships like the dollar falling when metals rise, or metals falling when real interest rates rise, are broken and what that implies for the future.  The reality is that other than gold, which is the calmest of them all, these metals are indicating actual shortages for users.  Consider that, according to Grok, the typical catalytic converter uses between 0.1 and 0.25 troy ounces of platinum, so at today’s price, between $230 and $575.  Given the average price of a new car is ~$50K, paying up for platinum is not going to change the equation that much, certainly relative to not having the platinum and therefore not being able to complete and sell the vehicle.  I suspect that metals, while likely to be volatile in their price action, have much further to run higher.

Lastly, the dollar…is still there.  Using the DXY as my proxy this morning, you can look at the chart below for the past year and see, it has basically not moved since it stopped declining in late April 2025.  It is hard to get excited about things right now.  However, I maintain that the US will remain the cleanest dirty shirt and benefit accordingly over time.

Source: tradingeconomics.com

On the data front, Services (exp 52.9) and Composite (53.0) PMI are released this morning with both expected lower than last month, but still in expansion territory.  We also hear from Richmond Fed governor Barkin, but it seems the Fed has taken a back seat to Venezuela lately, at least with respect to what is driving markets.  As of this morning, there is just a 16% probability of a rate cut priced in for the end of the month with a 53% probability priced for the March meeting.  But two more cuts are seen as a certainty by September, although if GDP continues to perform like it has, I imagine that will change.  According to the Atlanta Fed’s GDPNow model, Q4 is forecast at 2.7%.  We shall see how that evolves over time.

Summing it all up, the dollar is an afterthought in markets right now and seems unlikely to move very much in the near term.  Metals remain the place to be, and nothing indicates those trends have ended.

Good luck

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Talk of the Town

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Two things have been talk of the town
First, silver ne’er seems to go down
But also, of late
The Dow’s in a state
Where it wears the daily stock crown
 
But if we dig deeper, we find
Industrials, as they’re defined
Don’t build many things
Instead, they pull strings
As finance and tech are combined

 

Before I start, this will be the last poetry of 2025.  I want to thank all my readers for continuing to read and I certainly hope I both amused you and highlighted one view of what is driving the zeitgeist in markets these days.  FX poetry will return on January 5th with my annual long-form poetic prognostications.  Merry Christmas, Happy Chanukkah and Happy New Year to you all.

So, I was reading my friend JJ’s evening wrap up from yesterday and he highlighted the fact that the DJIA (+1.3%) made a new all-time high in trading and it was led by…Goldman Sachs.  

Source: tradingeconomics.com

Now, I have nothing against Goldman Sachs, per se, but it struck me as odd that Goldman Sachs, an investment bank, was a member of the Dow Jones Industrial Average.  It’s not that I wasn’t aware of the fact, but for some reason, this mention stuck out.  So, I thought I might look at the current membership of the Dow and see just how industrial it is.

While you will likely not be surprised that it has several non-industrial, service-based companies in the index, you might be surprised by just how many.  For instance, aside from Goldman, JPMorgan, American Express and Visa are in there as well as United Health and Travelers from the insurance space.  There are major retailers like Walmart, Home Depot, Amazon and McDonalds, along with tech and telecom/media names like Microsoft, Salesforce, Disney and Verizon.  

This is not to say that these are misplaced with respect to their relative importance in the US economy, clearly all are major corporations with long histories of profitability.  But it seems odd to list them as industrial.  I would contend that nothing explains the financialization of the US economy better than the fact that 14 out of the 30 members of the DJIA are service companies rather than producers of stuff.  Maybe they should rename it the Dow Jones Major Corporate Index.

To conclude the equity portion of our discussion, yesterday saw the NASDAQ (-0.25%) decline in the face of a broad overall equity rally as there appears to be a rotation of investors from AI into other things like financials (as hopes of another Fed rate cut spring eternal) and power producers as the power needs of AI keep getting estimated ever higher.  This rally was followed pretty much everywhere around the world as regardless of one’s religion, it appears investors are all counting on Santa to deliver higher prices.  In Asia, Tokyo (+1.4%). HK (+1.75%), China (+0.6%), Australia (+1.2%), Korea (+1.4%) and virtually every other market rallied.  The only data of note here was Japanese IP which came in a tick higher than its preliminary forecast, but to counter that, Nikkei reported that the BOJ, when they meet next week, are definitely going to raise the base rate by 25bps to 0.75%, the highest level since 1994.  That doesn’t seem that bullish, but then, I’m not Japanese.

In Europe, the gains are also universal, albeit less impressive with Spain (+0.5%) and France (+0.5%) leading the way and Germany and the UK both only marginally higher.  The most interesting news here is about the EU’s efforts to confiscatethe Russian assets that have been frozen since they invaded Ukraine, but which are being blocked by Belgium where they reside under SWIFT.  And as I type (7:45) US futures are mixed with the Dow (+0.2%) still in favor while NASDAQ (-0.5%) continues to lag.

But the other story that is getting press, and arguably more press, is precious metals.  Silver (+0.9% today, +10% this week, +122% this year) is the leader and is now trading above $64/oz.  This is the very definition of a parabolic move, which is obvious when you look at the silver chart for the past 5 years.

Source: tradingeconomics.com

Referring back to JJ’s note, it is important to understand he is a commodity trader of long standing (remarkably even longer than my time in FX) and he discussed silver from an insider’s perspective.  The essence of the issue here is that there are quite a few paper short positions that have existed for a long time.  The rumor has long been that JPMorgan has been preventing silver from rising by playing in futures markets.  But now, real demand, between industrial users (solar panels and electronics) and Asian retail demand from both India and China is far higher than new supply or recovery from scrap, to the tune of 120 million oz/year, and those shorts cannot find the metal to deliver.  The last time there was a squeeze, when the Hunt’s tried to corner the market in 1980, people lined up at stores to sell their silver tea services, bringing metal to the market.  But those are all gone.  I’m not sure what will change this in the short run, but it cannot go up forever.  With that in mind, though, I think precious metals have much further to run as the ongoing debasement of fiat currencies simply adds further to demand.  

Silver managed to drag gold (+1.1% today, +3.0% this week, +65% this year) and platinum (+3.6% today, +7.2% this week, +98% this year) along for the ride and I expect this will continue across the board.  Meanwhile oil (0.0%) is unchanged this morning but has fallen -4.0% this week.  The news that the US boarded a Venezuelan oil tanker and took control in an effort to pressure Maduro didn’t seem to concern anyone in the market.  This trend remains clear.  

As to the bond market, this morning yields are higher by 2bps, pretty much across the board of Treasuries and all European sovereigns.  But with that in mind, the 10-year Treasury is still yielding 4.18%, below its worst level immediately following the FOMC meeting, and as I mentioned above, there appears to be a growing belief that Powell’s concern about the labor market will result in more cuts sooner rather than later.  While that is not really playing out in the futures market yet, as you can see below with the next cut priced for April with a 76% probability, that is the narrative that is being promulgated in FinX.  

Source: cmegroup.com

Next week we will get the November NFP report (exp 35K) and all the data we missed in October.  I can assure you if that comes in weak, the idea of a rate cut will explode onto the scene once again.  Too, on Wednesday evening, the WSJpublished an article indicating that Chairman Powell is concerned the employment data is overstating things because of the flaws in the birth/death model.  The point is he may be far more inclined to cut if next Tuesday’s report is weak.

Finally, the dollar is…still here.  It sold off after the Fed, and as I showed yesterday, has fallen back to the middle of its trading range of the past 6 months.  I keep reading how the dollar is the key, but quite frankly, I’m not certain what that key will unlock.  We need out of consensus activities to change the current situation.  After all, the underlying demand for dollars because of the trillions of dollars of debt outstanding outside of the US makes it difficult to get too bearish without a major reason.  If the Fed cut 50bps intermeeting, that would do it, but I’m not holding my breath.

And that’s really it my friends.  There is no data today although we do hear from three Fed speakers.  Given the dissent on the FOMC, I expect that we are going to be need to keep score as to views for a while when these folks speak. 

In the meantime, as I said above, have a wonderful holiday all

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Crazier Still

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There once was a time when the Fed
When meeting, and looking ahead
All seemed to agree
The future they’d see
And wrote banal statements, when read
 
But this time is different, it’s true
Though those words most folks should eschew
‘Cause nobody knows
Which way the wind blows
As true data’s hard to construe
 
So, rather than voting as one
Three members, the Chairman, did shun
But crazier still
The dot plot did kill
The idea much more can be done

 

I think it is appropriate to start this morning’s discussion with the dot plot, which as I, and many others, expected showed virtually no consensus as to what the future holds with respect to Federal Reserve monetary policy.  For 2026, the range of estimates by the 19 FOMC members is 175 basis points, the widest range I have ever seen.  Three members see a 25bp hike in 2026 and one member (likely Governor Miran) sees 150bps of cuts.  They can’t all be right!  But even if we look out to the longer run, the range of estimates is 125bps wide.

Personally, I am thrilled at this outcome as it indicates that instead of the Chairman browbeating everyone into agreeing with his/her view, which had been the history for the past 40 years, FOMC members have demonstrated they are willing to express a personal view.

Now, generally markets hate uncertainty of this nature, and one might have thought that equity markets, especially, would be negatively impacted by this outcome.  But, since the unwritten mandate of the Fed is to ensure that stock markets never decline, they were able to paper over the lack of consensus by explaining they will be buying $40 billion/month of T-bills to make sure that bank reserves are “ample”.  QT has ended, and while they will continue to go out of their way to explain this is not QE, and perhaps technically it is not, they are still promising to pump nearly $500 billion /year into the economy by expanding their balance sheet.  One cannot be surprised that initially, much of that money is going to head into financial markets, hence today’s rally.

However, if you want to see just how out of touch the Fed is with reality, a quick look at their economic projections helps disabuse you of the notion that there is really much independent thought in the Marriner Eccles Building.  As you can see below, they continue to believe that inflation will gradually head back to their target, that growth will slow, unemployment will slip and that Fed funds have room to decline from here.

I have frequently railed against the Fed and their models, highlighting time and again that their models are not fit for purpose.  It is abundantly clear that every member has a neo-Keynesian model that was calibrated in the wake of the Dot com bubble bursting when interest rates in the US first were pushed down to 0.0% while consumer inflation remained quiescent as all the funds went into financial assets.  One would think that the experience of 2022-23, when inflation soared forcing them to hike rates in the most aggressive manner in history, would have resulted in some second thoughts.  But I cannot look at the table above and draw that conclusion.  Perhaps this will help you understand the growth in the meme, end the fed.

To sum it all up, FOMC members have no consensus on how to behave going forward but they decided that expanding the balance sheet was the right thing to do.  Perhaps they do have an idea, but given inflation is showing no signs of heading back to their target, they decided that the esoterica of the balance sheet will hide their activities more effectively than interest rate announcements.

One of the key talking points this morning revolves around the dollar in the FX markets and how now that the Fed has cut rates again, while the ECB is set to leave them on hold, and the BOJ looks likely to raise them next week, that the greenback will fall further.  Much continues to be made of the fact that the dollar fell about 12% during the first 6 months of 2025, although a decline of that magnitude during a 6-month time span is hardly unique, it was the first such decline that happened during the first 6 months of the year, in 50 years or so.  In other words, much ado about nothing.  

The latest spin, though, is look for the dollar to decline sharply after the rate cut.  I have a hard time with this concept for a few reasons.  First, given the obvious uncertainty of future Fed activity, as per the dot plot, it is unclear the Fed is going to aggressively cut rates from this level anytime soon.  And second, a look at the history of the dollar in relation to Fed activity doesn’t really paint that picture.  The below chart of the euro over the past five years shows that the single currency fell during the initial stages of the Fed’s panic rate hikes in 2022 then rallied back sharply as they continued.  Meanwhile, during the latter half of 2024, the dollar rallied as the Fed cut rates and then declined as they remained on hold.   My point is, the recent history is ambiguous at best regarding the dollar’s response to a given Fed move.

Source: tradingeconomics.com

I have maintained that if the Fed cuts aggressively, it will undermine the dollar.  However, nothing about yesterday’s FOMC meeting tells me they are about to embark on an aggressive rate cutting binge.

The other noteworthy story this morning is the outcome from China’s Central Economic Work Conference (CEWC).  I have described several times that the President Xi’s government claims they are keen to help support domestic consumption and the housing market despite neither of those things having occurred during the past several years.  Well, Bloomberg was nice enough to create a table highlighting the CEWC’s statements this year and compare them to the past two years.  I have attached it below.

In a testament to the fact that bureaucrats speak the same language, no matter their native tongue, a look at the changes in Fiscal Policy or Top Priority Task, or even Real Estate shows that nothing has changed but the order of the words.  The very fact that they need to keep repeating themselves can readily be explained by the fact that the previous year’s efforts failed.  Why will this time be different?

Ok, a quick tour of markets.   Apparently, Asia was not enamored of the FOMC outcome with Tokyo (-0.9%) and China (-0.9%) both sliding although HK managed to stay put.  Elsewhere in the region, both Korea (-0.6%) and Taiwan (-1.3%) were also under pressure as most markets here were in the red.  The exceptions were India, Malaysia and the Philippines, all of which managed gains of 0.5% or so.  

In Europe, things are a little brighter with modest gains the order of the day led by Spain (+0.5%) and France (+0.4%) although both Germany and the UK are barely higher at this hour.  There was no data released in Europe this morning although the SNB did meet and leave rates on hold at 0.0% as universally expected.  There has been a little bit of ECB speak, with several members highlighting that ECB policy is independent of Fed policy but that if Fed cuts force the dollar lower, they may feel the need to respond as a higher euro would reduce inflation.  Alas for the stock market bulls in the US, futures this morning are pointing lower led by the NASDAQ (-0.7%) although that is on the back of weaker than expected Oracle earnings results last night.  Perhaps promising to spend $5 trillion on AI is beginning to be seen as unrealistic, although I doubt that is the case 🤔.

Turning to the bond market, Treasury yields have slipped -2bps overnight after falling -5bps yesterday.  Similar price action has been seen elsewhere with European sovereign yields slipping slightly and even JGB yields down -2bps overnight.  Personally, I am a bit confused by this as I have been assured that the Fed cutting rates in this economy would result in a steeper yield curve with long-dated rates rising even though the front end falls.  Perhaps I am reading the data wrong.

In the commodity markets, the one truth is that there are no sellers in the silver market.  It is higher by another 0.5% this morning and above $62/oz as whatever games had been played in the past to cap its price seem to have fallen apart.  Physical demand for the stuff outstrips new supply by about 120 million oz /year, and new mines are scarce on the ground.  This feels like there is further room to run.

Source: tradingeconomics.com

As to the rest of the space, gold (-0.2%) which had a nice day yesterday is consolidating, as is copper.  Turning to oil (-1.1%) it continues to drift lower, dragging gasoline along for the ride, something that must make the president quite happy.  You know my views here.

As to the dollar writ large, while it sold off a bit yesterday, as you can see from the below DXY (-0.3%) chart, it is hardly making new ground, rather it is back to the middle of its 6-month range.  

Source: tradingeconomics.com

This morning more currencies are a bit stronger but in the G10, CHF (+0.45%) is the leader with everything else far less impactful.  And on the flip side, INR (-0.7%) has traded to yet another historic low (USD high) as the new RBI governor has decided not to waste too much money on intervention.  Oh yeah, JPY (+0.2%) has gotten some tongues wagging as now that the Fed cut and the BOJ is ostensibly getting set to hike, there is more concern about the unwind of the carry trade.  My view is, don’t worry unless the BOJ hikes 50bps and promises a lot more on the way.  After all, if the Fed has finished cutting, something that cannot be ruled out, this entire thesis will be destroyed.

On the data front, Initial (exp 220K) and Continuing (1950K) Claims are coming as well as the Trade Balance (-$63.3B).  There are no Fed speakers on the docket, but I imagine we will hear from some anyway, as they cannot seem to shut up.  

It would not surprise me to see the dollar head toward the bottom of this trading range, but I think we need a much stronger catalyst than uncertainty from the Fed to break the range.

Good luck

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