Tag Archives: stock-market

End of Days

Posted on by

The one thing about which we’re sure
Is risk assets lost their allure
It’s not clear quite yet
How big a reset
Is coming, and what we’ll endure


Now, I don’t think its end of days
And this could be quite a short phase
But don’t be surprised
If answers devised
Result in a lack of real praise

Chaos continues to reign in the markets as volatility across all asset classes has risen substantially.  Perhaps the best known indicator, the VIX, is back at levels seen last during the Covid pandemic.  Remember, the VIX is a compilation of the implied volatility of short-term equity options, 1mo – 3mo.  While markets can technically be volatile moving in either direction, the VIX has earned the sobriquet of ‘fear index’ as equity volatility most typically rises when stock markets fall.  As you can see from the below chart, the movement has not only been large, but very quick as well.

Source: finance.yahoo.com

The key thing to remember is that while volatility levels can rise very quickly, as the chart demonstrates, their retracement can take quite a long time to play out.  Part of that is that even when things start to calm down, many investors and traders are worried about getting burnt again, so prefer holding options to underlying cash positions.  At least until the time decay becomes too great.  My point is that look for trepidation amidst the trading community and markets in general for a while yet, even if by Friday, the tariff situation is made perfectly clear.  Of course, with that as background, we cannot be surprised that the Fear & Greed Index has made new lows.

Source: cnn.com

However, arguably of more concern is the price action in US Treasuries, which despite the havoc in the market, are not playing their historical safe haven role.  Instead, Treasury bond yields are rising, actually trading as high as 4.50% around midnight last night although they have since retraced a bit.  The bond market has a generic volatility index as well, the MOVE index, and it, too, is trading at very high levels, the highest since the GFC.

Source: finance.yahoo.com

In many ways, this is of much greater concern to markets, as well as both the Treasury and the Fed.  The 10-year US Treasury is the benchmark long-term rate for the entire world.  A rise in the MOVE index may indicate that there is something wrong with the bond market and its inner workings, or it may be an indication that inflation expectations are rising quickly.  Whatever the reason, you can be certain the Fed is watching this far more carefully than the VIX.

I have heard two explanations for the bond market’s recent performance as follows:  first, there are those who are saying that China is selling its Treasury bonds and using the dollar proceeds to buy gold.  Now, while their holdings have been slowly shrinking, they still have just under $800 billion, so that is a lot of paper and would clearly have an impact.  The thing about this thesis is we will be able to determine its reality when China next reports their reserve numbers next month.  

The other explanation rings truer to me and that is the bond basis trade may be unwinding.  Briefly, the bond basis trade is when investors, typically hedge funds, arbitrage the difference in price between cash Treasury bonds and Treasury bond futures on the exchange.  The current positioning is these funds are long cash and short futures, and since it is a basis trade, they typically lever it up significantly, with leverage ratios of up to 100x I understand.  The total size of this trade is estimated at > $1 trillion.  Now, if this arbitrage disappears, or these funds are forced to liquidate this strategy quickly, it could be a real problem for the Treasury market.  

Ever since the GFC and the Dodd-Frank legislative response, banks no longer carry large bond risk positions and are not able to absorb large transactions seamlessly.  During Covid, you may remember that Treasury yields were all over the map, crashing and then exploding higher one day to the next, and that was caused by this basis trade unwind.  Back then, the Fed purchased nearly $1.7 trillion in QE to stabilize the market, and by all accounts, the basis trade was half the size then that it is now.

Remember, too, arguably the most important part of the Fed’s mandate is to maintain Treasury bond market stability.  Without this, the US will not be able to fund its debt and deficits.  So, whatever your view of how Chairman Powell may respond to the tariff story, which seems to be patience for now, if the bond market starts to break, you can be sure the Fed will step in.  QT will reverse to QE in a heartbeat as they offset the impact of this position unwinding.  If that is the case, I anticipate we will see further weakness in equities and the dollar, while gold will truly shine both literally and figuratively.  I’m not saying this is what is going to happen, just that this explanation makes more sense to me.  

Ok, now that tariffs have officially kicked in as of midnight last night, let’s see how markets are responding this morning.  Most equity markets continue to struggle after yesterday’s disappointing US session, where higher opens eroded all day with the major indices all closing on their session lows.  This bled into Asia where Japan (-3.9%) gave up most of yesterday’s gains although both China (+1.0%) and Hong Kong (+0.7%) held up well amid government support.  As to the rest of the region, Taiwan (-5.8%) was worst off, but other than Thailand and the Philippines, both of which managed gains, every other index was lower, often sharply.  In Europe, the realization of the tariffs is hurting with declines of -3.0% to -4.0% across the board.  As to the US futures market, at this hour (7:25), all three major indices are lower by at least -1.0%.

Bond yields are all over the place this morning with Treasuries (+8bps) continuing their recent climb amid the fears discussed above.  However, in Europe, things are such that German yields (-1bp) are doing fine while UK Gilts (+9bps) are suffering along with Treasuries.  The rest of the continent, save the Netherlands, has also seen yields rise, but much less, between 2bps and 5bps.  Overnight, JGB yields were unchanged as players are uncertain as to the next steps by the BOJ there.

In the commodity market, oil (-5.6%) is once again under major pressure.  This feels like a confluence of both technical factors (the price has broken below long-term support at $60/bbl and is now testing for lows) and fundamental factors, with OPEC raising output and the mooted recession likely to reduce demand.  Interestingly, lower oil prices are a tremendous geopolitical weapon for the US as both Russia and Iran are entirely reliant on them for financing their activities.  As to the metals complex, gold as regained its luster (sorry 😁) rallying 2.8% and well above the $3000/oz level.  This has taken silver (+3.1%) and copper (+3.5%) along for the ride.  It seems to me the copper story is not in sync with the oil story as a recession would likely drive copper prices lower, but that is this morning’s movement.

Finally, the dollar is softer again this morning with the euro (+0.8%) trading through 1.10 and the yen (+1.0%) back below 145.00.  It’s interesting because there was a story last night about how the new Mr Yen, Atsushi Mimura, was speaking to the BOJ amid concerns that the yen has been too volatile.  However, to my eye the movement has been relatively sedate, strengthening gradually and still, as can be seen in the chart below, substantially weaker than for the many years prior to the Fed beginning to tighten policy in 2022.

Source: finance.yahoo.com

The other noteworthy move is CNY (+0.5%) which after slipping to levels not seen since 2007, has retraced somewhat.  If Treasury bonds are not seen as haven assets for now, the dollar has further to fall.

On the data front, the FOMC Minutes at 2:00pm are released, but given all that has happened since then, it is hard to get excited that we will learn very much new.  We also see EIA oil inventories with a modest build expected, but this market seems likely to have adjusted those numbers outside any forecasting error bars.

The tariff story will continue to drive markets for now as investors try to determine the best way to protect themselves until things settle down.  And things will settle down, but when that will happen is the $64 trillion question.  FWIW, which is probably not much, my sense is that we have a few more weeks of significant chop, as we await clarity on the tariff policy (meaning its goals).  I still believe there will be a number of deals that will reduce the initial numbers, but the ultimate goal is to isolate China.  It is going to be messy for a while yet.  As to the dollar through all this, my sense is lower, but not dramatically so.

Good luck

Adf

Demoralizing

Posted on by

Complaints among traders are rising
That markets are demoralizing
Liquidity’s shrinking
And now they are thinking
They might need to alter trade sizing
 
But can anyone be surprised
That markets are not immunized
From ongoing impacts
Of tariffs and new tax
Which President Trump advertised?

 

While headlines around the world have focused on the ongoing trade war negotiations, and peace talks between Russia and Ukraine and all of the political machinations in the US as President Trump continues to fight both the courts and Democrats to implement his agenda, markets are generally at a loss as to what to do.  Is the news bullish for stocks?  Bearish? What about bonds or the dollar or oil?  I cannot remember a time when there was so little clarity on expected future outcomes.  Well, I can actually, but it was a very long time ago.  Prior to the Black Monday stock market crash in the US in October 1987, the reality was there were many views fighting to be heard, but rarely consensus as to what would happen in markets.  Successful traders were those with trading intuition and positions were sized much smaller because you never knew when you might need to reverse course.

Since then, however, we have seen a steady diet of central bank intervention every time there is an indication that growth may be slowing, or markets may be having a bad day.  This process went into overdrive in the wake of the GFC (which, BTW, was a product of that central bank intervention warping markets) when QE was implemented in the US and then elsewhere throughout the G10.  In fact, then Chairman Bernanke was explicit that this was his goal.  He called it the portfolio rebalance channel and the idea was the Fed would buy all the Treasuries, driving yields lower and promise to keep rates very low for a long time thus forcing encouraging investors to move up the risk scale to corporate debt, high-yield debt and equities.  As well, QE pumped enormous amounts of liquidity into the financial system.  This combination of actions led to a huge expansion of risk taking and the creation of strategies like risk parity which were designed to lever up assets to increase returns.

It was all great as long as the Fed and other central banks kept expanding the available liquidity.  Alas, trees don’t grow to the sky and when the Fed, in 2018/19 tried to finally reduce the balance sheet and initiated their first QT program, things got hairy in September and halted them in their tracks.  It turns out that markets had become addicted to liquidity continually increasing and like any addict, responded negatively to the loss of its fix.

Of course, Covid ensued and the next gusher of liquidity, this time both fiscal and monetary, was initiated by governments and central banks around the world, so any idea that investors and traders were chastised by the events of 2019 were quickly forgotten and position sizes ramped up again along with market performance.

But there is a new sheriff in town, as has been mentioned by many in the Trump administration, and the old rules are not likely to work in the new environment.  As the US government has taken hold of virtually all the market’s bandwidth, relegating the Fed to a sideshow, traders and investors are suddenly finding that the old ways of doing things, buy the dip and lever up, are no longer the best way to get along.  With the ongoing efforts by the Trump administration to shrink the government and reduce flows to financial markets, the lessons of the post-GFC financial market are losing their validity.  

This was perfectly expressed in a Bloomberg article this morning where traders were complaining that when they wanted to adjust a position they had to “wait longer to execute an order until there’s better liquidity in certain instances.”  Of course, we all know how difficult it is to wait so I’m sure that you are just as sympathetic towards these traders as I am.  There was an interesting chart in the article (below) showing that futures liquidity in S&P 500 contracts had fallen to the lowest in two years and was clearly at the lower end of the recent spectrum.  Doesn’t your heart just bleed?

I have been clear that President Trump is the virtual avatar of volatility and one of the key characteristics of a volatile market is that liquidity dries up.  While prices may not move much on a particular day, trends disappear and when moves occur, they tend to be large, and often discontinuous.  This is true in all markets, so be prepared as we go forward.

As it happens, yesterday was a day with very little net movement, although some decent gyrations intraday in some markets.  For instance, in the bond market, yields, which opened the day much higher fell sharply after weaker than anticipated data then rebounded throughout the day finishing little changed from Monday’s levels.  The chart below shows the 7bp range resulting in zero movement net.

Source: tradingeconomics.com

Too, US equity markets traded both sides of unchanged all day, with some choppiness but no net directional movement.

Source: tradingeconomics.com

My point is that this is likely a portent of the future.  There are too many known unknowns for traders and investors to have confidence in taking a side.  Now, we are only two months into the new administration, and they have been working hard to get things done quickly.  It is possible that the fight drags on for the rest of the year or longer, with no clear outcomes on key issues regarding extending the tax cuts and a finalized tariff policy.  In this case, I would anticipate market activity to continue to be lower volumes and choppy price action with a lack of direction.  Or perhaps, lower risk asset prices as investors get scared.  The lesson is the processes that had become normalized in the post GFC world are clearly no longer in play.  Hedge accordingly.

So, as we look at overnight activity, yesterday’s US market activity didn’t inspire much movement in Asia where we saw some gainers (Nikkei +0.65%, Hang Seng +0.6%) and laggards (CSI 300 -0.3%, India -0.9%) but no consistency at all.  The PBOC is subtly altering their monetary policy toolkit which some are seeing as a modest ease, but clearly equity markets didn’t get that message.  Meanwhile, comments from the newest BOJ member, Koeda, explained she was not sure her previous analysis of the economy leaving the zero-rate world is valid now that rates are all the way up to 0.50%!

European shares are softer on the continent, down about -0.5% in most places but UK shares have gained slightly, +0.2%, after inflation data was released a tick lower than expected across both headline and core measures.  While the BOE stood pat last week, as expected, this has encouraged some traders to believe that a cut could come sooner than previously thought.  As to US futures, at this hour (7:45), they are basically unchanged.

Treasury yields, after yesterday’s choppiness, are creeping higher today (+3bps) but that is not following through in Europe, where sovereign yields are all flat to slightly lower today.  It seems difficult for investors to get excited about Germany’s rearming plan if the overall economy remains in the doldrums.  As well, tariff tensions have investors uncertain what to do, so doing nothing is the default.

In the commodity markets, oil (+0.9%) is higher from the close yesterday, but yesterday’s close was slightly softer than when I last wrote.  As such, we have still not quite made it to $70/bbl.  There are many crosscurrents in this market between tariffs, sanctions, potential Ukraine peace and Trump’s goal of drill, baby, drill.  As to metals, the star of the show continues to be copper (+1.5% today, +15% in the past month) which is now trading at all-time highs across the entire curve.  This has helped support both gold (+0.3%) and silver (+0.3%) although the former doesn’t need that much help, I think.

Finally, the dollar is mixed this morning, with the pound (-0.3%) lagging on the idea that the BOE may ease again sooner than previously thought, while AUD (+0.3%), CAD (+0.2%) and CLP (+0.3%) are all firmer on the commodity market strength.  Here, too, I expect that liquidity will diminish and trends will be hard to find until there is more clarity on policy outcomes in the US.

On the data front, this morning brings Durable Goods (exp -1.0%, +0.2% ex Transport) and then the EIA oil inventory data with a small build expected.  We also hear from two more Fed speakers, but they are just not driving markets right now.  Choppiness is the rule here, with short-term direction very difficult to discern.  I am still on board my ultimate lower dollar, higher commodity train, but that is subject to change if policies change as well.

Good luck

Adf

Not Fraught

Posted on by

The Retail Sales data did nought
To clarify anyone’s thought
‘Bout growth or inflation
While anticipation
Of Jay, for a change, is not fraught
 
Meanwhile, tariffs are, once again
A question of how much, not when
Just two weeks from now
The president’s vow
For more, has disturbed market zen

 

In a remarkable situation, at least these days, there is precious little new news impacting financial markets.  Perhaps that is why equities around the world are rallying, the absence of bad news is seen as good.  Here in the States, the biggest story continues to be the controversy over the deportation of several hundred Venezuelan and Salvadorean gang members that some claim ignored a judge’s order.  I’m confident this will get top billing for at least another day, but after that, we will move on.  However, market related stories are sparser.

For instance, we can look at yesterday’s Retail Sales data, which was not terrible, but not great, as the headline number rose a less than expected 0.2%, but that still translated into 3.1% growth Y/Y.  One of the things weighing on the data was the fact that gasoline prices fell, thus despite modest growth in volume, total dollar sales declined.  The same was true with autos, where allegedly prices declined though volumes remained solid.  (Remember, Retail Sales measures the dollar value of sales, not the quantity of items sold.). At any rate, investors absorbed the data and decided that the recent market declines, to the extent they are a reflection of concerns over rapidly slowing economic activity, were overdone.  The result, happily, is that equities rallied most of the day yesterday and that has followed through around the world overnight.

Alas, the other string of stories in headlines today is the Trump administration’s efforts to determine exactly how they want to implement the promised reciprocal tariffs which are due to be put in place on April 2.  It seems the fact the US trades with over 180 nations, each with their own tariff schedules, makes the details of the proposal difficult to shape and implement.  However, my take is, absent some major shifts by other nations, these tariffs will be imposed.

Ultimately, given the US is the ‘buyer of last resort’ for pretty much every other nation on earth with regards to any of their exports, I expect that there will be a number of nations that choose to adjust their own schedules rather than have diminished access to the US market.  But ex ante, there is no way to determine which nations will blink.

As a testament to just how much things have changed in the market, and just as importantly, the market narrative, the fact that three major central banks are meeting this week with the potential to adjust policy, is basically a footnote.  The FOMC starts their meeting today and tomorrow afternoon they will announce rates are unchanged.  Some attention will be paid to the dot plot, to try to see if the recent discussions of patience translate into higher long-term rate expectations, but quite frankly, it is not clear to me that Chairman Powell can say anything that is going to move markets absent a surprise rate adjustment.  The Fed funds futures market continues to price in basically one rate cut each quarter for the rest of the year at this point.

But before that, this evening the BOJ will announce their latest policy updates and, not surprisingly, there is no anticipation of a move there either.  While there has been much discussion in Japan of how companies will be, on average, increasing pay by 5.46% this year, that has not resulted in any expectations for the BOJ to adjust policy in response.  And in fairness to Ueda-san and his crew, the fact that the yen (-0.3% today) has been relatively stable of late, having rebounded from its dramatic lows last summer and held a good portion of those gains, concerns over a much weaker yen have diminished.

Source: tradingeconomics.com

Looking at the chart above, while I am no market technician, there seem to be several overhead resistance levels starting with that recent trend line.  The absence of concern over a declining yen (rising dollar) will leave the BOJ on hold for a while I think.

And let us not forget Thursday morning, where the BOE will convene, also with no policy changes expected. While GDP remains desultory there, printing at 1.0% Y/Y last week for Q4, inflation refuses to fall to their 2% target and so Governor Bailey is caught between that proverbial rock and hard place.  In such a scenario, no action is the most likely outcome.

Ok, let’s turn to the overnight market activity, which has all investors excited given the fact that markets everywhere are embracing risk today.  A solid day in the US was followed by strong gains throughout Asia (Nikkei +1.2%, Hang Seng +2.5%, CSI 300 +0.3%) with the mainland a little disappointing.  There has been more discussion recently that despite some splashy headlines about more Chinese stimulus, it is less than meets the eye.  That is a view with which I agree.  The exception to this rule was Indonesia (-3.9%) which fell after concerns over slowing growth and a widening budget deficit spooked foreign investors.  In Europe, things are also bright with all markets firmly higher led by Germany (+1.2%) as continued belief in the end of the debt brake has investors anxious to take advantage of all the government spending set to come.  We shall see how that works out, but if the US is the template, it probably has some room to run.  However, all these bourses are higher this morning in a general risk-on mood.  The crimp in the story is US indices are all slightly softer this morning ahead of Housing data.

In the bond market, yields are climbing with Treasury yields up by 1bp and European sovereign yields all higher by 3bps.  Again, this seems to be focused on the mooted extra government spending which is coming down the pike, although yields have backed off the levels seen after the initial announcements as per the below.  In fact, I read a forecast this morning about German bund yields rising to 4% by the end of next year after all the borrowing.

Source: tradingeconomics.com

In the commodity bloc, gold (+0.9%) is unstoppable for now, and taking silver (+1.1%) and copper (+0.4%) along for the ride.  Whatever else is ongoing, it appears that more and more investors have decided that having some portion of their portfolios in the barbarous relic is the right trade. After all, it is higher by more than 15% just since the beginning of the year and more than 40% over the past twelve months.  Oil (+1.1%) is also managing to hold above its recent lows but continues to run into resistance below $70/bbl.  The biggest news today is that Saudi Aramco has seen its stock price falling to 5-year lows, down 50% from its highs of 2022 after cutting dividends earlier this month.

Finally, the dollar is little changed at this hour (7:45), rebounding from modest weakness earlier in the session.  The euro and pound are unchanged, and the yen remains slightly softer.  However, MXN (-0.5%) and KRW (-0.5%) are both feeling the heat of the tariff story.  In the opposite camp, CL (+0.6%) continues to benefit from the rally in copper prices.  The big picture here remains unchanged, with the dollar likely to remain on its back foot as capital flows toward Europe’s government spending bonanza and away from the US, which appears to be pushing for fiscal tightness. 

On the data front, this morning we see Housing Starts (exp 1.38M) and Building Permits (1.45M) at 8:30 then at 9:15 we get IP (0.2%) and Capacity Utilization (77.8%).  With the Fed meeting ongoing, the only headlines will come from the White House, and those are virtually random these days.  Tight fiscal and loose monetary policy tends to weaken a currency and given that is the best description of the US these days, it remains my default position.

Good luck

Adf

Not Worried

Posted on by

‘Bout markets, Scott Bessent’s not worried
As favor with specs can’t be curried
Instead, what he seeks
Is policy tweaks
To help growth, though folks want that hurried
 
Meanwhile, Chairman Jay and his team
Continue their policy theme
Inflation’s still falling
Although they are calling
For patience, as bulls start to scream

 

“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent said Sunday on NBC’s Meet The Press. “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.”

The above comments from Treasury Secretary Scott Bessent yesterday morning (quote courtesy of Bloomberg.com) have garnered a remarkable amount of commentary amidst both the political and market punditry.  My first comment is I must be much older than Mr Bessent, since I have been in the investment business for 43 years.  However, as I have written numerous times over the course of the past years, the market has not cleared for a very long time.  Since the 1987 stock market crash, when then Fed Chair Greenspan started pumping liquidity into the financial markets to stabilize things, and realized he could do that to prevent serious downturns, we have seen two significant downdrafts, the tech bubble and the housing market crash, both of which were immediately met with massive liquidity injections, extremely low interest rates and for the latter, the advent of QE.

All of that liquidity has resulted in market excesses across many markets and has been a key driver in the stock market’s exceptional rise since the Covid blip.  Adding to that was the massive fiscal spending (remember those 7% budget deficits?) which has helped to insure that not only did markets rise, but so did retail prices.

Now, along comes a Treasury Secretary who hasn’t married himself to higher stock markets on a day-to-day basis and instead is focused on the long-term.  What I find most interesting is that the same pundits who are screaming about Bessent and Trump destroying the economy, were all-in on the discussion of how the US debt was going to ultimately cause a collapse.  Yet as the administration explicitly tries to address that issue (you may disagree with their methods, but that is their clear goal) suddenly, the fact that stock prices are falling is a tragedy of biblical proportions.  Here’s the thing, the worst performer, the NASDAQ, is down about -12% since its peak last month as per the below chart.  I might argue that is hardly a collapse.  In fact, a healthy correction doesn’t seem to be a bad description.

Source: tradingeconomics.com

There is no doubt that uncertainty about the near-term direction of the economy has grown, and there is no doubt that President Trump’s mercurial tendencies make long-term planning difficult.  However, I would contend we are a long way from the apocalypse or even a stockopalypse.  But once again, I highlight that volatility remains the key metric for now, and that hedging exposures remains very important.

With that as backdrop, the FOMC meets on Wednesday and while there is no expectation of any rate move, the market continues to price three rate cuts for the rest of the year, pretty much one each quarter.  A key unknown is just how hawkish or dovish Fed members currently find themselves given the recent market gyrations.  As well, while inflation had seemingly been the primary focus, with all the concern over a significant slowdown in the US economy, there are now many who believe we will see a rising Unemployment Rate despite a lack of evidence from the weekly Claims data.  These same pundits are also certain that Trump’s tariff policy will lead to rising inflation, really putting the Fed in a bind with a stagflationary outcome.  And maybe that is what will happen.

But I would contend it is far too early to assume that is our future.  First off, on the inflationary front, energy prices have fallen, a key inflation component, and as far as the tariffs are concerned, if they reduce demand, that is likely to cap prices. If on the other hand, demand is not reduced, I don’t see slowing growth as the likely outcome.  

In the end, if the economy is adjusting from one with far more government spending support, to one with more organic private sector economic activity, the transition may be bumpy, but the outcome will be far stronger.  We shall see if that is how things evolve.

In the meantime, let’s look at how the world has responded to the latest stories.  Friday’s US equity rebound was welcomed everywhere, although the key narrative remains the end of American exceptionalism, at least as regards equity markets.  Friday also saw the exiting German Bundestag agree to eliminate the debt brake for infrastructure and defense, with Chancellor-to-be Merz agreeing to waste spend €100 billion on climate related projects to convince the Green Party, which is out of the new government, to vote in the rule change before the new government is seated.  It is not clear to me how spending that money on net-zero ideas will defend Germany, but then I am just a poet, not a German policymaker.

As to Asian markets, other than mainland China (-0.25%) green was the predominant color on screens overnight with Japan (+0.9%), Australia (+0.8%) and Hong Kong (+0.8%) all following the US.  One of the remarkable things, though, is that Chinese data overnight showing IP (5.9%), Retail Sales (4.0%) and Fixed Asset Investment (4.1%) was generally solid.  Of course, Unemployment (5.4%) rose 2 ticks, an unwelcome outcome, and House prices (-4.8%) continue to decline, albeit at a slowing rate, but neither of those speak to a rebound in the Chinese economy.  The end of the Chinese NPC offered more platitudes about supporting the consumer, but it is not clear where the money is coming from.  And recall, more than 60% of Chinese household wealth remains tied up in housing investment, which continues to decline in value.  The Chinese have a long way to go in my view.

Quickly, European bourses are all modestly higher this morning, on the order of 0.3% or so, as hope springs eternal that the rearming of Europe will drive profit margins higher.  Unfortunately, at this hour (7:15), US futures are pointing lower, about -0.25% across the board, although that is up from earlier session lows.

In the bond market, Treasury yields have slipped -2bps this morning, but are really just trading around in their new trading range of 4.20% to 4.35% as investors try to get a handle on which of the big themes are going to drive markets going forward.  European sovereigns are all seeing rallies, with yields slipping -5bps to -6ps which seems out of step with the news about the end of the German debt brake.  Perhaps bond investors don’t believe the legislation will pass, or perhaps that they won’t spend the money after all.  As to JGB yields, the edged lower by -1bp in the 10yr, although longer dated paper has seen yields rise with 40-year bonds touching 3.0% for the first time in their relatively short history.

In the commodity markets, oil (+1.4%) is continuing to bounce of its lows from last week but remains well below levels seen at the beginning of the month.  The US attack on the Houthis is being called the beginning of an escalation in the Middle East by some, and perhaps that has traders concerned.  On the flip side, ostensibly, Presidents Trump and Putin are to speak tomorrow in an effort to get peace talks moving along, potentially a bearish oil signal.  In the metals markets, gold (+0.6%) remains in great demand having crested the $3000/oz level last week and rising from there.  This has helped both silver and copper, with the latter, despite concerns over slowing economic activity, pushing closer to $5.00/lb.  There is much talk of shortages in the market driving the price action.

Finally, the dollar is under pressure this morning with every G10 currency firmer led by NZD (+0.6%) and AUD (+0.4%) although gains elsewhere are on the order of +0.25%.  This story seems to go hand-in-hand with the German defense spending and the end of US exceptionalism.  As to the EMG bloc, most of these currencies are also stronger this morning, but the magnitude of these moves is generally less than the G10 bloc.  Recall, Trump wants a lower dollar, and my default is that is where we are headed at this point.

On the data front, we have an action-packed week ahead starting this morning.

TodayRetail Sales0.6%
 -ex autos0.4%
 Empire State Manufacturing-0.75
TuesdayHousing Starts1.375M
 Building Permits1.45M
 IP0.2%
 Capacity Utilization77.8%
WednesdayFOMC Rate Decision4.50% (unchanged)
ThursdayInitial Claims224K
 Continuing Claims1880K
 Philly Fed12.1
 Existing Home Sales3.92M
 Leading Indicators-0.2%

Source: tradingeconomics.com

As we have seen over the past many months, I suspect that this week’s data will be likely to give analysts on both sides of the economy is stronger/weaker argument new fodder.  While the Fed won’t be doing anything, and despite their relative decline in importance, I suspect that Chairman Powell’s press conference will still get a lot of attention.

While we don’t know what the future will bring for sure, I remain convinced that the dollar will slide, and commodities will rally.  As to stocks and bonds, well your guess is as good as mine.

Good luck

Adf

Trumpian Thunder

Posted on by

No respite was found yesterday
With risk assets given away
Now traders all wonder
If Trumpian thunder
Will ever, a rally, convey
 
But from the cheap seats what seems clear
Is Trump, for right now, will adhere
To efforts to trim
The grift and the skim
A prospect his enemies fear

 

The only discussion in markets today is about yesterday’s sharp declines in equity markets.  Questions about how long this can continue or how long President Trump can withstand the pain that accompanies these declines are rampant.  However, thus far the indications are that he and his administration are aware of the risks but also committed to achieving his goals of more domestic manufacturing activity and a perceived fairness or leveling of the international commerce playing field.

We have heard from Trump, Bessent and Commerce Secretary Lutnick, that there is going to be some pain, but they believe it will be short-lived in nature.  And ask yourself this, given how overextended both market valuations and debt metrics had become, was there any way to address these issues (assuming you believed they were issues) without some pain?  Of course not.  I have long maintained that what needs to happen in the US economy is for markets to be allowed to clear, all markets, whether housing or financial, and that we have not seen that happen for more than 50 years.  

While perhaps the case can be made that the housing market came close to clearing in the wake of the GFC, consider what has happened since then with the implementation of waves of QE and ZIRP.  The chart below from the St Louis Fed’s FRED database shows their housing index over time.  Ask yourself if you think the housing market really cleared?  And more importantly, look at the acceleration since then.  President Trump has made clear his focus is on Main Street, not Wall Street, and it is easy to argue that a key driver of this massive rise in house prices has been the Fed and their efforts to prop up Wall Street.  Reversing that is going to be painful.  Hell, simply stopping that move will be painful.

As to equity markets, the only clearing event that we have seen was the crash of the NASDAQ after the tech bubble burst in 2000.  But again, the Fed was there cutting rates and easing policy to support things.  The best evidence that equity markets are at unsustainable levels comes from the valuation metrics, with things like the Shiller CAPE ratio pushed to levels only ever seen in that tech bubble, and clearly significantly above long-term mean (17.21) and median (16.03) levels with today’s current reading of 35.34.

Source: multpl.com

All of this is my way of saying that I do not believe we are anywhere near the end of this process.  While many of you don’t remember President Reagan, at the beginning of his first term, he stood by Fed Chairman Volcker in his efforts to squelch inflation, when Volcker raised Fed funds to 22.0% (see below) and the economy suffered two quick recessions in 1980 and 1982.  

However, that was the medicine that was needed to break inflation’s back and begin a 40-year run of stability and growth in the US amid low inflation.  It is not hard to believe that we are going to need to see another cleansing bout of austerity to once again reset the economy.  And remember, Trump is not running again, so is not worried about reelection.  If we do have a recession soon, it will likely be over and the recovery under way as we head into the next elections, a perfect political outcome for his party.

Ok, let’s see how other markets responded to yesterday’s US declines.  In Asian equity markets, Tokyo (-0.6%) slid, but nowhere near the declines seen in the US.  China (+0.3%) and Hong Kong (0.0%) basically ignored the situation, but the rest of Asia saw a lot more red on the screen with large losses seen in Korea, Taiwan, Australia, Malaysia, Singapore and the Philippines.  In Europe, though, the price action is mixed with some gainers (DAX +0.4%, CAC +0.2%) and laggards (IBEX -0.2%, FTSE 100 -0.15%) as it appears funds continue to flow from the US markets to Europe on the back of the mooted defense buildup.  US futures at this hour (7:10), are very modestly higher, 0.15% across the board, but my take is there is further pain to come.

In the bond market, yesterday saw a flight to safety with Treasury yields sliding 10bps and although we did not see similar moves in European sovereigns.  This morning, Treasury yields are unchanged from the close while European bonds are showing modestly higher yields, between 1bp and 3bps.  JGB’s though, saw yields follow Treasuries lower, dropping -6bps last night as not only did US yields fall, but Japanese Q4 GDP data was released at a weaker than preliminarily reported 2.2%.  Although that was higher than Q3, and represents solid growth, it is not quite what was in the market.

In the commodity market, oil (+0.9%) while higher this morning continues to hold its downtrend as per the below chart.  With further Russia/Ukraine peace talks starting up in Saudi Arabia, the prospects of Russian oil coming back to the market seem to be growing.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) is the laggard this morning with both silver (+1.6%) and copper (+1.9%) leading the space higher.  If US equities are responding to a growing probability of a US recession, then I would have expected the industrial metals to soften.  However, after several down days, this could well be just a reflexive trading bounce.  We will need to see further movement to get a better sense of things.

Finally, the dollar remains under pressure generally with the euro (+0.5%) once again gaining ground and touching the 1.09 level for the first time since the US presidential election.  Not surprisingly, that has dragged the CE4 currencies higher as well, but the dollar’s weakness is seen vs. CNY (+0.4%), KRW (+0.5%), SEK (+0.45%), NOK (+0.8%) and even CAD (+0.25%).  Again, the big picture here is that the current policy aims for the US have begun to alter the concept of US exceptionalism with regards to the stock market.  As funds flow elsewhere, the dollar is quite likely to continue to decline.  This will be reinforced if we continue to see 10-year Treasury yields decline.

On the data front, while today is not very exciting, we do see CPI and PPI this week.

TodayJOLTS Job Openings7.75M
WednesdayCPI0.3% (2.9% Y/Y)
 Ex food & energy0.3% (3.2% Y/Y)
ThursdayInitial Claims225K
 Continuing Claims1910K
 PPI0.3% (3.3% Y/Y)
 Ex food & energy0.3% (3.6% Y/Y)
FridayMichigan Sentiment66.3

Source: tradingeconomics.com

We are now in the Fed’s quiet period so there are no Fed speakers until their meeting next Wednesday, but as I have been saying, nobody is really paying much attention to them anyway.  I think we have seen some major changes evolve and that means that equities are likely to remain under pressure along with the dollar, while bonds should hold their own.

Good luck

Adf

I Am Your Savior

Posted on by

Investors are showing concern
‘Bout tariffs and Trump, so they spurn
The riskiest stuff
But that’s not enough
To help generate a return
 
Seems most of the holdings in favor
Are no longer risk takers’ flavor
How long before Jay
Will finally say
QE is here, I am your savior

 

Have you bailed out on your risk exposures yet?  Because if not, it certainly seems you are behind the curve!  At least, that’s what it feels like this morning as trepidation underlies every player’s market activity.  Based on the commentary, as well as the Fear & Greed Index, you might think we are in a depression!

Source: cnn.com

But are things really that bad?  I know that the past week has seen a modest drawdown in equity prices, but after all, on February 20th, they reached yet another new all-time high, at least as per the S&P 500.  Since then, as you can see below, the decline has been less than 5%.  And while the market has traded below its 50-day moving average (blue line), a key technical indicator, it remains well above both the 200-day version of the same (purple line) and the longer-term trend line.  My point is it feels like the narrative is overstating the magnitude of the move thus far.

Source: tradingeconomics.com

Is this the beginning of the end?  While you can never rule that out, as major corrections can occur at any time, I have no reason to believe this will be the case.  Much has been made of yesterday’s Initial Claims print at 242K, much higher than forecast as a harbinger of future economic weakness.  However, looking at the past 3 years of weekly data here, while certainly in the upper levels of readings, it is not nearly the only occurrence and not nearly the highest reading.

Source: tradingeconomics.com

One data point does not make a trend and to my eye, looking at this chart, there is no discernible trend in either direction.  Yet part of the narrative evolution is that the DOGE cuts in government jobs, along with all the headline spending cuts, is setting the economy up for much slower growth in the short run.

In fact, this issue goes back to one about which I wrote several days ago here regarding the impact of government spending on actual economic activity.  The current view of economic activity includes government spending.  If President Trump’s goal is to reduce that spending, regardless of the net long-term benefits of such actions, GDP readings are going to decline initially.  Yes, there will be more productive use of capital with less regulation and less government, but that will take some time to become evident.  In the meantime, weaker economic activity is likely to be the outcome.

I have frequently written that there has not been a market clearing event since, arguably, October 1987, when equity markets plunged and erased significant excess and speculation.  Alas, newly minted (at the time) Fed Chair Greenspan stepped in and promised to support markets with ample liquidity the next day which opened the way for far more Fed intervention in markets leading up to Ben Bernanke and the first QE programs in the wake of the GFC in 2009 and every QE version since then.  While the movement so far does not remotely indicate the end of the world, based on the Fed’s history, once equity markets correct about 20%, they tend to become far more active in supporting the markets economy.  Will this time be different?  Given the Fed’s seeming underlying desperation to cut rates to begin with, my take is if the correction reaches 15% – 20%, we will see just that.

To sum things up, risk assets are under pressure on the basis of 1) excessive valuations, 2) the Trump efforts to reduce wasteful spending (which while wasteful is still spending and counted as economic activity), and 3) the idea that Trump’s imposition of tariffs is going to dramatically raise inflation and slow growth further.  Given the mainstream media’s inherent hatred of the president, they will certainly be playing up this theme for as long as they can as they try to force Trump to change tack.  But Trump, and Treasury Secretary Bessent, have been clear that their concern is 10-year bond yields, and getting them to lower levels.  A natural corollary of the current risk-off sentiment is that bond yields tend to decline.   Look at the chart below which shows that since Trump’s inauguration, 10-year yields are down nearly 40bps.  I would argue that Trump and Bessent are perfectly comfortable with the market right now.

Source: tradingeconomics.com

Ok, let’s move on to the overnight activity.  Sticking to the bond theme, while Treasuries, this morning, are unchanged, they did decline all yesterday afternoon and this morning European sovereigns are all lower by -2bps.  As well, JGB yields have also slipped by -3bps as we are seeing risk aversion evident all around the world.  Of course, the problem with all G10 nations (Germany excepted) is that they all have very high debt/GDP ratios and in Europe, especially, this is a problem as they have begun to realize they need to spend a great deal more on defense than they have in the past.  And all that spending is going to be funded by more borrowing.  The tension between additional issuance driving yields higher and risk aversion driving yields lower is going to be the theme of European bond markets for a while.

In the equity world, it is not a pretty picture anywhere in the world.  After yesterday’s US rout, with the NASDAQ (-2.8%) leading the way lower, Asian bourses were all in the red.  Japan (-2.9%), Hong Kong (-3.3%), China (-2.0%), Korea (-3.4%), India (-1.9%)… the list goes on across the entire region with only New Zealand (+0.5%) bucking the trend on some better than expected local earnings and consumer confidence data.  European markets, though, are in a bit better shape as they suffered yesterday and are consolidating those losses this morning with most markets trading +/- 0.3% on the session.  We have seen a lot of European inflation data this morning, most of it lower than forecast which has encouraged the view that the ECB will be cutting rates more aggressively going forward.  US futures, too, are higher at this hour (7:00), on the order of 0.5% as they bounce from yesterday’s, and truly the past week’s, declines.

In the commodity markets, oil (-1.25%) is back under pressure and back under $70/bbl.  The latest fear is that slowing economic activity around the world will reduce demand for the black sticky stuff and drive prices lower still.  Remember this, oil supply is restricted not by geology, but by politics.  As nations determine that cheaper energy is critical to their future, expect to see more effort to produce more oil.  Meanwhile, metals markets are also under pressure with gold (-0.5%) still falling despite its ostensible risk profile.  However, the barbarous relic remains well above $2800/oz and I continue to believe that this correction is just that, and not the reversal of a trend.  Too many things are happening around the world to induce more fear and in that scenario, gold is the oldest store of value around.  The rest of the metals complex is also under pressure with copper (-1.2%) slipping back a bit.  It is important to remember, though, that despite the recent declines, all the major metals are still nicely higher on the month.  

Finally, the dollar is a bit firmer again this morning after a rally yesterday as well.  In classic risk-off fashion, investors flocked to the dollar, arguably to buy Treasuries.  So, we are seeing weakness in NZD (-0.6%), JPY (-0.4%) and CHF (-0.3%) in the G10 and weakness in KRW (-0.5%), ZAR (-0.2%) amongst others in the EMG bloc.  Here the story remains the impacts of Trump’s tariffs and how they will be applied, if they will be applied, as well as a general fear factor which tends to help the dollar.  Consider, too, ideas that the ECB is going to cut rates will not help the single currency.

On the data front, this morning brings Personal Income (exp +0.3%), Personal Spending (0.1%), and the PCE data where Headline (0.3%, 2.5% Y/Y) and Core (0.3%, 2.6% Y/Y) will be the most important data points.  As well, we will see Chicago PMI (40.6) which has been below 50.0 in every month but one since August 2022.  

There is no question that the economic data has been softening lately.  We saw that with the Citi Surprise Index as well as the continuous stream of commentary by the economic bears who point to underlying pieces of data that point in that direction (whether housing or employment indicators and the recent weak PMI data).  

Consider this, an early recession in Trump’s term can be blamed on the Biden administration as well as set things up for future growth, certainly in time for the mid-term elections.  As well, it will likely help reduce the yield on the 10-year, an explicit goal.  This scenario likely means short-term weakness with an eye to longer term growth.  The dollar is likely to benefit early on, at least until the Fed steps in.

Good luck and good weekend

Adf

A Fifth Wheel

Posted on by

Confusion is clearly what reigns
As even the punditry strains
To understand whether
Investors will tether
Their future to stocks or take gains

 

As there was no activity in the US financial markets yesterday, it seems there was time for analysts to consider the current situation and make pronouncements as to investor behavior.  Ironically, we saw completely opposite conclusions from two major players.  On the one hand, BofA posted the following chart showing that investors’ cash holdings are at 15-year lows, implying they remain fully invested and quite bullish.

Meanwhile, the WSJ this morning has a lead article on how bearish investors are, claiming they are the most bearish since November 2023 according to the American Association of Individual Investors.  Apparently, 47.3% of investors surveyed believe stock prices will fall over the next 6 months.

So, which is it?  Are investors bullish or bearish?  To me this is a perfect description of the current situation.  Everyone is overloaded with information, much of which is contradictory, and so having a coherent view has become extremely difficult.  This is part and parcel of my view that the only thing we can clearly expect going forward is an increase in volatility.  In fact, someone said that Donald Trump is the avatar of volatility, and I think that is such an apt description.  Wherever he goes, mayhem follows.  Now, I also believe that people knew what they were voting for as change was in demand.  But for those of us who pay close attention to financial markets, it will take quite the effort to keep up with all the twists and turns.

Fed speakers are starting to feel
Like they have become a fifth wheel
So, let’s get prepared
For Fed speaking squared
As they work, their views, to reveal

Away from the conundrum above, the other noteworthy thing is that FOMC members are starting to feel left out of the conversation.  Prior to President Trump’s inauguration, market practitioners hung on their every word, and they apparently loved the power that came with that setting.  However, now virtually every story is about the President and his policies with monetary policy falling to a distant issue on almost all scorecards.  Clearly, for a group that had grown accustomed to moving markets with their words, this situation has been deemed unacceptable.  The solution, naturally, is to speak even more frequently, and I fear believe this is what we are going to see (or hear) going forward.  

Yesterday was a perfect example, where not only, on a holiday, did we have multiple speakers, but they actually proffered different messages.  From the hawkish side of the spectrum, Governor Michelle Bowman, the lone dissenter to the initial 50bp rate cut back in September, explained caution was the watchword when it comes to acting alongside President Trump’s mooted tariff and other policies, “It will be very important to have a better sense of these policies, how they will be implemented, and establish greater confidence about how the economy will respond in the coming weeks and months.”  That does not sound like someone ready to cut rates anytime soon.

Interestingly, from the dovish side of the spectrum, Governor Christopher Waller, an erstwhile hawk, explained in a speech in Australia (on the day the RBA cut rates by 25bps for their first cut of the cycle and ending an 18 month period of stable rates) that, “If this wintertime lull in progress [on inflation] is temporary, as it was last year, then further policy easing will be appropriate.”  I find it quite interesting that Governor Waller suddenly sounds so dovish as many had ascribed to him the intellectual heft amongst the governors.  This is especially so given that is not the message that Chairman Powell articulated either after the last meeting or at his Humphrey-Hawkins testimony recently.  

So, which is it?  Is the Fed staying hawkish or are they set for a turn?  That will be the crux of many decision-making processes going forward, not just in markets but also in businesses.  We will keep tabs going forward.

Ok, on to the market’s overnight performances.  Lacking a US equity market to follow, everybody was on their own last night which showed with the mixed results.  Japan (+0.25%) showed modest gains while the Hang Seng (+1.6%) rocketed higher on the belief that President Xi is going to be helping the economy, notably the tech firms in China, many of which are listed in Hong Kong.  Alas, the CSI 300 (-0.9%) didn’t get that memo with investors apparently still concerned over the Trump tariff situation.  Elsewhere in the region, Korea and Taiwan rallied while Australia lagged despite the rate cut.  In Europe, unchanged is the story of the day with most bourses just +/-0.1% different than yesterday’s close.  Right now, in Europe, the politicians are trying to figure out how to respond to the recent indication that the US is far less interested in Europe than in the past, and not paying close attention to financial issues.  As to the US, futures at this hour (7:25) are pointing higher with the NASDAQ leading the way, +0.5%.

In the bond market, yields are climbing led by Treasuries (+4bps) with most of Europe seeing yields edge higher by 1bp or 2bps as well.  Remember, yesterday European sovereign yields rose smartly across the board.  Also, I must note JGB yields (+4bps) which have made further new highs for the move and continue to rise.  It appears last night’s catalyst was a former BOJ member, Hiroshi Nakaso, explained he felt more rate hikes were coming with the terminal rate likely to be well above 1.0%.  While I believe the Fed will be cautious going forward, I still think they are focused on rate cuts for now.  With that in mind and the ongoing change in Japanese policy, I am increasingly comfortable with my new stance on the yen.

In the commodity markets, last Friday’s sell-off in the metals markets is just a bad memory with gold (+0.5%) rallying again and up more than 1% since Friday’s close.  I continue to believe those moves were positional and not fundamental.  Too, we are seeing gains in silver (+0.2%) and copper (+0.6%) to complete the triad.  Meanwhile, oil (-0.25%) continues to lag, holding above its recent lows but having a great deal of difficulty finding any buying impulse.  Whether that is due to a potential peace in Ukraine and the end of sanctions on Russian oil, or concerns over demand growth going forward is not clear to me, but the trend, as seen in the chart below, is clearly downward and has been so for the past year.

Source: tradingeconomics.com

Finally, in the FX markets, the dollar is firmer this morning rising against all its G10 counterparts with NZD (-0.6%) the laggard.  But losses of -0.2% are the norm this morning.  In the EMG bloc, we are seeing similar price behavior in most markets although MXN (+0.2%) is bucking the trend, seemingly benefitting from what appears to be a hawkish stance by Banxico and the still highly elevated interest rate differential in the peso’s favor.

On the data front, Empire State Manufacturing (exp -1.0) is the only data point although we will hear from two more Fed speakers, Daly and Barr.  I cannot believe that they have really changed their tune and expect that caution will remain their guiding principle for now, although I expect to hear that repeated ad nauseum as they try to regain their place in the spotlight.

Aside from my yen view, I still find it hard to be excited about many other currencies for now.  There is still no indication the Fed is going to move anytime soon, and other central banks are clearly in easing mode.  That bodes well for the dollar going forward.

Good luck

Adf

Eclipse

Posted on by

This morning, the question on lips
Is where did DeepSeek get their chips
As well, there’s concern
That China will learn
Our secrets, and so, us, eclipse

 

Narratives are funny things.  They seemingly evolve from nowhere, with no centralization, but somehow, they quickly become the only thing people discuss.  I’ve always been partial to the below comic as a perfect representation of how narratives evolve for no apparent reason.

Of course, yesterday’s narrative was that the Chinese LLM, DeepSeek, was built by a hedge fund manager with older NVDA chips and for far less money than the other announced models from OpenAI or Google and performed just as well if not better.  While equity traders were not going to wait around to determine if this was true or not, hence the remarkable selling on the open of all things AI, a little time has resulted in some very interesting questions being raised about the veracity of how DeepSeek was built, what type of chips they use and who actually built it.

For instance, a quick look at NVDA’s 10Q shows that, remarkably, Singapore is a major source of revenue, and it has been growing dramatically.

Source: SEC.gov

Now, it is entirely possible that Singapore is a hotbed of AI development, but from what I have read, that is not the case.  In fact, there is basically one lab there that has resources on the order of just $70mm.  But despite that lack of local investment, at least reported local investment, Nvidia shows that chip sales in Singapore nearly quadrupled in the last year.  Far be it from me to suggest that the narrative may change again, but who is buying those chips, more than $17 billion worth?  The idea that they have been trans shipped to China is quite plausible and they may well be what underpins DeepSeek.

Again, I have no first-hand knowledge of the situation but it is not beyond the pale to make the connection that China has been effectively circumventing US export controls through Singapore, have built their own LLM model using the exact same chips as OpenAI and others, but propagated a narrative that they have built something better for much less in order to undermine the US tech sector equity performance and call into question some underlying beliefs in the US market and economy.  Now, maybe this Chinese hedge fund manager did what he said.  But the one thing we know about China is, it is opaque in everything it does, so perhaps we need to take this story and dig deeper.  I am sure others will do so, and more information will be forthcoming, but it highlights that narratives continue to drive markets, but can also, at times, be constructed rather than simply evolve.

The thing is, this is still the only story of note in the market.  Scott Bessent was confirmed as Treasury Secretary yesterday, and indicated he was a fan of gradual tariff increases, perhaps 2.5% per month, rather than large initial tariffs, but that does not seem all that exciting.  And while Trump has not slowed down one iota, his focus has been on things like browbeating California into allowing reconstruction of LA rather than international issues, at least for the past twenty-four hours.  The upshot is that markets, which even yesterday closed far above their worst levels from the opening, are rebounding further today with many of yesterday’s moves reversing, at least to some extent.

Starting in the equity markets, despite the weakness in the tech sector, US market closes were far higher than the opens with the DJIA actually gaining 0.65% on the session.  However, while Japanese shares (-1.4%) definitely felt the pain of the tech sector, the rest of Asia saw some decent performance (Korea +0.85%, India +0.7%, Taiwan +1.0%) although Chinese shares (-0.4%) struggled.  Of course, one reason for that may be that the largest Chinese property company, Vanke, reported humongous losses and both the Chairman and CEO stepped down.

In Europe, though, all is well with every major exchange in the green led by Spain’s IBEX (+1.0%) although gains of 0.5% – 0.7% are the norm.  Now, remember, there is effectively no tech sector in Europe to be negatively impacted by the AI story, and it should be no surprise that these shares have followed the DJIA higher.  And this morning in the US futures market, at this hour (6:50), we are seeing gains on the order of 0.4% across the board.

In the bond market, yesterday’s early rally in prices (decline in yields) backed off as stocks bounced from their lows although Treasury yields still fell 10bps on the day.  This morning, the bounce in yields continues with Treasury yields higher by another 3bps and European sovereign yields rising between 1bp and 2bps on the session.  It will be very interesting to watch the bond market now that Bessent has been confirmed as Treasury Secretary given his goal to extend the maturity of the US debt outstanding.  Arguably, that should push up back-end yields, so we will see how effective he can be in reaching that goal.  

Turning to commodities, yesterday saw a rout there as well with both oil and the metals markets suffering greatly.  However, this morning, like many other markets, things are reversing course.  Oil (+0.75%) has bounced off its lows from yesterday, and despite a pretty rough past two weeks, is still higher than it was at the beginning of the year.  Gold and silver are unchanged from yesterday’s closing levels, and while off their recent highs, remain much higher in the past month.  Copper, too, is bouncing slightly and still much higher this month.  Perhaps yesterday’s price action was a catalyst for lightening up positions rather than changing views.

Finally, the dollar has rebounded vs. the G10 this morning, rising alongside US yields with the euro (-0.7%) and AUD (-0.8%) lagging the field, although dollar gains of 0.5% are the norm across the entire G10 this morning.  In the EMG bloc, the CE4 are all tracking the euro lower, with all down around -0.6% to -0.8%, but yesterday’s biggest laggards, MXN, COP and BRL are little changed this morning, not rebounding, but not falling further.  With the Fed expected to remain on hold while both the BOC tomorrow and ECB on Thursday are set to cut rates, perhaps the FX market is reverting to its more fundamental interest rate drivers than the hysteria of AI models.  If that is the case, then we are likely to turn our attention to Chairman Powell’s press conference as the next critical piece of news.

On the data front this morning, we see Durable Goods (exp 0.8%, 0.4% -ex Transport), Case Shiller Home Prices (+4.3%) and Consumer Confidence (105.6).  Yesterday saw New Home Sales rise more than expected but still resulted in the smallest number of sales for the year since 1995 when the population was far smaller.  

Once again, depending on where you look, you can find data that supports either economic strength or weakness.  It strikes me that today’s data will be of little consequence as traders will be focused on the equity market to see if the rebound has legs, as well as further news regarding DeepSeek.  Tomorrow, however, the Fed will take center stage.

Good luckAdf

Much Havoc

Posted on by

Colombia tried to prevent
Deportees, who homeward were sent
But Trump’s strong response
Meant that in a nonce
Gustavo, his knee quickly bent
 
Meanwhile, all the talk of AI
This weekend has pundits awry
The Chinese DeepSeek
Could very well wreak
Much havoc in stocks priced sky-high

 

If there was any doubt that things were going to be different under a Trump administration than virtually any previous administration, even his first term, they were dispelled this weekend.  By now you will all have heard the story of the Colombian president, Gustavo Petro (he of the 26% local approval rating) and his refusal to allow two US C-17 military transports filled with Colombian deportees, land in Bogota.  Apparently, when Trump was informed while playing golf, after birdieing the 3rd hole, he tweeted that the US would immediately impose 25% tariffs on everything Colombia exports to the US, rising to 50% in one week if this policy was not changed.  By the time he finished the 6th hole, President Petro reversed his policy and even offered the Colombian presidential plane to come and pick up the deportees.

While the golf portion of the story is amusing, the lesson to the rest of the world is that President Trump is very serious about his electoral promises, and he will utilize the entire might of the US government to achieve his goals.  For smaller nations with little power and leverage, it means that toeing the line is the only solution.  For larger nations, it certainly is a wakeup call to the idea that the US attitude toward international relations has dramatically changed.  As Machiavelli explained, it is better to be feared than loved, and it seems abundantly clear that President Trump understands that.

Perhaps the biggest takeaway from this situation, though, is that the US government is no longer the slow-moving behemoth to which it had evolved over the past decades.  The rest of the world is going to find itself needing to respond very quickly to things that in the past were sent to committees for study and review but now are decided instantly.  If you want to understand why I believe volatility is set to increase across all asset classes, this is the crux of the issue.

Turning to the tech world, the buzz is all about DeepSeek, which is a Chinese AI model that allegedly outperforms OpenAI’s top model, or performs just as well, although it costs a fraction of what OpenAI and others (Microsoft, Google, etc.) spent to train the model and it uses far less advanced chips which are also much less expensive and less power hungry.  Because this is all a new story, it remains unclear if DeepSeek will be an effective replacement for the others, or if it excels in only one or two areas and still lags elsewhere.  

But the market impact has been instantaneous and dramatic.  At this hour (6:00am), the NASDAQ (-4.5%) is leading US equity markets lower with the S&P (-2.4%) along for the ride.  Nvidia (-10.6% in premarket trading) is leading the way, but I suspect that this news will be negative for the entire US tech sector.  After all, it was certainly priced at premium levels.  

Source: tradingeconomics.com

In the short term, I expect we are going to hear a lot more analysis of why this is a game changing event and how the future that was so clear just last week is now cloudy.  However, while this will almost certainly take the shine off the megacap tech companies for a while, I think it would be a mistake to dismiss their futures because of this.  Two things in their favor are they still have virtually infinite resources, and they have dramatically large installed networks which means that changing things will be very difficult.  While their equity prices can decline a lot, it doesn’t mean their businesses are going to collapse.

PS, spare a thought for the impact on the energy sector here as well.  One of the narratives that has been fed lately is that all this AI will require gobs of power that will need a lot more power production.  It was a key feature of the Uranium story as nuclear is seen as one of the few sources capable of delivering the reliable power necessary.  I suspect that this part of the narrative will need to adjust as well if the AI story has actually changed.  But keep in mind that with efficiency comes more demand, so perhaps this is just a temporary downdraft.  Again, volatility is the name of the game.

Ok, let’s see how these stories have impacted the rest of the world.  With all the news over the weekend, you may not recall that US equity markets edged lower on Friday.  Well, Asian markets were mixed overnight with the Nikkei (-0.9%) following the US, although also reacting to the fact that the yen (+1.3%) rallied sharply as well.  Meanwhile, Hong Kong (+0.7%) managed to gain while mainland Chinese shares (-0.4%) certainly showed no benefit from the changing attitudes in tech.  Elsewhere in the region, Korea (+0.9%) and Taiwan (+1.0%) rallied while India (-1.1%) and Indonesia (-0.9%) fell and the rest of the region batted back and forth. In Europe, red is the dominant color, likely on the generally weak US performance although there are no European tech companies of note (perhaps ASML).  But the DAX (-1.2%) is leading the way down followed by the CAC (-0.9%) and the bulk of the rest of the continent and the UK.  Let’s just say that equities are not in favor this morning.

However, what we are seeing is a major bond market rally as Treasury yields (-12bps) tumble as risk is very definitely off.  European sovereign yields are also lower, by between -5bps and -7bps, and JGB yields (-2bps) also slipped, although relative to the rest of the world, they held up pretty well.  Interestingly, with all the talk about DeepSeek and the impact on the tech community, there has been virtually no discussion about the myriad central bank meetings this week, including, of course, the Fed on Wednesday where the market still sees no chance of a rate cut.

Commodity markets are relatively calm this morning as oil (-0.6%) is a touch lower although there has been no news of note.  The background story is that President Trump and Saudi Arabia’s Mohammed bin Salman are talking about increasing production to drive oil prices lower, but that remains more rumor than anything else.  As the polar vortex has passed, and forecasts are for warmer weather, NatGas (-6.2%) is sliding.  In the metals markets, very little movement is ongoing as traders try to determine what all the new news means.

Finally, the dollar is under some pressure this morning despite the risk off attitude that prevails.  I suppose it is because one of the recent drivers of the dollar’s strength has been the insatiable demand for the megacap tech stocks.  It seems that for now, that demand has been satiated.  So, the yen is behaving in its traditional safe haven role, as is the CHF (+0.85%) but the euro (+0.15%) and pound (+0.15%) are both a touch higher.  That said, we are definitely seeing emerging market currencies under pressure as they have nothing to do with tech and everything to do with the very obvious change in attitude regarding how the US is going to deal with smaller nations that don’t accede to US demands, especially regarding immigration.  So, MXN (-1.0%), COP (-1.1%), ZAR (-1.4%) and BRL (-0.6%) are all under significant pressure.  CE4 currencies, though, are not in the line of fire, so are little changed this morning.  

On the data front, remarkably, it almost seems an afterthought given what we just saw this weekend, but along with the Fed, BOC and ECB, we get PCE on Friday.

TodayNew Home Sales670K
TuesdayConsumer Confidence106.0
WednesdayBank of Canada Rate Decision3.0% (current 3.25%)
 FOMC Rate Decision4..5% (current 4.5%)
ThursdayECB Rate Decision2.75% (current 3.0%)
 Initial Claims220K
 Continuing Claims1885K
 Q4 GDP2.8%
FridayPersonal Income0.4%
 Personal Spending0.5%
 PCE0.3% (2.6% Y/Y)
 Core PCE0.2% (2.8% Y/Y)
 Chicago PMI40.0

Source: tradingeconomics.com

At this point, the central bank story is background noise, not the major theme, but by Wednesday I expect that all eyes will be on Chairman Powell as he describes the Fed’s thoughts at the press conference.  Of course, that assumes that there are no other political earthquakes, which may not be a very good assumption these days.  I think we are in a seismic zone for now.  

As to the dollar, if DeepSeek really is an Nvidia killer, then it is not hard to derive a scenario that says, US equity markets are going to decline, along with growth expectations.  The Fed will cut more aggressively, and the dollar will start to really fall as well.  I’m not forecasting that, just highlighting a possible, if not likely, scenario in the event the world believes the AI story is not going to be as expensive and profitable for the Mag7 as they thought last week.  Once again, the key is to hedge your risks, because as you learned this weekend, things change, and they can change quickly!

Good luck

Adf

More Than a Tweet

Posted on by

In Davos, the global elite
Were treated to more than a Tweet
The president spoke
And in one broad stroke
Explained that he won’t be discreet
 
For oil, he wants prices falling
For Europe, he said it’s appalling
That nations don’t pay
Enough to defray
The costs of the war they’re forestalling

 

If, prior to yesterday, European leaders weren’t sure how things were going to play out now that Mr Trump is back in office, they have a whole lot better understanding now.  I imagine that all their fears were realized when Trump spoke via video at the WEF meeting in Davos, Switzerland.  It’s funny, Argentine president Javier Milei has been calling out the globalist agenda since his election last year and Europe didn’t care and didn’t change their behavior.  I guess that makes sense because the European press would never allow the narrative to change for a minor player like that.  Alas, for the European narrative now, the US, one of their largest trading partners and the nation that insures their safety via NATO membership, is calling them out for their behaviors, whether it is the rarely discussed tariffs they impose on US imports, or the lack of funding for a war they claim is critical to continue in Ukraine, and they are suddenly aware they better reconsider their positions. 

It will be very interesting to watch if things change in Europe (I think they will) and how quickly these changes will come (that could take more time).  Arguably, the biggest problem the current  European leaders have is that there are already large segments of their populations that are unhappy and have been voting accordingly, whether for AfD in Germany, or the RN in France to name two.  Trump’s comments are going to only foment more support for those positions.  I suspect the elections upcoming in Europe are going to see a further rightward swing, or perhaps simply a further swing against the incumbents given what appears to be a significant amount of dissatisfaction amongst the electorate.  No matter your view of Trump’s policies, we all must recognize he is a remarkable political force!

Fifty basis points
Is now Japan’s new baseline
Can it go higher?

As widely expected, the BOJ hiked its base rate by 25bps last night to 0.50%, the highest levels since October 2008.  The immediate market response, as you can see in the chart below, was for the yen to rally (dollar decline) almost one full percent despite interest rate markets having fully priced in the hike.  However, as you can also see, the yen has given back virtually all those gains in the wake of Ueda-san’s press conference where he explained the BOJ was not “seriously behind the curve” which was taken as meaning that it will be a while before they move again.  

Source: tradingeconomics.com

While JGB yields did perk up 2bps on the session, it hardly seems like the start of a rout.  And, as I highlighted yesterday, the interest rate differential does not seem likely to have changed enough to alter investor plans. Going forward, I expect the yen to be entirely beholden to the dollar’s broad movement.  If, as I suspect, the market starts to price in a more hawkish Fed, USDJPY is likely to go back and test its highs from last summer.

Ok, let’s move on to the overnight market action.  Once again, US equities rallied yesterday, although at this hour (7:10), futures are essentially unchanged.  In Asia, Japanese shares shed early gains after the BOJ rate hike and Ueda presser and closed unchanged on the day.  However, both Hong Kong (+1.9%) and China (+0.8%) rallied on the news that Trump and Xi had a “friendly” conversation as traders and investors took that to mean that tariffs on Chinese goods were not coming right away.  As to the rest of Asia, once again there were both gainers (Korea, Taiwan, Australia) and laggards (India, Indonesia, Philippines) with the rest showing little net movement.  

In Europe, the picture is also mixed as the CAC (+0.9%) is leading the way higher as investors want to believe that Trump’s call for lower interest rates as well as lower oil prices will help the European economy, especially the luxury sector in France.  But elsewhere in Europe we see Germany (+0.3%) a bit higher while Spain (-0.4%) and the UK (-0.4%) are lagging with the former suffering from rising energy prices while the ongoing political mess in the UK has investors steering clear of the Kingdom for now.

In the bond market, Treasury yields are unchanged this morning, holding the recent 10bp bounce from the lows seen last week.  European sovereign yields are higher by 1bp to 2bps across the board, with activity quiet and we’ve already discussed JGBs.  

Ironically, after Trump’s call for lower oil prices, they are firmer this morning, up 0.6%, although in the broad scheme of things, relative to the recent price action, that is tantamount to unchanged.  Here is something to consider though, which is a little bit outside the box.  The Biden EO that cited the OCSLA of 1953 prohibited drilling across a series of areas including the Atlantic and Pacific Oceans as well as the Gulf of Mexico.  Now, what is one of the first things that Trump said?  He is renaming the Gulf of Mexico to the Gulf of America.  Does that nullify the EO?  (h/t Alyosha).  I’m sure that is a legal battle to be had, but it would be right in line with Trump’s MO.  It would also allow drilling to continue unabated there, which to my understanding, has the most fruitful potential new sites.

Meanwhile, in the metals markets, they are all rallying nicely this morning with gold (+0.85%) now just about 1% below the all-time high seen in October of $2826/oz.  There are many market technicians (and gold bugs) calling for a breakout to new highs, but there is a case to be made this remains a technical short squeeze into NY delivery next week.  However, gold has dragged both silver (+0.9%) and copper (+0.9%) along for the ride.

Finally, the dollar is under pressure this morning with the DXY (-0.5%) falling to its lowest level since mid-December.  Ironically, while the G10 weakness is widespread (EUR +0.7%, GBP +0.5%, AUD +0.5%) the yen, after the rate hike, is the massive underperformer.  In the EMG bloc, one of the biggest movers is CNY (+0.5%) which is clearly benefitting from that phone call, while SGD (+0.5%) is benefitting despite the MAS having eased monetary policy.  This is an indication of just how much of a dollar selling move this is this morning.  In fact, other than the yen’s modest decline, every other major counterpart currency is higher vs. the dollar today. 

On the data front, Flash PMI (exp 49.6 Manufacturing, 56.5 Services) leads off at 9:45 then at 10:00 we see Existing Home Sales (4.19M) and Michigan Sentiment (73.2).  With the Fed meeting next Tuesday and Wednesday, there are still no speakers.  Perhaps of more interest is the fact that we have not seen a single article from the Fed whisperer lately.  As the data is third tier this morning, I wouldn’t expect anything today either.  Too, next week there is limited data of note before the meeting so unless we see a narrative shift of substance, I imagine the Fed will do nothing next week and Powell will dodge any questions regarding the future.

For now, it is all Trump and his actions, comments and EOs.  And you can’t plan how to trade those.  Once again, this is why hedging is so important.

Good luck and good weekend

Adf