Tag Archives: stock-market

Quite Gory

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While yesterday, there was one story
‘Bout silver and gold and their glory
By end of the session
The dollar’s depression
Was headlining comments quite gory
 
The narrative now speaks of trends
Which lead to a dollar that ends
The problem they’ve got
Is history’s taught
That cycles and dollars are friends

The dollar is clearly under pressure lately as discussed here yesterday morning.  Using the DXY as our proxy, it has traded and closed through the recent double bottom (see chart below), and the doomsayers are licking their chops that their views of the demise of the dollar are finally coming to fruition. 

Source: tradingeconomics.com

And I am not here to say the dollar is about to reverse course higher.  While I remain medium and long-term bullish on the buck, it doesn’t feel like the time to get long.  However, look at the chart below, to get a longer-term perspective on the dollar’s history.  This chart starts back in 1985, which is just before the Plaza Accord where it was agreed the dollar was too strong and central banks around the world intervened and altered policy to change it.  But here we are at 96ish in a market that has spent no little time below 80 with several drops below 75.  My point is, the dollar tends towards long cycles.  It is entirely possible that we peaked in late 2022 for this cycle and are now heading lower from there.  But I remain highly confident that it will reverse course and rebound. Not tomorrow, but this is not the end.  Just remember that when you read the eulogies for the buck.

Source: finance.yahoo.com

One other thing that seems to be getting headlines is that the president was asked his views on the dollar’s recent weakness and was (rightly) nonplussed over the issue as described here.  After all, this is a man who constantly rails against the artificial weakness of the yen and the yuan, and who is seeking to rebalance the trade account.  All that points to a weaker dollar, so it beggar’s belief that this is a surprise to the market.

One last thing while I’m on my high horse.  I couldn’t help but notice this article about Banque de France chief Villeroy explaining that the weakening dollar may impact ECB policy-making with a throwaway line about diminishing confidence in the dollar stemming from the unpredictability of US economic policy.  First off, US policy is very clear, run it hot!  And second, it is remarkable that when the euro was tumbling, we never saw this same introspection about Eurozone/EU economic policy and their self-destructive energy policies.  My point is, nothing we are currently witnessing is new in any way at all, but rather part of the longer-term cycle of FX markets.

OK, how has this dollar move impacted other markets?  Well, yesterday’s US equity session was marked by a rotation back to tech as the NASDAQ (+0.9%) had a fine day while the DJIA (-0.8%) fell hard.  This led to a mixed session in Asia with the Nikkei little changed (although other indices there were under steady pressure), while HK (+2.6%) exploded higher on news that China has licensed its first Nvidia H200 chips to Alibaba and someone threw money at China Vanke, one of the collapsing Chinese real estate firms.  The mainland was modestly higher (+0.25%) but there was strength in Korea (+1.7%), Taiwan (+1.5%) and India (+0.6%).  On the downside, Indonesia (-7.3%) tumbled after MSCI indicated they may downgrade the market there to frontier status due to lack of liquidity.

In Europe, red is today’s color led by Spain (-1.1%) and France (-1.0%) with the latter seeing weakness in luxury stocks while the former appears to be unwinding some of its recent strength with no particular catalyst, merely a negative view overall in Europe.  Germany (-0.2%) and the UK (-0.4%) are also softer without anything specific.  As to US futures, at this hour (6:40) they are pointing higher with NASDAQ (+1.1%) leading the way again.  As an aside, the S&P 500 futures are above 7000 now, and the cash market looks set to break that big round number this morning.

In the bond market, as we await the FOMC policy decision (no change expected) and the subsequent press conference, Treasury yields are unchanged this morning after having edged higher by 2bps yesterday.  European sovereign yields are all basically softer by -2bps, perhaps on the back of the euro’s strength.  After all, Villeroy hinted that if the euro remains strong, they may need to cut rates again.  Interestingly, JGB yields (-5bps) fell after BOJ Minutes from the December meeting (remember, they already met again last week) indicated that some members were concerned over the weaker yen driving inflation higher.  Talk about stale news.  My sense here is this is much more about the election and JGB’s will track Takaichi-san’s support level with lower yields coincident with weakening support, potentially preventing her Liz Truss moment.

In the commodity space, oil (0.0%) is unchanged this morning but has rallied more than 7% in the past month after a solid session yesterday.  Looking at the chart, the trend clearly remains lower, but the short-term reversal is also quite clear.

Source: tradingeconomics.com

The dollar’s recent weakness is supporting all commodities (given they are generally priced in USD, other nations can afford more with the dollar’s slide), but the bigger picture remains that there is an extraordinarily large amount of the stuff around and much of the angst over its recovery is political (look at Europe) rather than geologic.  Nat Gas (-4.5%) is backing off its extended levels as temperatures are forecast to rebound early next week (cannot happen soon enough for me, where’s global warming when you need it?), but the long-term story here remains positive as it continues to be the energy source of choice for timely access with the least environmental impact.

Turning to metals, gold (+1.6%) continues to trade to new highs on the ‘all of the above’ thesis (weak dollar, debasement trade, geopolitical risk, central bank buying) and shows no signs of slowing down.  Silver (-0.1%), however, has been so incredibly volatile it is starting to become a concern for all involved.  It is not normal for 10%-12% daily moves in any product, let alone one with so much involvement from both retail and institutional players.

Source: tradingeconomics.com

The silver market has gone into backwardation which means that there is significant demand for the actual metal.  And prices in Shanghai trade at a significant premium to the COMEX.  Shanghai is a delivery market.  We will need to watch deliveries at futures expirations closely going forward.

Finally, the dollar today is bouncing off yesterday’s session lows but remain under pressure overall.  After trading through 1.20 yesterday, the euro (-0.6%) has backed off a bit and we have seen similar moves through much of the rest of the G10 (GBP -0.6%, SEK -0.7%, NOK -0.7%, CHF -0.9%).  The yen (-0.3%) continues to be caught between potential intervention fears and fears of unfunded spending.  In the EMG bloc, we have seen CE4 currencies all suffer on the order of -0.7% or so, although APAC currencies are little changed this morning.  The one currency bucking the trend is CLP (+0.2%) which remains closely connected to copper (+1.0%).

On the data front, yesterday’s Consumer Confidence Index fell sharply, a further indication that there is a split between most of the economic numbers and people’s beliefs.  Today, aside from the Fed, we hear from the BOC (no change expected) and we get EIA oil inventories with a small draw forecast after several weeks of large builds.  Too, later in the day the Banco do Brazil will announce their policy (no change expected).

The thing that makes me happy is the Fed is an afterthought today.  While the cacophony of noise that comes from media is extremely difficult to parse given the biases underlying almost all one reads or hears, to me, the question will be whether people start to believe things are getting better, and that is more political than economic in my view.  In the meantime, the dollar appears to be set for a bit of further weakness, but do not mistake this for the end of the dollar or the dollar’s role in the global economy.

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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What We’ve Learned

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It wasn’t but three weeks ago
That pundits who felt in the know
Were sure the attack
On Vene would crack
The world, and more chaos bestow
 
But that news, so quickly, has faded
While Greenland fears have been upgraded
The pundits were sure
That war was the cure
And Europe would soon be invaded
 
Now as it turns out, what we’ve learned
Is NATO, which had been concerned
Has ‘greed to a deal
Which stopped Denmark’s squeal
As Trump, to the US, returned

 

It is certainly difficult to keep up with current events these days, especially for the punditry who feel it is critical they demonstrate expertise on every issue, given the speed with which the issues change.  All that effort to understand the geopolitics behind ousting Nicholas Maduro has been forgotten in less than 2 weeks as they needed to pontificate on Greenland and its importance.  If, as the president’s TruthSocial post below is the current lay of the land, by Monday, Greenland will return to its historic obscurity as President Trump will move on to the next issue of his choosing.  In fact, this morning, the WSJ is claiming Cuba is next on the list, which, while it wouldn’t be that surprising, has to date only been mentioned in passing by Mr Trump.

Here’s the thing about all the pontification regarding President Trump, nearly, if not all of it, is simply that, pontification by outsiders who have no idea about what is really happening.  These folks are not sitting in the Oval Office when the President is meeting with his advisors discussing strategy and are generally wishcasting their views and creating a narrative around that.  As I am also an outsider, all I can do is observe and try to ascertain how things might impact markets, but if you are not hearing it from the president or Secretary Rubio or someone like that, it is all speculation.  However, one must admit, it is entertaining!

As I don’t know what the next ‘global crisis’ is going to be ahead of time, let’s turn our attention to markets and how they responded to the president’s speech in Davos as well as the news of the deal framework.

Equities were quite happy.  After the sharp decline seen Sunday night, when the tariff threats were made, the S&P 500 has recouped nearly all of the losses as per the below chart.  Yesterday saw US market gains of 1.2% across the board and futures, this morning, continue to rally, up about 0.5% across the board.

Source: tradingeconomics.com

It should be no surprise that things were bright in Asia as well, with Tokyo (+1.75%) leading the way as almost every exchange in the region was higher by a decent amount (Korea +0.9%, India +0.5%, Taiwan +1.6%, Australia +0.75%) but interestingly, China (0.0%) and HK (+0.2%) were the laggards.  Perhaps good news for the West is not seen that positively there, although the story of regulators in China cracking down on possible stock manipulation by social media influencers has raised some concerns.  After all, one of the biggest issues with investing in China by outsiders is the capriciousness of President Xi and the CCP as they decide what they don’t like that particular day.  

As to Europe, it should be no surprise that there has been a collective sigh of relief from investors there given the removal of the threat of more tariffs and the promises of more defense spending by European nations.  So, gains across the board with the DAX (+1.2%) leading the way although the CAC (+1.1%) is right there as well with most of the rest of the nations seeing gains on the order of 0.5% to 0.75%.

In the bond markets, apparently the end of the world has also been postponed.  Yields declined yesterday and this morning, Treasury yields are unchanged at 4.24%.  In Europe, yields have slipped -2bps to -4bps on the continent although UK gilts (+2bps) are bucking the trend, which appears to be an ongoing impact from yesterday’s higher than expected inflation data which continues to point toward stagflation in the UK.  Interestingly, JGB yields (-4bps) have also fallen again, although they certainly remain near recent highs.  PM Takaichi is going to formally dissolve the Diet tonight and the election is slated for February 8th (wouldn’t it be wonderful if US election campaigns were just 2 weeks long!).  While nothing has changed in her fiscal planning, it seems that investors are awaiting the BOJ announcement tonight (no change expected) and have been modestly appeased by a substantial increase in exports although the trade surplus declined slightly.  

I think it is worth looking at the trade balance relative to the yen (-0.2%) as per the below chart.  Recall, historically, Japan ran major trade surpluses, which was always one of the tensions between the US and Japan dating back to President Reagan.  But as you can see below, the blue bars are the monthly trade numbers and since Covid, that situation changed dramatically.

Source: tradingeconomics.com

However, once the yen started to weaken substantially, the lagged effect showed up in trade data as can readily be seen above.  In fact, this is the real tension in Japan, I believe, that the weak yen helps exports significantly, but has become an inflation problem and the government is caught between the two issues.  This is why I believe we will see a weaker yen over time, especially if Takaichi-san comes out of the election with a solid majority.

As I’m on currencies, if we look elsewhere, the dollar, although we have been constantly assured it was collapsing, remains in its trading range.  This morning, the DXY (-0.1%) has edged lower after yesterday’s rebound.  As it happens, yen weakness has been offset by modest euro strength, but the real strength is in the commodity space with NOK (+0.8%), SEK (+0.36%), AUD (+0.6%) and NZD (+0.6%) all having solid sessions.  Now, my take is that the first two are more likely responses to the Greenland issue’s apparent resolution as NOK is rallying despite oil’s (-1.7%) sharp decline.  Remember, both those nations were in the crosshairs of Trump’s mooted tariffs.  On the other hand, last night, the employment situation in Australia perked up nicely which has helped raise market pricing for a rate hike by the RBA and given the strength in commodity prices and the apparent end of another global crisis, has helped support the currency.  Ironically, as I scan the EMG space, movements there have been much smaller overall.

Finally, turning to the rest of the commodity space, for the first time in a week, gold is not higher this morning, but rather essentially unchanged.  Silver (+0.25%) has bounced a tiny bit after selling off somewhat yesterday in NY.  I have maintained that trees don’t grow to the sky, and frankly, the price action here appears tired regarding ever larger gains.  I believe the fundamental story remains in place, but that doesn’t mean silver won’t chop around for a few weeks or months before starting higher again.   Copper (-0.6%) is also under modest pressure this morning and has retreated much further, about -6.3%, from its recent highs at $6.10/lb than the precious metals.  However, the red metal remains much in demand given the underlying electrification story. 

And lastly, a quick look at NatGas (+12%) shows what happens to commodity markets when there is the perception of insufficient supply for the current demand.  This is higher by 75% this week!  And while today in NJ, the temperature is a relatively balmy 34°, the forecast for the coming weekend is much colder and a huge snowfall.  It’s not often you see a movement of this magnitude so here is the chart for the past month.

Source: tradingeconomics.com

On the data front, today brings the final look at Q3 GDP (exp 4.3%) as well as Initial (212K) and Continuing (1880K) Claims.  Too, we get Personal Income (0.4%) and Spending (0.5%) for November and PCE (0.2%, 2.8% Y/Y) for both headline and core.  The EIA releases its weekly oil inventory data today, a day later than usual because of the holiday Monday, with a modest build expected.

Market participants in all markets appear to have found a comfort zone and are taking risk positions again, at least for now.  All the apocalyptic stories about the world rejecting the dollar and the rise of the BRICS will have to wait for another day.  While I don’t know what the next situation is going to be, I am highly confident we are going to have another geopolitical scenario that is going to result in more screaming, teeth gnashing and pearl clutching by those who continue to believe the rules-based order is the way things should be.  Alas for them, economic power and statecraft is the new world order, and my take is ultimately, the dollar benefits from this pivot.

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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Markets Ain’t Fair

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

 

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

Source: tradingeconomics.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

Good luck and good weekend

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Left For Dead

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

 

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

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

Source: cnn.com

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

Good luck

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A Day to Give Thanks

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Today is a day to give thanks
To those who flew planes and drove tanks
In multiple wars
And too many tours
No matter which service or ranks
 
Now, turning to markets at hand
The bulls, yesterday, had command
So, risk assets rose
While pundits compose
A narrative, things are just grand

 

It was certainly a positive day in markets yesterday, with equities and commodities rising sharply while bonds sat in the corner with the dollar, neither one trying to rain on the parade.  The imminent end of the government shutdown had everyone feeling euphoric.  But that is so yesterday. It appears that reopening the US government is not enough to keep global markets rallying.

And the thing is, there is just not that much new of note to discuss this morning.  As it is Veteran’s Day here in the US, banks and the bond market are closed, although equities and commodities markets are open.  But the news cycle overnight was led by the fact that Softbank sold their NVDA stake for a $5.8 billion profit.  And that’s pretty thin gruel for someone who writes about market activities.  Everything else is about who won/lost regarding the shutdown and frankly, that is something markets tend to ignore.

With that in mind, and given the absence of any substantive data, let’s go right into market activity overnight.  Asian equity markets were mixed although I would say there was more red (Japan, China, Taiwan, Australia, Indonesia, Thailand, Philippines) than green (HK, Singapore, Malaysia, Korea, India) but it appears most of the activity had limited volumes and there are few stories of note as drivers.  

In Europe, though, things are looking better with all the major bourses higher this morning, led by the UK (+0.8%) where bad news was good for stocks as the Unemployment Rate ticked higher, to 5.0%, which has markets now pricing an 80% probability of a rate cut by the BOE next month.  This has been enough to help most European markets higher (CAC +0.65%, IBEX +0.5%) except for the DAX (0.0%) which is lagging after the ZEW Sentiment Index was released at a weaker than forecast 38.5, which was also down from last month’s reading.  

I think it might be worthwhile, though, to take a longer-term perspective on this sentiment survey.  As you can see from the chart below (data from ZEW.de), the current level is very middle of the pack.  In fact, the long-term average reading is 21.3, but of course, that includes numerous negative readings during recessions.  I might argue that things in Germany are not collapsing, but nowhere near robust.  My concern, if I were a German policymaker, is that it appears the survey has peaked at a much lower level than history, an indication that the best they can hope for is still mediocre.

Finally, US futures are pointing slightly lower, -0.2% or so, at this hour (7:50), arguably a little hangover from yesterday.

In the bond market, of course, Treasury yields aren’t trading, but European sovereigns are essentially unchanged as well, except for UK Gilts, which have seen yields slip -7bps on that higher Unemployment data driving rate cut expectations.  Given the ongoing fiscal issues in the UK, where they cannot seem to come up with a budget and all signs point to a worsening debt position, I’m not sure why yields there would decline, but that’s what’s happening.

Turning to the commodity markets, oil (+0.5%) continues to trade either side of $60/bbl, making no headway in either direction.  I listened to an excellent podcast yesterday with Doomberg, who once again highlighted his view that the long-term direction of the price of oil is lower.  The case he makes is that on an energy basis, NatGas, even though it is up 48% in the past year, remains significantly cheaper than oil, one-quarter the price, and that the arbitrage will close driving the price of oil lower and the price of NatGas higher.  Remember, politics is far more impactful on oil drilling than geology.  Ask yourself what will happen to the price of oil if Venezuela’s government falls and is replaced by a pro-US government allowing the oil majors in to help tap the largest oil reserves on the planet.  I assure you that is not bullish for the price of oil.

As to the metals markets, after yesterday’s very impressive moves, they are continuing higher this morning, at least the precious metals are with gold (+0.5%), silver (+0.8% and now over $50/oz) and platinum (+0.75%) all extending their gains.  These are the same charts in the metals, and my take is we had a blowoff run which has now corrected, and we could easily see another leg higher of serious magnitude.

Source: tradingeconomics.com

Finally, the dollar is mostly drifting lower this morning, although not universally so.  While the euro (+0.15%), CHF (+0.6%) and Scandies (NOK +0.6%, SEK +0.4%) are all firmer, the pound (-0.2%) and Aussie (-0.2%) are suffering a bit.  Yen is unchanged along with CAD.  In the EMG bloc, it is also a mixed bag with INR (+0.25%) and PLN (+0.25%) having solid sessions although KRW (-0.6%) is going the other way and the rest of the bloc is +/- 0.1% or so different.  Again, the dollar is just not that exciting in its own right.

There is a new data point coming out, ADP Weekly Employment change, seemingly in an effort to fill in gaps until the BLS gets back to work.  However, given its newness, it is not clear what value it will have to markets.  There is also a speech by Governor Barr but tomorrow is when the Fedspeak really hits.

It is shaping up to be a quiet day, and I suspect absent a major equity move, or some White House bingo, FX markets are going to drift nowhere of note.

Good luck

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Cracks Have Shown Through

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A shift in the narrative view
On AI has started to brew
What folks had thought certain
From behind the curtain
Seems like, now, some cracks have shown through
 
For stock markets, this is bad news
‘Cause AI has been the true fuse
Of recent price action
And any distraction
Could well, bullish thoughts, disabuse

 

While equity markets around the world continue to trade near record highs which were set just weeks ago, there has been a subtle change in the narrative, at least based on my perusal of FinX.  Although there are still many in the ‘buy the dip’ camp who strongly believe that it is different this time and AI is the future, there has been an increase in the number of voices willing to say that things have gone too far.  One of the stories getting a lot of press is the fact that Tesla’s shareholders voted to give Elon Musk a pay package that could amount to $1 trillion if the company meets its milestones over the next 10 years, including having the company’s market cap rise to $8.5 trillion from the current $1.5 trillion.  This certainly has a touch of excess attached to it.

But more broadly, I couldn’t help but notice this graph, originally created by the Dallas Fed, but more widely disseminated by the FT showing the potential future of AI’s impact on humanity.  Under the standard of a picture is worth a thousand words, I might argue the information in this picture falls some 985 words short.  Rather, they simply could have said, ‘AI could be amazing, it could be catastrophic, or it might not matter at all.’ 

However, aside from the inanity of this chart, and more importantly for those paying attention to markets and their portfolios, things look a bit different.  There has been a lot of discussion regarding the everything bubble which has been led by the massive increase in value of the Mag7 stocks.  Recently, it set some new valuation records with the Shiller CAPE (Cyclically Adjusted Price Earnings) ratio now trading at its second highest level of all time, at 41.2, exceeded only during the dotcom bubble of 2000.

Source: @DavidBCollum on X

Added to this is the fact that only about half the companies in the S&P 500 are trading above their 200 day moving averages, a key trend indicator, which implies that the uptrend may be slowing, and the fact that we have had seven down days in the past eight sessions (and US futures are lower this morning by -0.2% as I type at 7:15) indicates that perhaps, a correction of some substance is starting to take shape.

Source: tradingeconomics.com

As of this morning, the S%P 500 is merely 3% below the highs seen on October 29th, so just a week ago.  The conventional description of a correction is a 10% decline, and a bear market is a 20% decline.  I am not saying this is what is going to happen, but my spidey sense is really starting to tingle.

Source: giphy.com

Remember, I’m just a poet, and an FX one at that, so my takes on markets are just one poet’s views based on too many years in markets.  This is not trading advice in any way, shape or form.  But what I can say is, be careful with your investments, things are changing.

So, let’s move on to the overnight session to see how things played out following the selloff yesterday in the US.  Let me say this, it wasn’t pretty.  Pretty much all Asian markets were lower to end the week led by Korea (-1.8%) which has seen its market race higher than the NASDAQ this year, but there was weakness in Japan (-1.2%), China (-0.3%), HK (-0.9%), Taiwan (-0.9%) and Australia (-0.7%) with most other regional exchanges flattish to lower by -0.5%.  Given the tech story is critical to Asia overall, if that is starting to falter, we can expect these markets to slip as well.  Too, there was news from China showing its Trade Surplus shrank slightly, to $90.7 billion, but more ominously, exports actually declined -1.1% while imports rose only 1.0%.  Arguably, the reason President Xi was willing to make a deal with President Trump is because the domestic economic situation in China is troublesome and he knows that more trade problems will be a domestic nightmare for him.

In Europe, red is the dominant color on screens as well with the IBEX (-0.9%) leading the way lower, but the DAX (-0.9%), FTSE 100 and (-0.7%) and CAC (-0.5%) all fading as well and losses the universal story on the continent.  Now, we know that it is not a tech story since, arguably, Europe has no tech presence.  So the problems here are more likely a combination of following the global trend lower and ongoing soft Eurozone data implying that economic growth, and hence corporate profits, are going to continue to be weak.  With the ECB taking themselves out of the equation for now, claiming rates are at the correct level and turning their focus to the idea of a digital euro (which will never be important), if we continue to see the US market slip, you can be certain that European bourses will follow.

In the bond market, it is hard to get excited about anything right now as Treasury yields, which slipped a basis point yesterday, are higher by 1bp this morning.  We remain right at the level from the immediate aftermath of the FOMC meeting, which tells me that traders are awaiting the next major piece of news.  European sovereign yields are also higher by 1bp across the board with only the UK (+3bps) the outlier here today while JGBs overnight slipped -1bp following yesterday’s Treasury price action.

In the commodity space, both oil (+0.8%, but below $60/bbl) and gold (+0.5% but below $4000/oz) continue to trade in a range and basically have not moved anywhere of note over the past 2+ weeks as you can see in the chart below.

Source: tradingeconomics.com

There have certainly been some choppy moves, but net, nothing!  Silver (+1.0%) however, has gotten a boost after the US designated it a critical mineral implying government support.  It would not be surprising to see silver outperform gold for a while going forward.

Finally, the dollar remains an afterthought to markets.  The DXY rallied to above 100 briefly, but has now slipped back below that level into its multi-month trading range as per the below chart.

Source: tradingeconomics.com

Looking at the major currencies today, +/-0.2% describes the price action, which means nothing is happening.  The only notable difference is KRW (-0.7%, which has continued to decline on the back of growing outflows of capital, perhaps anticipating the flows that will come with Korea’s promises for investing in US shipbuilding and semiconductor manufacturing.  But the won has been tumbling since early July, down 8% in that period.

Source: tradingeconomics.com

And that’s really it this morning.  Looking at the KRW, though, we must really consider what I mentioned yesterday about the Supreme Court’s tariff ruling, whenever that comes.  If the tariffs are overturned, it’s not the repayment of those collected that is the issue, it is the change in the investment flows, and that will be a very good reason to turn negative on the dollar.  But until such time, while risk managers need to stay hedged, traders have carte blanche.  If tech stocks really do correct, a risk off scenario is likely to support the dollar, at least for a while.  Hopefully, that won’t be today’s outcome.

Good luck and good weekend

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Filled With Chagrin

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The vibe in the market is fear
As equities get a Bronx cheer
Commodities, too
Most traders eschew
The dollar, though’s, getting in gear
 
So, what has the catalyst been
To drive such a change in the spin
No story stands out
But there is no doubt
Investors are filled with chagrin

 

Ladies and gentlemen, boys and girls, this morning things just feel bad.  As I peruse the headlines around the major publications, there is no obvious story that is driving today’s weakness in risk assets, but there is no mistaking the vibe.  Certainly, there are several issues outstanding that might be seen as a negative, but none of them are new.  

  • The government has been shut down for 35 days as of today, and it doesn’t sound like the Senate Democrats are ready to vote to reopen it.  Granted, the problems of the shutdown increase with time, but there has been no apparent change in tone for at least the past two weeks, so why is today the day when things look bad?
  • The war in Ukraine continues apace with no obvious timeline to ending, but this has been ongoing for nearly 4 years, so what is it about today that may have changed?
  • Concerns over fraud have increased after the recent bankruptcy filings by First Brands and Tricolor, as well as accusations by banks of other situations, but again, no new story broke overnight.
  • Perhaps it is the fact that today is Election Day in the US, and there is concern that Zoran Mamdani, a self-described Democratic Socialist, could become the next mayor of NYC, which given it is still home to so many financial markets, has those market participants unnerved.

Some days, it’s just not clear why markets move in the direction they do, and there can be far less dramatic drivers.  For instance, we have seen a major rally in equity markets, and risk assets in general, over the past 5 years, with an acceleration over the past 6 months and they are simply taking a breather.  Whatever the driver, the movement is clear.

Source: tradingeconomics.com

So, given the absence of obvious drivers to discuss, let’s simply recap the damage. After yesterday’s mixed session in the US, Asia was under significant pressure led by Tokyo (-1.75%) with HK (-0.8%) and China (-0.75%) slipping as well.  But Australia (-0.9%) fell after the RBA left rates on hold, as expected, although Governor Bullock sounded a touch more hawkish than expected, and the rest of the region saw almost universal weakness with Korea (-2.4%) the worst of the bunch, but declines everywhere (India, Taiwan, Indonesia, Singapore, Thailand) except New Zealand, which managed a small gain, to reach yet another record high, on solid earnings numbers from key companies.

Meanwhile, European bourses are all sharply lower as well (DAX -1.3%, CAC -1.2%, IBEX -1.1%) as the overall market vibe weighs on these markets, all of which recently traded at new all-time highs.  Ironically, the UK (-0.6%) is about the best performer despite a speech from Chancellor of the Exchequer, Rachel Reeves, which explained…well, it is not clear what it explained.  The UK has major budget problems and has discussed raising taxes, but given growth is lagging, there is a lot of pushback, even within the Starmer government, on that subject.  As with virtually every G10 economy, the government is spending far more than they take in and they don’t know how to address the deficit.  Unfortunately for the UK, the pound is not the global reserve currency and so they are subject to market discipline, unlike the US…so far.  But, in this space, US futures are all lower this morning, down -1.0% or so as I type at 7:10am.

Now, your first thought might be that bonds have rallied nicely on all this risk aversion, but while they have, indeed, moved higher (yields lower) I don’t know that nicely would describe the movement.  Rather, barely is a better description as 10-year yields are lower by -2bps in the Treasury market and between -1bp and -2bps in all European sovereign markets.  In fact, despite the weakness in Japanese stocks overnight, JGB yields are unchanged.  The message is, bonds are not that appealing, even if stocks aren’t either.

Turning to commodities, oil (-1.4%) is having a hard time this morning alongside the equity markets, with virtually all energy prices lower across the board.  Given there has been no announcement of a major energy breakthrough, this has the feel of growing concern over economic activity going forward.  With that in mind, though, WTI is still trading right around $60/bbl, which seems to be its “home” lately.

In the metals markets, gold (-0.15%) continues to trade around the $4000/oz level, which seems to be its new “home” as traders await the next catalyst in this space.  Silver (-0.3%) is similarly fixated on its level of $48/oz and seems likely to follow gold’s lead going forward.  However, copper (-2.3%) seems like it is more in sync with oil lately, as the two are both so intimately linked with economic activity and changes thereto.  It’s funny, despite the risk asset weakness, I have not seen anything new on a pending recession in the US, nor globally, although there continues to be a steady stream of analysts who have been explaining we are already in one.

Finally, the dollar is today’s winner, rising against every one of its counterparts except the yen (+.45%) which responded to a second round of verbal intervention from FinMin Katayama, who once again drew from the MOF seven-step playbook with a half-step overnight: “I’m seeing one-sided and rapid moves in the currency market. There’s no change in our stance of assessing developments with a high sense of urgency.”  

But away from the yen, it is merely a question of which currency looks worst.  The pound (-0.65%) has traded down to levels not seen since Liberation Day, as it appears the FX market did not take Chancellor Reeves’ comments that well.

Source: tradingeconomics.com

For those who view the DXY as the key indicator, it has traded above 100 for the first time since August, and I know many technicians are looking for a breakout here.  The fact remains that the Fed’s recent seeming mildly hawkish turn is out of sync with most of the rest of the world and will support the dollar for now.  Of course, the futures market is still pricing a 72% probability of a rate cut in December, so traders are taking the ‘hawkish’ comments by Chair Powell at the press conference last week with a grain or two of salt.  In fact, one of the things weighing on the pound is the idea that the BOE may cut this week despite still high inflation.

But wherever you look in this space, the dollar is sharply higher.  ZAR (-1.0%), NOK (-0.9%), MXN (-0.85%) and SEK (-0.9%) lead the way, but declines of -0.5% are rampant across all three regional blocs.  Today is a straight up dollar story.

And that’s all we have today.  Yesterday’s ISM data was a touch weaker than forecast, and last month, slipping to 48.7 with Prices Paid (58.0) slipping as well.  Weirdly, the S&P PMI was a better than expected 52.5, rising from last month and beating expectations.  It seems a mixed message.  Yesterday’s Fed speakers didn’t tell us anything new, with Governor Cook explaining that December is a “live” meeting.  I’m not sure what that means.  Is the implication they may not cut there?  That would not go down well in either markets or the White House.

Given how far equity prices have come in the past 6 months, it would not be a surprise to see a more substantial pullback.  In fact, it would be healthy for the market to remove some of the excesses that abound.  The fraud stories are concerning as they tend to flourish at the end of bull markets, and while they are not yet flourishing, they are starting to become more common.  In the end, while I expect the Fed will cut in December, and then again in January, I don’t see a reason for the dollar to decline sharply.

Good luck

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Decidedly Glum

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The mood is decidedly glum
In markets, as traders succumb
To views that the world
Is coming unfurled
And fears that the game’s zero-sum
 
So, stories ‘bout regional banks
With problems are joining the ranks
Of reasons to sell
Ere things go to hell
And why folks are buying Swiss francs

 

It doesn’t seem that long ago when equity markets were trading at all-time highs, arguably a sign of significant positive attitudes, and yet here we are this morning with equity markets around the world under significant pressure.  Of course, the reason it doesn’t feel like it was that long ago is BECAUSE IT WASN’T.  In fact, as you can see from the chart below, it was just last week!

Source: tradingeconomics.com

And understand, that even with futures pointing lower by -1.0% this morning, the S&P 500 is only 3% off its highs.  That hardly seems like a collapse, but the vibe I am getting is decidedly negative.  Certainly, haven assets are in demand this morning with both the yen (+0.5%) and the Swiss franc (+0.45%) rising sharply after bottoming on the same day as the S&P’s top, with both currencies back to their levels from a month ago.

Source: tradingeconomics.com

Is the world ending?  Probably not today but that doesn’t make it feel any better.  After all, we have been living through an unprecedented growth in leverage, with margin debt growing to new record highs every week, despite a backdrop of massive global uncertainty regarding trade, economic activity and kinetic conflict.  It is hard to believe that the fact that the FOMC is likely to cut rates by 25bps at the end of the month and again in December was enough to convince investors that future earnings were going to rise dramatically.

But that is where things stand this morning.  I must admit I have seen and read more stories about the idea that the AI hype train has run too far and needs to correct, and while that has probably been the case for a while, it is only in the past few days that those stances are becoming public.  There has also been an uptick in chatter about bad debt and more insidiously, fraud, that has been underlying some of the recent hype.  The First Brands bankruptcy is reverberating and now two regional banks, Zion and Western Alliance, have indicated that some recent loan losses may be tied to fraud.  While the amounts in question for the latter two are not enough to be a real problem for either institution, numbering in the $10’s of millions, history has shown that fraud tends to arise when money/lending standards are just too easy, and a sign that the end of good times may be nigh.

Again, it is a big leap to say that because some fraud was uncovered that signals the top.  But history has also shown that there is never just one cockroach, and if the lights are coming on, we are likely to see others.  While big bank earnings were solid, that was for last quarter.  And that’s just the market internal story for one industry.

If we add things like concerns over a potential conflict between the US and Venezuela, which is the top article in the WSJthis morning, or the idea that the US may send Tomahawk missiles, with ranges of up to 1500 miles, to Ukraine, it is unlikely to calm any fears.  And adding to that we continue to have the government shut down, although I personally tend to think of that as a benefit and since it doesn’t seem to be helping the Democrat party, the MSM stopped covering it, and we have the escalating trade conflict with China.  Looking at all the potential problems, it cannot be that surprising that some investors are a bit concerned about things and lightening their exposures.  Too, it is a Friday in October, and we have seen some particularly bad outcomes over weekends in October, notably in 1987!

I’m not forecasting anything like that, believe me, just reminding everyone that while history may not repeat, it often rhymes.  So, let’s look at the overnight session, which had a decidedly risk-off tone.  While the declines in the US markets weren’t that large, they left a bad taste everywhere in Asia with only India (+0.6%) managing to rise on the session.  Otherwise, Japan (-1.4%), China (-2.25%), HK (-2.5%), Taiwan (-1.25%), Australia (-0.8%) and virtually all the rest of the markets declined with Korea managing to close unchanged.  Fear was rampant, especially in China on the ongoing trade concerns.

In Europe, it should be no surprise that equity markets are also sharply lower led by the DAX (-2.1%) and FTSE 100 (-1.2%) with Paris (-0.7%) and Madrid (-0.95%) also under pressure.  The causes here are the same as everywhere, worries that things have gotten ahead of themselves while fears over escalations in both the trade and kinetic conflicts grow.  As well, the banking sector here is under pressure as credit concerns grow globally.  As to US futures, at this hour (7:15), they have bounced off their worst levels and are lower by just -0.25% to -0.5%.

Bond markets have been a major beneficiary of the growing fear with Treasury yields bouncing just 1bp this morning and sitting just below 4.00% after a -7bp decline yesterday.  European sovereign yields also fell sharply yesterday and are finding a near-term bottom as they retrace between 1bp and 2bps higher on the session.  If fear is growing, despite all the budget deficits, the default process is to buy bonds!

In the commodity markets, oil (-0.3%) has bounced off its lowest levels of the session which coincide with the lows seen back in April, post Liberation Day.  (see tradingeconomics.com chart below). It seems that not only are there economic concerns, but API inventory data showed a surprising build there.

Turning to the metals markets, gold (-0.2%) had a remarkable day yesterday, rising $100/oz, more than 2%, so a little consolidation here can be no surprise.  In fact, all the metals saw gains yesterday and are backing off a bit this morning in very volatile, and what appear to be illiquid markets.  Looking at the screen, the price is rising and falling $5/oz on a tick.  This 5-minute chart shows just how choppy things are.

Source: tradingeconomics.com

Finally, the dollar is softer, which on the one hand is surprising given its traditional haven status, but on the other hand, given the ongoing decline in yields and the fear pervading markets, is probably not that surprising.  Remember, one of the drivers for the dollar is capital flows and if US equity markets decline, we are going to see foreign investors sell, and then likely sell those dollars as well.  However, I would take exception with the Bloomberg headline explaining that the dollar is weakening because of Fed rate cut expectations given those expectations have been with us for several weeks.  At any rate, the weakness this morning is broad-based, but shallow with the two havens mentioned above the exception and most other currencies gaining 0.1% or 0.2% at most.  It seems President Trump has also made a comment about the trade war indicating that the current tariffs are unsustainable and he confirmed he would be meeting President Xi in a few weeks.

And that’s really all there is to end the week.  There is no data at all, and the only Fed speaker is KC Fed president Musalem.  The general takeaway from the Fedspeak this week is that they are prepared to cut rates but given the lack of data, will not be aggressive.

The world is a messy place.  No matter your political views, when viewing markets, it is important to focus on the reality of what is happening.  We know that leverage has been growing and helping to drive stock market indices to record highs.  We know that gold and other precious metals have been rallying on a combination of central bank (price insensitive) and growing retail buying as fears grow of impending inflation.  We have seen several instances of what appears to be lax lending standards, something that historically has led to substantial chaos in markets.  The advice I can offer here is maintain position hedges, especially those of you who are corporate risk managers.  Yes, volatility has risen a bit, but I assure you, if things really come undone, that will be insignificant compared to the benefit of the hedge.

And with those cheery words, I wish you all 

Good luck and a good weekend

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