Tag Archives: stock-market

What He Will Mention

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Last night there was, briefly, a peace
This morning, though, that seemed to cease
But worries Iran
From Hormuz, would ban
Most ships, have now greatly decrease(d)
 
So, markets have turned their attention
To Powell and what he will mention
When he sits before
The Senate once more
Though most seated lack comprehension

 

Talk about yesterday’s news!  While I am pretty confident we have not heard the last of the Iran/Israel conflict, it has dropped off the radar in a NY minute.  Last night President Trump announced a cease fire between the two nations and while Israel alleged that Iran already broke the peace, the market has clearly moved on from the erstwhile WWIII concept to WWJS (What Will Jay Say).  In that vein, this morning’s WSJ had an articlefrom the Fed whisperer, Nick Timiraos, describing the trials and tribulations of poor Chairman Powell as he tries to fend off those mean words from President Trump.  

Powell sits down before the Senate Banking Committee this morning, and the House Financial Services Committee tomorrow, ostensibly to describe the state of the economy and the Fed’s current thinking.  I have begun to see discussions that two Trump appointed governors, Bowman and Waller, are now interested in potentially cutting the Fed funds rate in July and the futures market has raised the probability of a cut next month to 23%, back to the levels seen a month ago, pre-war and prior to a run of stronger than expected economic data.

Source: cmegroup.com

Frequently mentioned throughout the WSJ article was the idea of Fed independence and how critical that is for monetary policy to be effective.  As well, the fact that the comments on rate cuts are from governors Trump appointed, and that is being highlighted in a negative fashion, is further evidence that the Fed remains a highly political, and quite frankly, partisan organization.  One cannot look at the rate cuts last autumn ahead of the election, which were certainly not warranted by the data, as anything other than the Fed’s attempt to support VP Harris’s presidential campaign.  And when inflation was still quite high, although starting to decline, calls for cuts by Biden appointees Cook and Jefferson, were also likely politically motivated given the still high inflation rate.  

In fact, I wonder where Governor’s Cook and Jefferson are today with respect to rate cuts.  After all, both have demonstrated dovish biases throughout their tenure at the Fed, but suddenly they are strangely silent on the subject.  I’m sure that is not a political bias showing, but rather deeply considered economic analysis. 🙃

I do find it interesting that there is an underlying presumption that the Fed funds rate is always too high, at least for the narrative, although I guess that is because most narrative writers believe strongly in the idea if rates are low, stock prices will rise.

Regardless of the politics, Powell will very likely explain that there is still concern that tariffs could raise prices and while there is the beginning of concern over the labor market, it remains solid and does not warrant rate cuts at this time.  Of course, we will also be subject to the preening of all those senators (what is the probability that Senator Van Hollen brings up deportations?) with no useful discussion.  It seems unlikely that Chairman Powell will alter his message from the post meeting press conference which remains, patience is a virtue.

Ok, now that the war has ended, let’s see how markets have behaved.  I must start with oil (-3.0% today, -12.0% since yesterday morning) where traders have removed the entire Hormuz closing premium and are now dealing with the fact that there are more than ample supplies around.  Recall, OPEC+ continues to increase production, and the macroeconomic narrative remains one of slowing economic activity.  Happily, gasoline prices are following oil lower so look for less inflation concerns for next month.

Source: tradingeconomics.com

Meanwhile, with war off the table, gold (-1.3%) is no longer in such great demand although silver (unchanged) and copper (+0.7%) continue to find support.  Net, my longer-term views remain that oil prices have further to decline while metals prices should grind higher over time.

In the equity markets, you have to search long and hard to find a market that didn’t rally overnight or is in the process of doing so this morning.  After yesterday’s strong US closing (all three main indices up about 0.9%), Asia (Nikkei +1.1%, Hang Seng +2.1%, CSI 300 +1.2%) rallied sharply with Korea (+3.0%) really popping and only one negative, New Zealand (-0.5%) where local traders cannot seem to get on board with the better news.  In Europe, the gains are also substantial (DAX +1.8%, CAC +1.2%, IBEX +1.4%) although the UK (+0.3%) is lagging given the large weighting of energy in the index.  US futures are also pointing higher this morning, about 0.8%.

In the bond market, Treasury yields are unchanged this morning after slipping -3bps yesterday, but we are seeing yields rise in Europe (Bunds +5bps, OATs +3bps) after the Germans announced they would be borrowing 20% more this quarter than initially expected to help their rearmament program.  I guess investors had a mild bout of indigestion.

Finally, the dollar, which rallied nicely into yesterday’s NY opening has basically reversed all those gains since then and is back trading near 98 on the DXY. While there are various relative sizes of movement, it is all in the same direction and entirely driven by the Iran/Israel war story.  Perhaps we are starting to see some pricing of a Fed rate cut, and if they do act in July, I would expect the dollar to fall, but right now, it feels much more like unwinding the war footing.

On the data front, aside from Chairman Powell at 10:00 this morning, we see Case Shiller Home Prices (exp +4.0%) and Consumer Confidence (100.0).  However, I suspect that neither of those will matter very much.  The equity market has the bit in its mouth and is looking for reasons to go higher.  Any dovish hints by Powell will set that off, as well as undermine the dollar.  We shall see.

Good luck

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A New Paradigm

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No matter the asset you trade
For weeks, every move’s been a fade
As headlines decry
Each thing Trump does try
Investors are feeling betrayed
 
They want to go back to the time
When markets did, every day, climb
But that time has passed
And I would forecast
We’ve entered a new paradigm

 

The following onslaught of charts from tradingeconomics.com are meant to highlight that for the past several weeks, basically nothing has gone on in markets.  Every day is like every other, and the only trend is a horizontal line.

Now, this is not to say that each movement is identical, just that any longer-term trends that may exist are not evident lately.  For traders, this can be terrific because there has been volatility which can be captured.  Of course, since much of the volatility has been headline bingo, that reduces the appeal.  But for longer term investors, it is a more difficult situation as those same headlines can call into question the underlying thesis of any or every trade.

Are the tariffs here to stay?  Or will they be overruled?  Is the “Big Beautiful Bill” going to be a benefit?  Or are there too many things hidden within that will impact the economy, markets and investor behaviors?  Is there going to be a Russia/Ukraine peace?  Is Iran going to sign a deal?  Will the US and China agree a trade deal?  Obviously, there are many very large issues currently outstanding with no clear resolutions in any of them as of now.  When you consider not only that the future is uncertain (which is always true) but the potential outcomes are diametrically opposed, it is easier to realize why markets are stuck in the mud.  But hey, nobody ever said trading was supposed to be easy!

There is, however, one issue I think worth highlighting that has seen an increase in discussion, and that is Section 899 of the reconciliation bill.  It is titled, “Enforcement of Remedies Against Unfair Foreign Taxes” and Bloomberg has a solid description here.  The essence of this clause is it increases taxes on nations, and individuals in those nations, who discriminate against US companies.  The idea is that Europe, especially, is busy enacting “Digital Services Taxes” which are designed to extract revenue from the large US tech companies that dominate particular spaces, like Meta, Google and Microsoft.  But these tax laws have thresholds such that essentially no other companies will be impacted.  This is the US response.  

Much of the discussion thus far has focused on the idea that this will discourage investment in US financial assets, potentially reducing the market for Treasury bonds and adding to the destruction of American exceptionalism in financial markets.  And it may well do that.  However, the thing to consider is that one of the reasons that the US has drawn so much investment is that there are so many investable securities here in the US, and that property rights remain sacrosanct.  Yes, taxation matters, but if you are a sovereign wealth fund with $100 billion in assets or more, where are you going to invest that money if not in the US, at least in some part?  And remember, this is only to be focused on nations with discriminatory taxes vs. US companies.  So, the Saudis, for example, or the Japanese need not worry.  It strikes me that at the margin, this could have a modest impact on prices, perhaps softening the dollar some and reducing future gains, but this is unlikely to end investment into the US.

Ok, let’s quickly run through the lack of overall movement last night.  Yesterday’s early US equity gains (triggered by the tariff ruling) faded all day and markets here closed very modestly higher.  In Asia, gains from yesterday were largely reversed as an appeals court stayed the ruling, so the tariffs remain in place as of now.  Thus Japan (-1.2%), Hong Kong (-1.2%) and China (-0.5%) basically reversed yesterday’s closings.  In Europe, though, things are a bit brighter. With gains across the board as inflation data released showed that it continues to drift lower across the continent.  This has encouraged traders to believe that more ECB rate cuts are coming, which was confirmed by the Bank of Italy’s Fabio Panetta, an ECB Governing Council Member, who exclaimed that inflation is nearly beaten.  Meanwhile, bank economists are now warning that further rate cuts need to come more quickly.  All this, of course, is music to equity investors’ ears.  As such, gains range from +0.3% (France) to 1.0% (Germany) and everywhere in between.  As to US futures, they are unchanged at this hour (7:30).

In the bond market, Treasury yields are unchanged this morning after sliding 8bps yesterday.  Interestingly, European sovereign yields, which also fell yesterday, have rebounded 3bps this morning despite the happy talk of more ECB rate cuts and the imminent death of inflation.  Too, last night saw yields decline in Japan (-3bps) and Australia (-11bps), following in the footsteps of yesterday’s Treasury market.

In the commodity markets, oil (+1.3%) is higher after EIA data yesterday showed modest inventory draws while gold (-0.75%) is giving back yesterday’s gains which came on the back of a weak dollar.  But as mentioned at the beginning of this piece, in the end, trends in both directions are on hold for now.

Finally, the dollar is firmer this morning, unwinding some of yesterday’s declines which grew throughout the day.  Right now, in the G10, the euro (-0.3%) is a pretty good proxy for the entire bloc, although JPY (+0.15%) is sticking out like a sore thumb.  In the EMG bloc, we see declines on the order of -0.5% (KRW, PLN, ZAR) although MXN (+0.2%) is also an aberration this morning.  Alas, I see no particular reason for this move.  However, as mentioned above, the recent trend is flat, although I cannot get over the idea that the dollar has further to decline going forward.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (+0.2%), PCE (0.1%, 2.2% Y/Y), and Core PCE (0.1%, 2.5% Y/Y) as well as the Goods Trade Balance (-$141.5B) all at 8:30.  Then we see Chicago PMI (45.0) and Michigan Consumer Sentiment (51.0) at 10:00.  There is one final Fed speaker this week, Atlanta’s Bostic this afternoon.  However, when it comes to the Fed, again yesterday we heard that patience is the watchword with no hurry to adjust policy right now.  As well, we learned that Chairman Powell had lunch with President Trump yesterday, where Trump asked him to lower rates, and Powell said they are following their long-proscribed tasks of responding to economic outcomes. 

There is nothing that seems likely to excite anyone today, so I look for a quiet session overall.  It seems unlikely that anything of note will be resolved, whether on a political or international relations basis, so look for a quiet session and a relatively early close as traders and investors head out for a summer weekend.

Good luck and good weekend

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Eighty-Sixed

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The data remains rather mixed
But traders are still all transfixed
By tariffs and trade
As JGBs fade
And new ideas get eighty-sixed
 
Despite signs that peace in Ukraine
Is further away and hopes wane
It seems all that matters
Is whether Huang flatters
Investors, so stock markets gain

 

Apparently, at least based on yesterday’s equity market performance, concerns over the eventual outcome of the current global fiscal and monetary regimes remains far down everyone’s list of worries.  Rising inflation?  Bah, doesn’t matter.  Increasing tensions between Presidents Trump and Putin as Russia continues, and arguably increases its aggression?  No big deal.  But you know what has tongues wagging this morning?  Nvidia earnings are to be released after the close, and as we all know, if they are strong (everyone is counting on Jensen Huang, the CEO), then every other concern pales in significance.  After all, a global conflagration is no match in the imagination compared to your stock portfolio increasing in value!

Once upon a time, investors in the stock market sought companies that had good business models and good management who were able to grow their businesses.  These investors were buying a piece of a business in which they believed.  Analysts looked at metrics like P/E ratios and book value to determine if the price paid offered future opportunities as an investment, but the underlying company was the focus.  Of course, that is simply a quaint relic of times long ago, pre GFC.  Today, there is only one metric that matters, ‘NUMBER GO UP’!  While this concept was originally ascribed to Bitcoin and the crypto universe, it has spread across virtually all financial markets.  Nobody cares what a ticker symbol represents, they only care if the number next to the ticker symbol rises, and how rapidly it does so.  Welcome to the future.

I highlight this because it has become increasingly clear that the macroeconomic landscape is an anachronism for analyzing financial markets.  At this point, whether or not a recession is on the horizon, or inflation is rising, or unemployment is rising or falling seems to have only a fleeting impact on market movements.  Rather, the true driver appears to be the flow of all that money that has entered the global financial system since the GFC.  The below chart from streetstats.finance shows the last 10 years of the growth in the global money supply and the corresponding move in the S&P 500.  You may not be surprised at the tight correlation.

My point is that all the news items that draw our attention may not matter at all in the broad scheme of things.  As long as money continues to be printed and injected into the financial system, while some assets will outperform others, the trend remains sharply from the lower left to the upper right.  Going back to my discussion yesterday, since the overriding goal of every global central bank is to ensure that their governments can issue bonds to finance their spending, I see no end to this trend.  While the speed of the increase may ebb and flow slightly, the direction will only change under the most egregious circumstances, something like the aftermath of WWIII.

In a funny way, this highlights that FX markets have the opportunity to be the most interesting trading markets going forward given the relativity of their underlying basis.  Assets, whether debt, equity or commodity, are all priced on demand functions while FX is priced on relative demand for each side of the cross.  Perhaps FX will be the last bastion of macroeconomic analysis.

But not today!  Starting with FX, the dollar is little changed to slightly higher this morning, consolidating yesterday’s gains but things are quiet.  In fact, across the main markets, the largest movement in either direction is NZD (+0.25%) after the RBNZ cut rates as expected by 25bps, but the market reduced the probability of another rate cut in July.  But away from that move, +/-0.1% is the norm today.  Discussion about tariffs continues to be the major talking point, but as of now, it appears nobody has a clue as to how things will evolve, so everybody is just hunkering down.  

Turning to equities, while yesterday saw a very large rally in the US, that sentiment was absent overnight with Asian markets generally drifting slightly lower although New Zealand (-1.7%) was clearly unhappy with the RBNZ mild hawkish view.  But elsewhere, movement was far less than 1.0%.  In Europe, it is a similar tale, very modest declines across the board as data showed German Unemployment rising slightly, Eurozone Consumer Inflation Expectations also rising slightly while French GDP disappointed on the downside, just 0.6% Y/Y.  You can appreciate the lack of enthusiasm there, although the story that Madame Lagarde is considering stepping down from the ECB to take over WEF should put a spring in the step of European investors as perhaps the next ECB president will understand economics and central banking.  As to US futures, they are little changed at this hour (7:35).

In the bond market, after a session where yields slid across the board yesterday, this morning brings a modest reversal with Treasuries (+2bps) right in line with most of Europe (+1bp across the board) although JGB’s (+5bps) suffered after another lousy long-dated auction last night where 40-year JGBs saw pretty weak demand overall.  The Japanese bond market remains a serious issue for many and a potential signal for the timing of next big move.  While risk assets rallied yesterday, nothing changed my description of the problems that exist globally.

Finally, in the commodity markets, oil (+0.7%) is modestly higher this morning but continues to trade within its range and shows no sign of breaking out in the near term.  Metals markets, which sold off aggressively yesterday have stopped falling, but are hardly rebounding, at least as of now.  

Let’s look at the data for the rest of the week though.

TodayFOMC Minutes 
ThursdayInitial Claims230K
 Continuing Claims1900K
 Q1 GDP (2nd estimate)-0.3%
FridayPersonal Income0.3%
 Personal Spending0.2%
 PCE0.1% (2.2% Y/Y)
 Core PCE0.1% (2.5% Y/Y)
 Goods Trade Balance-$141.5B
 Chicago PMI45.0
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition to the data, with all eyes really on Friday’s numbers, we hear from six more Fed speakers, although, again, will they really change their tune about patience in watching what the impact of tariffs are going to be on the economy?  I think not.  In the Fed funds futures market, the probability of a cut in June has fallen to just 2% while the market is now pricing just 47bps of cuts this year, the lowest amount in forever.  Unless the data completely fall off the map, I don’t see why they would cut at all, and that has just not happened yet.

The summer is upon us (although you wouldn’t know by the weather in the Northeast) and that typically leads to a bit less activity overall.  At this point, much depends on Congress and its ability to complete the budget bill to move the legislative process along.  Then the hard part of spending bills will be the next topic and you can expect a lot of screaming then.  In the meantime, though, I expect that we will hear of a number of other trade deals getting completed and a good portion of the trade anxiety ebbing from market views.  Alas, the peace/war equation is far more difficult to handicap as so many in power clearly benefit from war.

The prevailing view in the market is that the dollar has further to decline going forward as I think a majority of players are anticipating a recession in the US and the Fed to respond.  Under that scenario, a softer dollar feels right.  But is that the right scenario?

Good luck

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Has Bug Met Windshield?

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So, once again, we were misled
By all those who told us, with dread,
The ratings reduction
Would cause much destruction
With both stocks and bonds, money, dead
 
Instead, what we saw yesterday
Was traders jumped into the fray
Despite all the gloom
It seems there’s still room
Where bullish investors hold sway

 

I know it is hard to believe, but it seems that all the angst that was fomented over the weekend following Moody’s ratings downgrade of US Treasury debt was for naught.  In fact, the decline in both stocks and bonds didn’t even last one session, let alone weeks or months as both markets closed the session essentially unchanged on the day, recouping the early losses seen.  A quick look at the chart below shows the price action in S&P 500 futures from the time of the announcement through yesterday’s close and then this morning.  It seems the market is concerned about things other than the US credit rating.

Source: tradingeconomics.com

In fact, I am willing to say that we are unlikely to hear anything more about the downgrade until such time that equity prices fall on some other catalyst, and the punditry will add in the ratings story to help bolster whatever claim they are making at that time.  Please remember, as well, that I am quite concerned that equity valuations remain rich and that a decline is quite possible, if not likely.  It’s just that the ratings downgrade story is not going to be the driver of that move.

In Japan, it seems
No one’s buying JGBs
Has bug met windshield?

Last night, Japan auctioned 20-year JGBs with the yield coming at 2.52%, the highest since these bonds were first issued back in 1999.  As well, yields in 30-year and 40-year JGBs also soared, rising 12bps in each case to the highest yield in more than 25 years as per the below chart of the 30-year bond.

While the selloff in JGBs has been accelerating, real yields there are still negative with CPI running at 3.6%.  This presents quite a conundrum for Japanese investors as despite the negative real yield, the ability to borrow cheaply (remember short term rates in Japan are 0.50%) and invest in long-dated bonds and earn 3.0% is quite tempting.  250 basis points of carry with no currency risk is now going to compete with 450 basis points of carry (US 30-year yields of ~5.0% – 0.50% funding costs in Japan) with FX risk.

What makes this especially tricky for Japanese investors is that the dollar’s future path, which had been clearly higher for longer, appears to have adjusted.  It seems evident the Trump administration is keen to see the dollar decline, or perhaps more accurately, see other currencies appreciate, especially if those nations run significant trade surpluses with the US.  Japan certainly fits that bill.  And the thing about currency risk is that FX can move swiftly enough to wipe out any carry benefits before institutional investors can even organize meetings to determine if they want to change their strategy.

One of the things that we have heard regularly for the past several years (decades?) is that the US fiscal situation has put the nation in a precarious position, relying on investment by foreigners to fund the massive budget deficits that the government has been running.  The problem with these warnings is they have been ongoing for so long, nobody really pays them any attention.  It is not to say the theory is incorrect, just that there have been other things that have offset that factor and attracted capital to the US anyway.  It is also not apparent that Moody’s ratings cut has changed that dynamic.

But, if at the margin, Japanese investors start to focus more on the JGB market to reduce currency risk, rather than on the highest yield available in major nations, that would likely have a negative impact on the Treasury market.  That is, of course, a big IF and there is no evidence yet that is the situation.  It is something, though, we must watch closely.  

Remember, too, global debt/GDP is more than 300% across all types of debt, public and private.  That tells me it will never be repaid, only rolled over.  The question is at what point will investors decide that holding debt is too great a risk at current yields?  While I assure you governments around the world will work hard to prevent that outcome, including changing regulations to force purchases, it is not clear how much higher that ratio can go without more seriously negative consequences.  We will need to watch this closely.

With that in mind, let’s turn to markets and see how things have behaved in the wake of the reversal in US markets yesterday.  Asian equities were mixed with Japan essentially unchanged, China (+0.5%) and Hong Kong (+1.5%) showing the best performance in the region while India (-1.0%) was the laggard.  Otherwise, there were both gainers and losers of limited note.  In Europe, though, equity markets are rallying across the board led by Spain’s IBEX (+1.6%) despite another infrastructure disaster where half the nation lost telecoms for several hours as Telefonica (Spain’s major telecom company) messed up a systems upgrade.  The rest of the continent has seen shares rise on the order of 0.4% to 0.5% as ECB comments seem to be encouraging the idea of another rate cut coming soon and European Current Account data showed a greater surplus than expected.  US futures, though, are ever so slightly lower at this hour (7:15), down about -0.1% across the board.

In the bond market, in the 10-year space, yields are within 1bp of yesterday’s closing for Treasuries (+1bp), European sovereigns (-1bp) and JGBs (+1bp).  It seems that despite all the talk of the end of times, investors haven’t given up yet, at least not in the 10yr space.  However, the evidence is growing that fixed income investors are growing leery of tenors longer than that.

In the commodity markets, oil (-0.6%) is slightly softer but remains well within its recent trading range amid the slightest of downtrends.  In truth, I find this chart to be an excellent description of my feelings of this market, a really slow decline over time.

Source: tradingeconomics.com

As to the metals markets, gold (+0.6%) is continuing its rebound from the worst levels seen last Thursday and is currently more than $100/oz higher than those recent lows.  This has helped silver (+0.5%) as well although copper (-0.5%) is not playing along today.

Finally, the dollar, remarkably, did not collapse in the wake of the Moody’s downgrade.  In fact, similar to the price action in both stocks and bonds yesterday, the dollar retraced much of its early losses.  This morning, it remains on the soft side, but movement is much less pronounced across both the G10 and EMG blocs.  However, the worst performer today is AUD (-0.7%) which some may attribute to the fact that the RBA cut their base rate by 25bps last night (although that was widely expected).  But I would point to the law that was recently enacted by the Albanese government in Australia to begin taxing UNREALIZED capital gains.  This idea has been floated by other governments but never actually enacted.  I fear that the consequences for Australia will be dire as it becomes clear the policy is extraordinarily destructive.  Capital will flee and that bodes ill for the currency.  If they truly follow through with this, be very careful.

There is no data today, but we hear from six different Fed speakers as they are all participating in an Atlanta Fed symposium.  However, I do not expect anything other than patience is the watchword as they observe the Trump administration policies unfold.

In the end, the predicted doom did not come to pass.  However, for my money, I would pay closest attention to Australia.  I fear the negative consequences of this policy will be extreme.

Good luck

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Set Cash On Fire

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On Friday, the Moody’s brain trust
At last said it’s time to adjust
America’s debt
As we start to fret
That it’s too large and might combust
 
So, Treasury yields are now higher
As pundits explain things are dire
But elsewhere, as well
Seems bonds are a sell
As governments set cash on fire

 

Arguably, the biggest story of the weekend happened late Friday evening as Moody’s became the third, and final, ratings agency to downgrade US government debt to Aa1 from Aaa.  S&P did the deed back in 2011 and Fitch in 2023.  The weekend was filled with analyses of the two prior incidents and how markets responded to both of those while trying to analogize those moves to today.  In a nutshell, the first move in both 2011 and 2023 was for stocks to fall and bonds to rally with the dollar falling. However, in both of those instances, those initial moves reversed over the course of the ensuing months such that within a year, markets had pretty much reversed those moves, and in some cases significantly outperformed, the situation prior to the downgrade.  

Looking at Moody’s press release, they were careful to blame this on successive US administrations, so not putting the entire blame on President Trump, but in the end, it is hard to ignore that the nation’s fiscal statistics regarding debt/GDP and debt coverage are substantially worse than that of other nations that maintain a Aaa rating.  As well, their underlying assumption is that there will be no changes in the current trajectory of deficits and so no reason to believe things can change.

The most popular weekend game was to try to estimate how things would play out this time although given the starting conditions are so different in the economy, I would contend past performance is no guarantee of future outcomes.  In this poet’s eyes, it is not clear to me that it will have a long-term material impact on any market.  We have already been hearing a great deal about how Treasuries are no longer the safe haven they were in the past.  I guarantee you that institutions looking for a haven were not relying solely on Moody’s Aaa rating for comfort.  In addition, given a key demand for Treasuries is as collateral in the financial markets, and the Aa1 rating is just as effective as a Aaa rating from a regulatory risk perspective, I see no changes coming

As to equities, I see no substantive impact on the horizon.  The equity market remains over richly valued and if it were to decline, I don’t think fingers could point to this action.  Finally, the dollar has been declining since the beginning of the year and remains in a downtrend.  Using the DXY as our proxy, if the dollar falls further, should we really be surprised?

source tradingeconomics.com

To summarize, expect lots more hyperbole on the subject, especially as many analysts and pundits will try to paint this as a failure of the Trump administration.  And while bond yields may rise further, as they are this morning, given the fact that yields are rising everywhere around the world, despite no other nations being downgraded, this is clearly not the only driver.

In fact, one could make the case that bond yields are rising around the world because, like the US, nations all over are talking about adding fiscal stimulus to their policy mix.  After all, have we not been assured that Europe is going to borrow €1 trillion or more to rearm themselves?  That is not coming out of tax revenue, that is a pure addition to the debt load.  As well, is not a key part of the ‘US will suffer more than China in the tariff wars’ story based on the idea that China will stimulate the domestic economy and increase consumption (more on that below)?  That, too, will be increased borrowing.  I might go so far as to say that the increased borrowing globally to increase fiscal stimulus will lead to higher nominal GDP growth everywhere along with higher inflation.  I guess we will all learn how things play out together. 

Ok, so now that we have a sense of THE big story, let’s see how markets behaved elsewhere.  I thought that today, particularly, it would be useful to see how bond markets around the world have behaved in the wake of the Moody’s news.  Below is a screenshot from Bloomberg this morning.  note that every major market that is open has seen bonds sell off and I’m pretty confident that Canada’s at the very least, will do so when they wake up.  Ironically, the European commission came out this morning and reduced their forecasts for GDP growth and inflation this year and next and still European sovereign yields are higher.  I have a feeling that this news is not as impactful as some would have you believe.

Turning to equity markets, Friday’s US rally is ancient history given the change in the narrative.  And as you can see below from the tradingeconomics.com page, every major market is softer this morning (those are US futures) with only Russia’s MOEX rising, hardly a major market.  Again, it appears the fallout from the ratings cut is either far more widespread, or not a part of the picture at all.  It seems you could make the case that if European growth is going to underperform previous expectations, equity markets there should underperform as well.  The other two green arrows are Canada and Mexico, neither of which is open as of 6:30 this morning.

Commodity markets are the ones that make the most sense this morning as oil (-1.3%) is under pressure, arguably on a weaker demand picture after softer Chinese data was released overnight.  While the timing of the impacts of the trade war is unsettled, there is certainly no evidence that China is aggressively stimulating its economy.  This was very clear from the decline in Retail Sales, Fixed Asset Investment and IP, although the latter at least beat expectations.  But the idea that China is changing the nature of their economy to a more consumption focused one is not yet evident.  Meanwhile, metals markets are all firmer this morning with gold (+1.2%) leading the way, arguably as a response to the ratings downgrade.  This has dragged both silver (+0.9%) and copper (+1.0%) along for the ride.  It is not hard to imagine that sovereign investors see the merit in owning storable commodities like metals in lieu of Treasuries, at least at the margin.  But also, given the dollar’s weakness, a rally in metals is not surprise.

Speaking of the dollar’s weakness, that is the strong theme of the day along with higher yields across the board.  Right now, the euro (+1.0%) and SEK (+1.0%) are leading the way higher although the pound (+0.9%) is also doing well.  Perhaps this has to do with the trade agreement signed between the UK and EU reversing some of the Brexit outcomes at least regarding food and fishing, although not regarding regulations or immigration.  JPY (+0.6%) is also rallying as is KRW (+0.75%) and THB (+0.9%) as there is a continuing narrative that stronger Asian currencies will be part of the trade negotiations.  Finally, Eastern European currencies are having a good day (RON +2.3%, HUF +1.8%, CZK +1.2%, PLN +1.0%) after the Romanians finally elected a president that was approved by the EU.  Yes, they had to nullify the first election and then ban that candidate from running again, but this is how democracy works!

On the data front, there is very little hard data to be released this week, although it appears every member of the FOMC will be on the tape ahead of the Memorial Day weekend.  Perhaps they are starting to feel ignored and want to get their message out more aggressively.

TodayLeading Indicators-0.9%
ThursdayInitial Claims230K
 Continuing Claims1890K
 Flash Manufacturing PMI50.5
 Flash Services PMI51.5
 Existing Home Sales4.1M
FridayNew Home Sales690K

Source: tradingeconomics.com

Actually, as I count, there are three members, Barr, Bowman and Waller who will not be speaking this week, although Chairman Powell doesn’t speak until next Sunday afternoon.  In the end, the narrative is going to focus on the ratings cut for a little while, at least for as long as equity markets are under pressure along with the dollar.  However, when that turns, and I am sure it will, there will be a search for the next big thing.  I have not forgotten about the potential large-scale changes I discussed on Friday, and I am still trying to work potential scenarios out there, but for now, that is not the markets’ focus.  Certainly, for now, I see no reason for the dollar to gain much strength.

Good luck

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Very Near Future

Posted on by

The “very near future” is when
The US and China, again
Will restart their talks
Assuming no balks
By either of these august men
 
That’s all that the market required
For buyers to get so inspired
Can this idea last?
Or will it have passed
Ere market resolve has expired

 

While all and sundry have been very confident that President Trump’s attempt to alter the structure of the global economy and world trade to a more beneficial one, in his view for the US, will fail dismally and that we are doomed to stagflation as prices rise and the economy sinks, it seems these same economic analysts have forgotten that there are two sides to the supply/demand equation.  I have written before that despite all the slings and arrows that have been aimed at Trump, the US has a very strong hand in the trade game given it is THE CONSUMER OF LAST RESORT.  Virtually every nation in the world has built an economy designed to be able to manufacture stuff cheaply and sell it into the largest economy in the world.

And US consumers are remarkable in their ability to continue to consume at high levels despite what appear to be significant headwinds, whether high financing costs, limited savings or slowing economic activity.  But a funny thing is happening on the way to this mooted US stagflation, it’s not happening yet.  In fact, as described by economist Daniel Lacalle in his most recent post, it seems that the biggest problem is not that Americans cannot find what they want to buy, it is that they only bought all this stuff because it was cheap.  They will not accept significant price rises and so inventory is building up at factories while ships are stuck with containers full of stuff nobody wants, at the price.  Could it be that President Trump read the room better than the economists?

I use this as preamble to yesterday’s massive equity rebound which was, ostensibly, triggered by comments from Treasury Secretary Bessent that substantive trade talks with China would begin in the “very near future.”  Subsequent soothing comments by the President indicated that the days of 125% tariffs were numbered but there would be tariffs in place.  As well, Mr Trump explicitly said he has no intention to fire Fed Chair Powell, despite his recent diatribe that Powell is always late to the party and should cut rates.  Certainly, I agree the Fed is, and will always be, late to the party as long as they use a data driven approach.  After all, by the time economic change is reflected in the data, whatever is going to change has already done so.  However, I don’t yet see the rationale for cutting rates given the current economic data and the fact that inflation remains a problem.

As of this morning, following significant equity rallies around the world, one might come to believe that all the world’s problems have been successfully addressed.  The fact that one would be wrong in that belief is the best example of ‘the market is not the economy’.  But, hey, let’s take the rallies when they come!

From a market perspective, that was really the big story yesterday and continuing into today.  Flash PMI data is not that exciting, and all the other headlines revolve around the ongoing immigration/deportation issues plus RFK Jr’s edict to remove petroleum-based food coloring from foods.  So, let’s look at the markets and recap the action.

The 2.5% to 3.0% gains in the US were followed by Tokyo (+1.9%) and Hong Kong (+2.4%) performing well but nothing like Taiwan (+4.5%).  The laggard last night was China (+0.1%) with other regional exchanges showing gains between 0.5% and 1.5%.  Net, I suppose everybody was happy.  In Europe this morning, the screens are green as well, with Germany (+2.6%) leading the way followed by France (+2.2%) and the UK (+1.3%).  Again, the trade story appears to be the leading driver.  And, adding to the joy, US futures are also higher between 2.0% (DJIA) and 3.0% (NASDAQ) this morning as of 6:50.  And to think, just two days ago I was assured that the end was nigh.  A quick look at the S&P 500 chart below does give a flavor for just how much volatility we have seen on a day-to-day basis and how narrative changes continue to have huge impacts.

Source: tradingecomics.com

At the same time, Treasury yields have been retracing, lower by -8bps this morning with UK gilts (-6bps) also performing well, although continental European sovereigns are not seeing the same demand with bunds (+3bps) the laggard despite the weakest PMI readings with both Manufacturing and Services below 50.0, lower than last month and far lower than forecasts.  The narrative of money leaving the US and heading back to Europe is certainly appealing, and seems quite reasonable as a long-term metric, but it is not clear to me that it will be driving daily price action in any market.

In commodities, oil (+1.0%) continues to edge higher although it has not yet come close to filling that massive gap lower from the beginning of the month.  

Source: tradingeconomics.com

From a fundamental perspective, fears of a US recession, which remain high, as well as the IMF recently reducing their global growth forecast seem to be undermining the demand side of the equation.  Meanwhile, the opportunity for significant new supply (Iran deal, Russia peace) seems quite real.  I’m no oil trader but it strikes me the risk-reward here is for a further drop in prices.  As to the metals markets, gold (-0.4%) fell more than $100/oz yesterday, so perhaps my view that the parabolic move was too much was correct.  However, I believe this is a short-term, and much needed, correction with the long-term story fully intact.  Meanwhile, silver (+1.4%) and copper (+0.4%) are modestly higher after quiet sessions yesterday.

Finally, the dollar is firmer this morning against most of its counterparts, but this is not a universal situation.  While both the euro and pound have fallen -0.25%, AUD (+0.6%) is showing some oomph as it figures to be one of the key beneficiaries of a trade agreement between the US and China, no matter how far in the future.  Other key gainers are KRW (+0.6%) and CNY (+0.3%), with both clearly benefitting from that same trade story.  But otherwise, the dollar is mostly ascendent.  

An aside here on the yen (-0.4%) which just two days ago traded below the key psychological level of 140 and this morning is back above 142.  It strikes me that this is the first currency that will be reactive to any trade deal.  As you can see from the below, long-term chart of the yen, it has spent the bulk of its time at far higher (dollar lower) levels.  I suspect that any trade deal will include an effort to revalue the yen higher vs. the dollar, perhaps to its longer-term average of around 120.

Moving on to today’s data, we have New Home Sales (exp 680K) and then the Fed’s Beige Book at 2:00pm. I’m not sure when the surveys were taken for the Beige Book, but you can be sure they will express a great deal of uncertainty and discuss how it will reduce economic activity.  You can also be sure that this will be hyped in the press.  But now that everything is better (just look at the stock market) is this old news?

If we try to look past the daily gyrations to the bigger picture, I would contend the following is the case.  Equity markets remain overvalued and are likely to weaken, the dollar is likely to slide as well as foreign investors slowly reallocate funds away from the US.  Quite frankly, the Treasury story is much harder as the interplay between inflation and potential reduced government expenditure is highly uncertain right now, although one will eventually dominate.  Finally, commodities remain far more important than their current relative weight in the global asset basket and I believe they have much further to climb in price.  One poet’s views.

Good luck

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This is the End

Posted on by

Apparently, this is the end
So says every article penned
The markets are tanking
But nobody’s banking
On help to arrest the downtrend
 
The pundits’ unanimous line
Is things before Trump were just fine
Yes, debt was insane
But that gravy train
Allowed them to drink the best wine

 

Every financial website lead this morning is how President Trump’s policies are causing the worst slide in equity prices in forever, with my favorite today in the WSJ describing this as the worst performance in April since 1932!  Much has been made about how President Trump is undermining the Fed’s credibility, as though the Fed has that much credibility to undermine.  This is the group that declared stable prices to be an increase in their favored indicator, core PCE, of 2.0% annually, and complained vociferously when inflation was slightly below that level for a decade.  In order to adjust things, they changed their target to an average of 2.0% over time, then watched their metrics, in the wake of the Covid fiscal response, explode higher.  Now, after more than four years of their target metric above their target, they are concerned they are losing their credibility because of President Trump.  

Source: tradingeconomics.com

Certainly, if they had been achieving their goals any time during the past four years, this argument might have had some force.  However, given the history, I am suspect.

Nonetheless, this is today’s narrative, that equity markets are falling sharply because of Trump.  It has nothing to do with the fact that US equity markets have been overvalued by nearly every measure since November 2012, (the last time the S&P 500 P/E ratio was at its mean of 16.14 vs today’s still very high 25.64).  This is not to say that the president’s tactics have necessarily been the best possible, but we have all long known that a catalyst would come along and adjust prices to a more sustainable level.  

Source: multpl.com

Once again, I will highlight that President Trump was elected with a mandate to make substantial changes to the way things work in the US, both the economy and other issues like immigration.  Remember, too, that many of his supporters are not heavily invested in equity markets, so this is not really a problem for them.  I believe he can tolerate a lot more downside in equity prices before feeling it necessary to address them.  And if he is successful in signing some trade deals during his 90-day time frame, I expect that things will calm down quite quickly.

But right now, investors are very unhappy, and since virtually everyone in the media is an investor, we are going to hear a lot more on this topic, especially since they almost certainly didn’t vote for President Trump.

Here’s the thing about markets, overvaluations correct over time.  In fact, often they result in under valuations as markets tend to overshoot in both directions.  However, you have probably heard of the Buffett Indicator, which is Warren Buffett’s shorthand way of determining stock valuations.  He simply divides the total market capitlaization of US equities by GDP.  His view is that when that ratio is between 110% and 130%, equity markets are fairly valued.  Below that, things are cheap, and it is a good time to buy stocks.  Above that, like today, and good values are hard to find.  You are also probably aware that Berkshire Hathaway is currently holding its largest cash position ever, a sign that he still thinks things are overvalued.  One need only look at the below chart to see that while the recent decline in stocks has brought the indicator lower, its current level of 173% remains extremely overvalued.

Source: buffettindicator.net

All I am trying to do is offer some perspective on the recent movement.  Risk appetite was over extended while the US ran 7% budget deficits and issued a massive amount of debt to fund it.  Much of that funding went into risk assets.  That situation has clearly changed, or at least that is the goal of the Trump administration.  It is a painful transition, but likely one that we need to absorb for longer term fiscal and economic health.

Ok, let’s see how market behaved overnight, after a rout in the US yesterday, now that everybody is back at their desks.  Major Asian markets were very quiet, with limited movement in Japan, China, Korea, Australia and India, although we did see sharp declines in Taiwan (-1.6%) and New Zealand (-2.25%) with the latter seeming to be one of the few markets tracking the US directly.  The only news there was a larger than expected trade surplus, which doesn’t seem the type of thing to cause a sell-off.  Meanwhile, in Europe, there is also little net movement with a couple of modest gainers (Spain, UK) and a couple of modest laggards (France Germany) with everything trading less than 0.5% different than their last closes.  Interestingly, US futures are all higher by about 1.0% at this hour (7:05).

In the bond market, this morning is quiet everywhere with movements of +/-1bp the norm although yesterday did see Treasury yields climb 6bps in the session.  Something that is starting to move in fixed income markets are credit spreads, which have been abnormally tight for a long time and may be starting to widen out to previous historical levels.  If spreads start to widen, that will not help equity markets at all, and that could be the signal that policy adjustments are coming, both from the administration and the Fed.  We will keep an eye here.

In the commodity markets, nothing is stopping the gold train, up another 0.7% this morning to another new high.  This movement is parabolic and that cannot last very long.  Beware of a correction.  

source: tradingeconomics.com

In the meantime, silver (-0.2%) and copper (+0.5%) are still hanging around, but without the same panache as gold.  In the oil market, WTI (+1.3%) has rebounded from yesterday’s decline as the latest stories are that capex by the oil majors is going to decline and with it, we will see a reduction in supply, hence higher prices.  On the flip side, if a deal with Iran is signed and their oil comes back on the market freely, that will weigh on prices for at least a while.

Finally, the dollar, which along with equities, has been sold aggressively of late, is bouncing slightly this morning.  This story remains perfectly logical as one of the reasons the dollar had been so strong was foreign investors bought dollars to buy the Mag7 and US equities in general.  With US equities weakening, these foreigners are likely to start to sell more and take their money home, or elsewhere, but nonetheless, they don’t need those dollars.  Certainly nothing has changed my bearish view here with today’s gains a modest correction.  There are two outliers this morning, with MXN (+0.6%) and ZAR (+0.5%) the only currencies of note rallying against the greenback, both seemingly following the commodity rally.

On the data front, there is nothing noteworthy this morning, but a bit of data later in the week.

WednesdayFlash Manufacturing PMI49.4
 Flash Services PMI52.8
 New Home Sales680K
 Fed’s Beige Book 
ThursdayInitial Claims221K
 Continuing Claims1880K
 Durable Goods2.0%
 -ex Transport0.2%
 Existing Home Sales4.13M
FridayMichigan Sentiment50.8
 Michigan Inflation Expected6.7%

Source: tradingeconomics.com

In addition, we have 7 Fed speakers over 8 venues this week, with four of them today.  However, it is not clear that they have much impact these days.  Expectations for a cut next month are down to 9% although the market is pricing 90bps of cuts this year.  But, once President Trump started implementing his policies, the Fed slipped into the shadows.  It is interesting that there are questions about the Fed’s credibility as lately, nobody has listened to them anyway.  I don’t expect anything other than patience from them for now as they await the “inevitable” decline in the economy.  However, until the data really starts to show something, and there is nothing forecast in this week’s releases, that points to economic weakness of note, they are on the sidelines.

Overall, I expect more volatility in risk assets, and I do believe the trend for foreign investors to reduce their exposure to the US will continue.  That, too, will weigh on the dollar.  Maybe not today, but another 10% this year is quite viable.

Good luck

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Downward, Crawling

Posted on by

The trends in the market of late
Continue, and there’s no debate
The dollar keeps falling
With stocks, downward, crawling
While gold never has looked so great
 
The latest concerns are that Trump
Chair Powell, is looking to dump
The narrative shows
That if Powell goes
That Treasuries clearly will slump

 

Europe remains closed today for its Easter Monday holiday, as was Hong Kong last night, but the rest of Asia and the US are open.  With that in mind, though, I’m guessing there are many who would prefer markets to remain closed given the price action.  At least those who remain invested in the US as equity futures are pointing lower, yet again, this morning, with all three major indices down by about -1.0% at this hour (6:00).  But really, the market story that is atop the headlines today is the dollar and its continued weakening.  Since President Trump’s inauguration, so basically in the past three months, the euro (+1.3% today) has climbed about 11% as you can see in the chart below.

Source: tradingeconomics.com

While that is not an unprecedented move, it is certainly swift in the world of foreign exchange.  Of course, it is important to remember that the current level, and higher levels, were extant for more than a year (July 2020 – November 2021) not all that long ago.  My point is perspective is key, and while the dollar has been declining sharply of late, this is not unexplored territory.  In fact, stepping back a bit, as I’ve shown before, the euro remains in the lowest quartile of its value over the past twenty years.

Source: finance.yahoo.com

One of the interesting ways in which the narrative has changed has been that prior to the imposition of tariffs by President Trump, when they were only threatened, the economic intelligentsia were convinced that the only outcome would be other currencies declining in value sufficiently to offset the tariff, thus a stronger dollar with the end result that US exports would no longer be competitive.  Now those same analysts are explaining that the weaker dollar is a problem because imports will be more expensive, thus raising the inflation rate.  

However, the lesson I have learned throughout my career is that movement in the dollar, while important on a very micro level for businesses and foreign earnings calculations, is rarely a driver of any macroeconomic trend.  In fact, it is a response.  Other things happen and the dollar adjusts based on the flows that occur. While theoretically, at the margin, a weaker dollar will tend to result in higher import prices, and ceteris paribus, that would feed through to the inflation rate, no ceteris is paribus these days.  For one thing, oil prices are lower by nearly 18% since the inauguration and oil prices have a far larger impact on inflation than does the value of the dollar.  My point is that neither the dollar’s level nor the fact that it is declining is a sign of the end of times.

Source: tradingeconomics.com

Of more concern to many is the Treasury bond market as that is a true Achilles heel for the US.  Given the massive amount of debt outstanding, and the fact that there is so much to roll over this year, and the fact that the budget is still running a massive deficit, the need to refinance is the biggest issue facing the US economy in my view.  Of course, the US will be able to refinance, the question is the price.  

Since we’ve been measuring things from Trump’s inauguration, a look at 10-year Treasury yields shows they have declined a modest 28bps as of this morning’s pricing.  There has also been some volatility, but again, hardly unprecedented volatility.

Source: tradingeconomics.com

For instance, a widely followed measure of bond market volatility is the MOVE Index, currently produced by BofA.  At Friday’s close, it sat at 114.64.  A quick look at this chart shows the index, and by extension bond market volatility, is in the upper one-third of its range since inflation kicked off in 2022.  Again, it has spent a lot of time at higher levels and a lot of time at lower levels.

Source: finance.yahoo.com

There are numerous stories being written these days about reduced liquidity in the bond market, and there are many stories being written about how the Chinese, or the Japanese, or Europeans are selling Treasury bonds as a signal that all is not well.  First, we know all is not well, so that should not be a surprise.  Second, there has been no indication that Treasury auctions are failing, in fact the opposite, with the most recent 10-year and 30-year auctions showing substantial foreign demand.  

The funny thing about the bond market is to many it is a Rorschach test as people see what they want to see. To some, it is entirely about inflation and inflation expectations, so rising yields portend inflation on the horizon.  To others, it is a recession/growth indicator, which for most people is a coincident indicator, higher growth leads to higher inflation in that view.  But these days, much ink is spilled discussing how it is now and indicator of confidence in the US, especially with the growing antagonism between President Trump and Chairman Powell.  The same folks who lambasted Powell for keeping rates too high, now seem to be cheering him on to keep rates “too” high as a sign of his independence.

There is no doubt that despite the fact that the Fed’s press has diminished, and the market’s focus on the Fed has waned, their actions remain important to the US economy.  But is Jay Powell the last bastion of confidence in the US?  That, too, seems a stretch.

Trying to summarize, things in the US are quite messy right now.  For many investors, and hedgers, the previous status quo was so comfortable, and actions were easy to take.  However, Donald Trump’s election back in November was a very clear signal that things were going to change.  And they are changing.  In situations like this, investors tend to bring their money as close to home as possible.  This process has only just begun.  Since March, I have maintained that I see the dollar lower, and for a long time that the equity market was overvalued.  While the recent speed of movement is unlikely to be maintained, I expect the direction is pretty clear.

Ok, a really quick tour of markets overnight.  In Tokyo (-1.3%) equity markets slumped further as the yen strengthened and the status of the trade talks with the US remains unclear.  Chinese shares (+0.3%) edged higher and the rest of Asia that was open was mixed.  With all of Europe closed today, all eyes will be on the States where things are pointing to a lower opening.

Treasury yields have risen 4bps this morning and European sovereign markets are all closed.  Last night, JGB yields edged higher by 1bp, but the narrative of Japanese interest rates rising closer to other national levels has not had much press lately.

The commodity markets have been where all the action is, with oil (-2.5%) lower this morning as I have seen comments that the US-Iran talks are making progress.  As well, it appears that the Russia / Ukraine peace talks are reaching a denouement.  Successful conclusions in either, or both, of these discussions would very likely point to a lot more available crude on the market, and lower prices ahead.  I still think $50/bbl is in the cards.  But gold (+1.9%) is the story of the day here as the barbarous relic makes yet another new all-time high vs. the dollar dragging silver (+1.3%) and copper (+3.9%) along for the ride.  Not only are foreign central banks continuing to buy, as well as populations in China, India and elsewhere in Asia, but it appears that US retail is waking up to the fact that gold has been the best performing asset for the past year (+45%).  I continue to see the metals complex benefitting from the current macro environment.

Finally, we have already discussed the dollar which is lower this morning against virtually all its counterpart currencies in Europe and Asia.  As it happens, LATAM currencies are gaining the least and BRL (-0.1%) has even managed a slight decline on the opening.  But overall, this is a dollar selling day.

On the data front, today brings Leading Indicators (exp -0.5%) at 10:00 and that is all that is on the calendar.  It is a quiet week, and I will outline the rest tomorrow.

It should be a quiet market given Europe’s absence, and given how far the dollar has fallen leading into the open, I wouldn’t be surprised to see a modest bounce, but the trend, as I explained, remains clearly for a lower dollar going forward.

Good luck

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Likely to Bleed

Posted on by

By now, everyone is aware
The world we had known is not there
While populist views
Are turning the screws
On governments ‘bout everywhere
 
The upshot is capital’s lead
O’er labor is like to recede
So, wages will rise
With yields, and surprise
Risk assets are likely to bleed

 

For the first time in quite a few sessions, certainly since ‘Liberation Day’, market activity has calmed down a bit.  It is not that markets have stopped moving, just that the wild gyrations have disappeared for the moment.  I would estimate that for most investors, and certainly for risk managers with hedging requirements, this is a blessing.  However, for the trading desks at Wall Street firms, maybe not so much.  I couldn’t help but notice the lead headline in the WSJ this morning, “Bank Trading Desks Are Minting Money From Tariff Chaos”  

Now, we cannot be surprised by this, as volatile markets are what traders, especially bank traders with customer flow, live for.  This is where they truly have an edge, even over the algos, because they have information the algos don’t have, the order flow.  This got me to thinking about the idea, one which I have embraced, that President Trump is concerned with Main Street, not Wall Street.  Well, if Wall Street is going to play second fiddle, I’m sure many there are perfectly comfortable with this situation.  Arguably, if this continues, we are going to see many internecine battles at the big Investment Banks as traders gain power at the expense of bankers, but the firms overall will be just fine.  (I know you were all worried 🤣.)

But let’s go back to the Main Street, Wall Street question.  Someone who I have been following on Substack, Russell Clark, a UK hedge fund manager, has described this point very well.  In the battle between labor and capital for corporate resources, Wall Street benefits when capital is favored by legislation/regulation while Main Street benefits when the rules turn in labor’s favor.  

For the past 25 years, the rules have been helping capital at labor’s expense.  Especially since the GFC, when the financialization of the economy really took off, this has been the case.  Just look at the extraordinary rise in corporate profits during this period compared to the long history.  This is a direct result of the globalization effort, with the outsourcing of much manufacturing to China and other low-wage nations.

Source: fred.stlouisfed.org

But let us consider what we have seen fomenting for the past decade, arguably since President Trump’s first election and Brexit occurred in 2016.  Those were populist outcomes.  And we have seen populism rise around the world.  It is couched as right-wing fascism by many in the media, but whether in Germany, France, Italy, the Netherlands, here in the US or many other Western nations, the people’s voice is being heard.  And what they are saying is, labor wants a bigger piece of the pie.

This idea offers solid explanations for several current situations.  Labor, aka Main Street, wants government to work for them, to protect their jobs and incomes.  They care far less about a company’s share price and far more about the company investing in the business and expanding.  Capital, aka Wall Street, wants the government to work for them, to keep financing costs down to increase capital productivity and drive share prices higher, whether through share repurchase or reduced expenses (aka job cuts).  

Right now, labor is in the ascendancy.  (It is ironic that labor’s ascent has been deemed right-wing, given the long history of its left-wing tendencies, but there you go).  As long as this remains the case, I think we need to consider how it will impact markets going forward.  Russell’s short-hand trade idea has been long GLD vs. short TLT (the long-bond ETF) and it has worked well for quite a while.  Can bond yields continue the rise that began in 2022?  Certainly.  Can gold continue its rally?  Of course.  Look at the chart below of gold and 10-year Treasury yields over the past 5 years.  There is nothing about the chart that says we are topping in either case.  Higher yields and higher gold prices seem contradictory, but they have been the reality for three years already.  I have explained numerous times that the world we knew is gone.  This may well be part of the new reality.  What about equities?  I have to believe multiples will be compressed which will not help them at all. And the dollar?  While higher rates seem like they should support the greenback, the case for capital flows leaving the US equity market is very real.  We could easily see the dollar decline further over time.

Source: tradingeconomics.com

Ok, let’s look at markets overnight.  Green continues to be the theme today after solid rallies yesterday in the equity markets.  I know this is not what I discussed above, but that is the long-term perspective, not the day-to-day.  Right now, the tariff pauses have traders and investors feeling a little more secure, as well as word that several nations are close to new trade deals with the US with significantly lower tariffs.  Yesterday’s modest US rally was followed by similar modest gains in Asia with the Nikkei (+0.8%) leading the way while both Hong Kong (+0.2%) and China (+0.1%) managed to gain, but only just.  Meanwhile, in Europe, the gains are somewhat better as the DAX (+1.0%) and IBEX (+1.2%) are leading the way with the FTSE 100 (+0.8%) and CAC (+0.25%) lagging a bit.  We did see some solid employment data from the UK with employment rising 206K over the past 3 months while earnings and the Unemployment Rate remained unchanged.  However, Germany is a bit more confusing given the ZEW Economic Sentiment Index there fell from 51.6 to -14.0, as the trade concerns really start to bite.  As to US futures, at this hour (7:20) they are slightly higher, about 0.15%.

In the bond markets, Treasury yields have edged higher by 1bp but remain below the recent peak at 4.50%. In Europe, we are seeing yields climb everywhere except the UK, where gilt yields are unchanged.  But Italian BTPs (+5bps), French OATs (+3bps) and German bunds (+3bps) are all under a bit of pressure this morning.  Perhaps this is a day where risk managers feel more comfortable about things, so bonds feel less compelling.

Oil (-0.4%) had a pretty big trading range yesterday but closed close to unchanged.  This morning it is slipping a bit as we continue to see demand forecasts reduced by various analysts with the IEA the latest culprit. Personally, I see prices declining from here.  As to the metals markets, gold (+0.25%) which slipped yesterday morning and rebounded all day and through the night continues to have significant support.  Silver is little changed this morning and copper (-0.7%) is backing off some of its recent gains, although is still higher by ~14% in the past week.

Finally, the dollar, which has been under general pressure lately, is stabilizing with the DXY clinging just below 100.00.  This morning, we see the euro softer but the pound and Antipodean currencies rallying, albeit not that much.  But generally, after several days of very large moves, with 2% gains for the euro and Aussie last week, most movement is 0.5% or less today and the randomness implies we are seeing positions being adjusted rather than new activity.

On the data front, here is what the rest of the week brings.

TodayEmpire State Manufacturing-14.5
WednesdayRetail Sales1.3%
 -ex Autos0.3%
 IP-0.2%
 Capacity Utilization78.0%
 Bank of Canada Rate Decision2.75% (unchanged)
ThursdayECB Rate Decision2.25% (-0..25%)
 Initial Claims225K
 Continuing Claims1870K
 Philly Fed2.0

Source: tradingeconomics.com

The only release yesterday was the NY Fed inflation expectations data which, it should be no surprise, rose to 3.6%.  I suppose that the virtual nonstop reporting that the tariff regime is going to raise inflation is having an impact.  From the Fed, yesterday we heard that patience remains a virtue and Governor Waller is in the transitory impact of tariffs on inflation camp.  There are two more Fed speakers today, Barkin and Cook, but nothing has changed my view that they are not that relevant now.

Big picture, my take is this is a reprieve before the next bout of risk selling.  The selling can last into the summer as I think it will take until then before we get a better understanding of the outcome of the trade situation.  Maybe that will be the bottom, or if trade relations worsen, perhaps another leg lower is to come.  As to the dollar, while I don’t see a collapse, I do think lower is the way.

Good luck

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Their Own Ego Trip

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The talk of the town is the “Pause”
Which led to much market applause
Though naysayers still
Say Trump’s actions will
Result in bad outcomes…because


But yesterday saw markets rip
And all those who did buy the dip
Are feeling quite smart
When viewing the chart
Of prices, their own ego trip

 

See if you can guess when President Trump posted that there would be a 90-day pause on tariffs for everyone but China.

Source: tradingeconomics.com

By now, you are almost certainly aware that equity markets in the US rebounded massively in the US, with one of the biggest gains on record as the S&P 500 rose 9.5% and the NASDAQ 12.2%.  Of course, that merely retraced the bulk of the losses seen since the beginning of the month.  In fact, the S&P 500 is still lower by about 200 points since then.  Regardless, moods are much brighter today than they were yesterday at this hour.  And those equity gains are global.

I’ve seen several interpretations of the sequence of events and like virtually everything these days, it appears to have a partisan bias to people’s views.  There are those who claim President Trump could not stand the pressure of a declining stock market and “blinked” in the game of chicken he was playing.  There are also those who claim this was part of the strategy all along, essentially moving the Overton Window substantially in his preferred direction and now he is ready to reap the benefits of this move.  

Arguably, there is evidence for both sides of this argument and I suggest we will never really know. Remember, Trump is quite comfortable making outlandish pronouncements as he level sets for a negotiation.  But he is also quite the realist and while I do not believe he was concerned with his personal or family fortune, recognized that the speed of the pain inflicted could be damaging overall.  In the end, it is not clear the rationale matters, the action stands on its own merits.  

But remember this, equity valuations were very high before the decline last week, and were still quite high, although obviously less so, after the decline.  The rebound put them back in very high territory, especially with equity analysts revising profit forecasts lower on the back of the still 10% tariffs being imposed.  A truism is that the biggest rallies in the stock market occur during bear markets.  Keep that in mind as you assess risk going forward.

But let us turn our attention to a player who is not getting much attention these days, the Fed.  Many questioned the Fed’s rate cuts back in Q4 and attributed the moves to a partisan effort to help VP Harris get elected.  Certainly, there is no love lost between Chairman Powell and President Trump.  Of late, though, the commentary has focused on patience regarding any further policy ease as the impacts of Trump’s tariff policies are unknown at this stage.  Yet, it is not hard to read these comments and get a sense that the Fed is going to work at cross purposes to Mr Trump.  

For instance, yesterday, Minneapolis Fed President Neel Kashkari released an essay with the following comments, “Given the paramount importance of keeping long-run inflation expectations anchored and thelikely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economyand potentially increased unemployment is higher.  The hurdle to change the federal funds rate one way or theother has increased due to tariffs.”  While the words here don’t appear partisan per se, Mr Kashkari is one of the most dovish FOMC members and dismissed inflation concerns regularly for a long time.  This sudden change is interesting, at the least.  

At any rate, the market, which had been pricing a 50% probability of a rate cut next month just a few days ago and a total of at least 4 cuts this year, is back down to a <20% probability of a cut in May and about 3 cuts this year.  Truly the pause that refreshes.

So, let’s look at how other markets responded to the pause.  Markets everywhere, including China, rallied last night and this morning, with Tokyo (+9.1%) and Taiwan (+9.2%) leading the way in Asia although gains were universal.  Hong Kong (+2.1%) and China (+1.3%) were the laggards with gains between 2.5% and 5.0% the norm.  In Europe, too, equities are flying this morning as the threat of much higher tariffs is removed, at least temporarily, with the UK (+4.6%) the laggard and gains between 5.0% and 6.5% the story there.  Alas, futures this morning, at 7:00am, are pointing lower by -2.0% or so.  Is that profit taking or a harbinger of the day to come?

In the bond market, which has expressly been Trump and Bessent’s main concern, yields are a bit lower this morning, -3bps in 10-year Treasuries.  But the story in Europe is confusing to me, or perhaps not.  German bunds (+6bps) have seen the largest rise while UK Gilts (-10bps) have seen a sharp decline.  Too, Italy (-4bps and Greece (-2bps) have seen yields decline.  Could this be an illustration that bunds are a better safe haven than Treasuries? And now that haven status seems less important today, they are being sold off?  JGB yields (+9bps) are also rising, perhaps on the same notion.  The corroborating evidence is that nobody thinks Gilts are a good investment, so with risk back on, they are in demand given their highest yield in the G10.

In the commodity markets, oil rebounded sharply alongside equities yesterday although it has slipped 2.4% this morning.  I have altered the Y-axis on the chart below to percentages to give an idea of the magnitude of these moves in the past days, especially relative to the past 6 months.  Despite being the most liquid commodity market around (both figuratively and literally), it is far less liquid than bonds or FX or even stocks, so as commodities are wont to do, sometimes the moves are breathtaking.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) continues its march higher, recovering more than 5% from the lows Tuesday morning.  I maintain that much of that selling was margin based, with positions liquidated to cover margin calls in other markets.  Now that the panic has passed, demand is likely increased given the new uncertainties.  However, both silver (-0.5%) and copper (-1.3%), which rallied sharply yesterday, have slipped back a bit.  These are different stories.

Finally, the dollar is lower this morning, having yo-yoed like every other market on the tariff news.  CHF (+1.9%) and JPY (+1.4%) are the big gainers in the G10 although the euro (+1.2%) is having a day as well.  However, there are currencies with less pizzazz this morning, notably ZAR (-0.9%), KRW (-0.6%) and MXN (-0.5%), as it remains difficult to know how to proceed going forward.  JPMorgan has a global volatility index which is a useful barometer of how things are going.  As you can see below, it is not surprising that volatility in this space has also risen sharply.

Once again, I return to the idea that President Trump is the avatar of volatility, and you must always remember that volatility can happen in both directions.  While financial assets tend to collapse (yesterday being the exception) when things get out of hand, commodities go the other way as supply interruptions are the big risk. Writ large, volatility simply means a lot of movement.

We finally get some meaningful data this morning with headline CPI (exp 0.1%, 2.6% Y/Y) and Core (0.3%, 3.0% Y/Y) along with the weekly Claims data (Initial 223K, Continuing 1880K).  Given all the focus on the tariffs, though, it is not clear to me what this data will imply on a forward-looking basis.  As we have seen with the Fed getting sidelined by Mr Trump, his tariff policies have also served to overshadow economic data, at least for now.  There are a couple of more Fed speakers and a 30-year bond auction as well.  Interestingly, I expect that auction may be the most important outcome of the day.  Will there be real demand or are investors shying away?

I expect that over the next few months, tariffs will be discussed on a nation-by-nation basis as new deals are struck.  But that will impede any medium-term views on the economy as until we have a much better sense of the end results, it will be difficult to assess things.  The upshot is, we may be entering a period where we chop up and down, but don’t go anywhere until the global trade situation is clearer.  Volatility with no direction is great for traders, less so for investors.  Headline bingo is still the game we are playing.

Good luck and good weekend

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