Tag Archives: stock-market

Not Worried

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‘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

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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

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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

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A Fifth Wheel

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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

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Eclipse

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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.

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Much Havoc

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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

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More Than a Tweet

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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

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Trump’s Whirlwind

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Markets have embraced
Trump’s whirlwind. Thus, Ueda
Is free to hike rates

 

Tonight, the BOJ is apparently set to hike rates by 25bps.  The market probability is essentially 100% and the key clue is that the Nikkei news organization wrote an article about it that was published after the first day of the BOJ’s two-day meeting.  At the December BOJ meeting, Ueda-san explained that if inflation remained at or above their 2.0% target (it has) and if there were no major ructions in markets after President Trump’s inauguration (there haven’t been), then the BOJ was likely to continue to move their policy rate toward what they believe is a neutral stance.  Currently, that neutral stance is mooted at 1.00%, so a 25bp hike tonight takes the overnight rate to 0.50%, somewhat closer.

With all this widely anticipated and markets pricing in the result, the key question is how what Ueda-san will say during his press conference that follows the meeting.  There are many who are looking for a so-called ‘dovish’ hike, where there is no indication of the timing of any further rate hikes and a benign view of the future.  Certainly, a look at the FX market, where the yen (unchanged today, -0.8% in the past week) doesn’t indicate a great deal of fear over a much tighter policy.

Source: tradingeconomics.com

There has been a background narrative that explains the BOJ’s ongoing tightening is going to reach a point where Japanese investors are going to repatriate much of their overseas investment, driving a forceful upward move in the yen and having major negative impacts on risk assets around the world as liquidity retreats.  This is based on the idea that the Japanese are the largest exporters of capital in the world which is one of the key reasons equity markets are rallying everywhere, so if they bring that money home, that means they will sell their foreign equity holdings and buy yen.  While I believe this is a neatly wrapped idea, I would contend Japanese investment prospects are not yet near the same as in the US, so this idea may be premature.  In fact, a look at the chart below showing 10-year US Treasury and JGB yields overlaid with USDJPY indicates that the rate differential is nowhere near where it might need to be in order to encourage that type of behavior.  My take is absent some type of multilateral agreement to weaken the dollar, this will not happen organically.

Source: FRED database

In China, though communists rule
They favor the capital tool
Of equity bourses
And so, Xi endorses
A government stock buying pool

Elsewhere in the world, as we try to get outside the maelstrom that is Donald Trump, I couldn’t help but notice that, once again, Xi Jinping has called on his finance minions to do something, anything, to support the stock market.  And I cannot help but be struck by the irony of the Chinese Communist Party being so concerned about the situation in the most capitalistic institution of all.  The WSJ had an article discussing the latest measures that are on the board, including forcing encouraging insurance companies to increase the local equity portion of their portfolios and utilizing 30% of premium income to buy stocks.  This is on top of the PBOC reducing interest rates last year for companies that want to repurchase shares.

It continues to be very difficult for me to accept the idea that the Chinese are playing 4-D chess with long-term goals in mind while the US is playing checkers.  If that is the case, then the Chinese, or at least President Xi, is a really bad player.  His economy is under dramatic pressure because the property bubble he inflated has been shrinking for the past three years, undermining both the population’s wealth (property was their store of value) and confidence, while he ramps up more beggar thy neighbor trade policies at the same time the US has just elected a president whose middle name is Tariff.  Their population is shrinking because of the ‘foresight’ of their leadership to impose a one-child policy for two generations and while millions of people will risk their lives to immigrate to the US, people are looking to leave China.  Once again, I cannot look at this situation and conclude anything other than the CNY (-0.15%) is going to gradually decline all year long, and maybe not so gradually if pressure really builds.

Ok, let’s take a look at how markets are handling the latest set of Trumpian pronouncements and reactions by targets of his ire.  After yet another rally in the US, albeit on declining volumes so not as exciting as it might otherwise have been, Japanese shares rallied (+0.8%) as investors seem to believe that the interest rate hike tonight will be accompanied by a more dovish stance at the press conference.  Mainland Chinese shares (CSI 300 +0.2%) eked out a gain after the latest news discussed above, although Hong Kong shares (-0.4%) did not follow suit.  After all, the focus is on mainland shares.  The rest of the region was widely dispersed with gainers (Taiwan, Singapore, Philippines) and laggards (Korea, Australia, Thailand), many of these moves in excess of 1%.  It appears investors don’t know which way to turn yet given the speed of changes emanating from Washington.

In Europe, most bourses are modestly firmer (DAX +0.3%, CAC +0.5%) as we continue to hear more from ECB speakers that not only are rates going to be cut, but they are increasingly certain that they will achieve their inflation target.  Maybe they will.  As to US futures, at this hour (7:00) they are mixed to slightly softer with the NASDAQ (-0.4%) the laggard.

In the bond market, the decline in yields appears to be over, at least for now, as Treasuries (+3bps) continue to bounce from their recent lows at 4.54%.  As is almost always the case, this has carried European sovereign yields higher as well, by between 1bp and 3bps across the continent and UK and we saw JGB yields gain 1bp overnight.  I would contend there is still a great deal of uncertainty as to how the Trump administration is going to handle the conundrum of reducing inflation while expanding growth.  Outside of declining energy prices, which may be coming, it will be a tall task, and inquiring minds want to know.

Speaking of energy prices, oil (+0.35%) is edging higher after a lackluster session yesterday.  As with most markets, uncertainty is rife right now although this is clearly an area where Mr Trump is focused on expanding output.  NatGas (-0.3%) is a touch softer as forecasts for the end of the current Polar Vortex keep getting moved up. Metals markets are under some pressure this morning, with gold (-0.3%) backing away from that all-time high level and both silver and copper fading as well.  However, volumes remain light here implying not much interest overall.

Finally, the dollar is a touch stronger this morning, but there are few large movers in either the G10 or EMG blocs.  In fact, every G10 currency is within 0.2% of yesterday’s closing levels and none of them are at extremes.  The biggest loser today is ZAR (-0.6%) which seems to be responding to the precious metals complex backing off a bit overnight.  It remains very difficult to get a read on the dollar with all the other things ongoing.  As it happens, this is one market that has not received any Trumpian attention at all…yet.

We finally have a smattering of data this morning with the weekly Initial (exp 220K) and Continuing (1860K) Claims to be followed by the EIA’s oil inventory data where it appears a modest net build across products is forecast.  With the Fed quiet, and very little focus on Powell and company right now, today looks to be shaping up as another equity focused day with the dollar likely taking its cues there.  While we never know what will hit the tape these days, absent a new surprise vector, there is no reason to look for significant movement today at all.

Good luck

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Trump 2.0

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Today begins Trump 2.0
And pundits are trying to show
Their ideas are sound
As how he’ll redound
On policies he will bestow
 
But this poet can’t comprehend
How anyone thinks what they’ve penned
Is likely to be,
To any degree,
Correct. ‘Stead, let’s look at the trend

 

As Donald Trump prepares to take the oath of office today, there has been a non-stop barrage of pundits putting forth their views as to how policy proposals that were made during the campaign, and even since the election, are going to impact the economy as well as equity, bond and FX markets.  But I would take exception to all these as, if we learned nothing else from Trump’s first term in office, we have no idea how he may try to do the things he says he is going to do.  Are tariffs a funding process?  Are they negotiating tactics?  Are they punishment?  Since we have no idea at this point (all three of those ideas have been floated by “insiders” and pundits), how can we meaningfully forecast the impact tariffs may have going forward?  So, I won’t even try.

Rather, I think there is much to be learned from looking at the long-term trends in markets and perhaps trying to come up with reasons that these trends may be changing, or not, going forward.  As such, take a look at the charts below, all from tradingeconomics.com, where I have tried to highlight the long-term trend in the dollar (EURUSD), the S&P 500, 10-Year Treasury Notes, oil and gold.

My first observation is that over the past twenty-five years, oil has traded both higher and lower with no discernible direction.  Certainly, we are higher now than 25 years ago, but we have been both much higher and lower in the interim.  Now, if Trump is successful at freeing up more drilling opportunities, removing the offshore drilling ban that Biden imposed last week, and reducing the regulatory structure such that the cost of drilling declines, my take is increased supply will result in some downward pressure.  As well, if he is successful at bringing an end to the Ukraine war, it seems probable that Russian oil may no longer be sanctioned, and that, too, would pressure prices lower.  But will he impose tariffs on Canada, a key source of sour crude used to refine diesel?  That could easily pressure prices higher.  And what of Venezuela?  As I said, no way to know.  In the end, my take is that the most likely outcome is that oil will continue to demonstrate its inherent price volatility given its price inelasticity.  I think you can equally make the case for $50 oil as well as $100 oil based on many idiosyncratic issues that have nothing to do with Trump.

The only noteworthy change we have seen is in 10-Year Treasury yields, which after a 40-year downtrend following the back-to-back recessions in 1980-1982 and Fed Chair Volcker’s policy tightening, look very clearly to have reversed course.  I am not the first to notice this but believe that it is an important feature of markets going forward.  There are virtually two generations of traders and investors who have only ever seen interest rates decline and have created their mental investment models on that underlying thesis.  If the future is going to bring about higher interest rates over time (and given my view that inflation is not going to disappear and that will be a key driving force), then investment models in a higher inflation, higher yield environment are going to be different than what we have seen up through 2022.  

One of the keys is that the idea behind the 60/40 portfolio, where declines in stock prices were offset by rises in bond prices, turns out to only really be true in a low inflation environment, sub 2.5%.  If inflation is going to run at 3.5% – 4.5% going forward, then all the strategies that incorporated that 60/40 basis are going to have an awfully difficult time, again, regardless of what Trump does.  The one caveat here is if he is successful in driving inflation back to that <2.0% level, but that seems highly unlikely in the near term given how sticky inflation has proven to be even without any new policies.

Now, if we look at the dollar, that trend has been very consistent and remains in place with the dollar seemingly set to continue to appreciate.  Given Trump’s stated desire to reshore American manufacturing and reduce the trade deficit, he almost certainly would like to see the dollar decline.  However, at this point, it’s not clear what policies are going to drive that.  Historically, loose monetary and tight fiscal policy will weaken a currency, and that could well be what we see, except that is likely to create a burst of inflation before the tight fiscal policy reins that in.  And you know as well as I that Trump will be very displeased with that outcome.

It is certainly possible that the Treasury could intervene to weaken the dollar, but that is also something that is exceedingly rare in this country.  Perhaps the most likely situation here would be a Mar-a Lago (?) Accord, or something like that akin to the Plaza Accord of 1985, where the G7 at the time all agreed that the dollar needed to decline.  Now, on the one hand, given the weakness in the other G10 economies currently when compared to the US, my take is those nations are pretty happy to have weak currencies to help support their domestic industries.  On the other hand, I suspect the EMG bloc who have funded themselves in USD are really interested in seeing a weaker dollar to help them get easier access to dollars to service and repay their debt.  My take is that until there is a definitive policy pronouncement, and this will require something like that as quiet policy adjustments are likely to be missed by the FX market, this trend will remain intact.

Finally, a look at both equities and gold shows basically the same chart, with both showing accelerating price increases and both now significantly above their long-term trend lines.  The question, of course, is can this continue?  Keynes was reputed to have told us that markets can remain irrational longer than you can remain solvent, implying just because market pricing doesn’t make fundamental sense doesn’t mean it cannot continue further.  But in the end, trees don’t grow to the sky, and corrections in these markets seem somewhat overdue.  Consider the S&P 500 chart, where we see the sharp decline in 2022.  Many remember that as the worst market since the GFC crash, and yet on the chart, it looks like a modest correction.  Consider also, that if the market were to decline to the trend line I have drawn, it would be nearly a 50% correction, and that just puts it back on trend!  Again, volatility seems the watchword going forward, but until we see something that is going to change opinions, the trend in both stocks and gold seems higher.

OK, as we await the official change in presidency here, let’s review the overnight price action, which was generally positive following Friday’s US equity rally.  Remember, too, it is MLK Day, and markets are closed in the US.

Asian markets saw broad gains with the Nikkei (+1.2%) and Hang Seng (+1.75%) leading the way while mainland shares (+0.45%) lagged but were still in the green.  Away from the major markets, there were far more gainers than laggards, but the biggest moves were on the order of 0.4%, nothing of real note.  Positive Japanese data was the driver in Tokyo (Machinery Orders +3.4%) while HK and Chinese shares benefitted from the news that Presidents Trump and Xi spoke, hopefully in a prelude to less tension.  In Europe, markets are essentially unchanged across the board this morning as it seems investors cannot discern whether Mr Trump will be beneficial for the continent or not.  Certainly, I continue to read about a number of European leaders who are unhappy at the prospects of a Trump presidency (specifically PM Starmer who has ostensibly said the US-UK relationship is destined to diminish).  While that may be true, my take is it will not help the UK very much.  And, while US markets are closed today, US futures are pointing modestly higher this morning.

In the bond market, yields are edging higher in Europe, up between 1bp and 2bps on the continent while UK Gilt yields are higher by 3bps.  Overnight saw JGB yields slip 1bp and, of course, with banks closed in the US, Treasury yields are unchanged in the cash market.  However, bond futures are pointing to a 1bp rise as well.

In the commodity markets, oil is little changed on the day while NatGas (-4.4% after a -6.0% decline on Friday) is falling on news that weather models, which had been calling for another cold spell in February, have changed and are now saying temperatures will be milder then.  In the metals markets, gold (+0.3%) is edging higher while both silver (-0.3%) and copper (-0.4%) are slipping a touch, but given their inherent volatility, arguably these are unchanged on the day.

Finally, the dollar is under some pressure this morning with then euro (+0.5%) leading the G10 higher although similar sized gains are seen across the board with only JPY (0.0%) failing to go along for the ride.  EMG currencies are also picking up led by HUF (+2.0%) as it seems there is excitement in Hungary regarding the inauguration as PM Orban seems to share many of President Trump’s views on various geopolitical issues.  But CZK (+0.9%) and PLN (+0.6%) are also rallying alongside KRW (+0.5%), although MXN (-0.3%) seems to be showing concerns regarding how that relationship will evolve.  Certainly, as I mentioned above, President Trump will not be unhappy to see the dollar slide a little, but I don’t see this as the beginning of a new trend.

With no data today, and a light week in general, and given how long this missive has already become, I will lay out the data releases tomorrow.  Today, all eyes will be on the ~200 Executive Orders President Trump will sign and I expect it will take a little time to digest it all, so we will see how things really begin tomorrow.

Good luck

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Falling Further

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Like a stone toward earth
The yen keeps falling further
Beware Kato-san

 

While we have not discussed the yen much lately, its recent weakness, in concert with the dollar’s broad strength, has begun to cause some discomfort in Japan.  Last night, Japanese FinMin Katsunobu Kato explained, “We will take appropriate action if there are excessive movements in the currency market.”  He went on that he is “deeply concerned” by the recent weakness, especially moves driven by those evil pesky speculators.

The problem, of course, is that all those expectations that the BOJ would be tightening policy to fight domestic inflation while the Fed would continue to ease policy since they “beat” inflation, with the result being the yen would regain its footing, have proven to be false hope.  Instead, as you can see from the below chart, since the Fed first cut rates back in September, the yen has tumbled nearly 13% and very much looks like it is going to test the previous four-decade highs seen last summer.

Source: tradingeconomics.com

Last year, the MOF/BOJ spent about $100 billion in their efforts to stem the yen’s weakness.  They still have ample FX reserves to continue with that process, but ultimately, history has shown that maintaining a cap on a currency that is weakening for fundamental reasons is nigh on impossible.  If a weak yen is truly seen as existential in Tokyo, then Ueda-san needs to be far more aggressive in tightening monetary policy.  This is especially so given the Fed continues to back away from earlier expectations that it would be aggressively loosening policy.  Now, while JGB yields have moved higher over the past several sessions, trading now at 1.18%, which is their highest level since April 2011, that is not going to be enough to stem this tide.  From what I read, inflation is an issue, but not the same as it was in the US in 2022, so Ueda-san is not getting the same pressure to address it as Powell did back then.  My read is the BOJ remains on hold this month and hikes rates in March while the yen continues its decline.  Look for another bout of intervention when we test the 162 level, but that will not stop the rot.  Nothing has changed my view of 170 or higher in USDJPY by year end.

Though Treasury yields have been rising
Most credit spreads have been downsizing
So, corporate supply
Is ever so high
An outcome that’s somewhat surprising

In the bond market, government bond yields continue to rise around the world (China excepted) as investors increase their demands in order to hold the never-ending supply of new bonds.  Ironically, despite this ongoing rout in government bonds across the board, corporate debt issuance looks as though it will set new records this month.  One thing to remember here is that corporates have a lot of debt coming due over the next two years as all that issuance during the ZIRP period needs to be rolled over.  But the other thing to recognize is that corporate credit spreads, the amount of yield investors require to own risky corporate bonds vis-à-vis “safe” government bonds, has fallen to its lowest levels in years, and as can be seen in the chart below, the extra yield available for high-yield investors is shrinking faster than for investment grades.

Potentially, one reason for this is the dramatic increase in the amount of Private Credit, the latest investment fad where weaker credits go directly to funds designed to lend money rather than to their banks, and investors ostensibly remove one of the middlemen from the process.  As such, there is less of this debt around than there otherwise might be, hence increasing demand and reducing that credit spread.  But the other reason is that there continues to be a significant amount of investable assets looking for a home, and with global yields near the highest they have been in a decade or more, and with the equity market dividend yield down to just 1.27% or so, a record low, there are lots of investors who are comfortable with clipping 5% or 5.5% coupons on BBB corporate bonds.

The question I would ask is, if government bond yields continue to climb, and I see no reason for that to stop given the trend in inflation and necessary issuance, at what point are investors going to get scared?  We are likely still a long way from that point, but beware if the new Treasury Secretary, Scott Bessent, follows through with his hinted views of reducing T-bill issuance and increasing coupon issuance, yields could go much higher absent the Fed implementing QE.  That would cause some serious market ructions!

Ok, let’s see how things look around markets this morning after yesterday’s sell-off in the US equity markets.  It seems Japanese stocks were caught between the weaker yen (generally a stock positive) and the tech sell-off (generally a stock negative) with the Nikkei closing lower by -0.25% on the session.  Meanwhile, the Hang Seng (-0.9%) suffered a bit more on the tech move, although Mainland shares (-0.2%) were not as badly affected.  An interesting story here is that the chief economist at state-owned SDIC Securities made comments at an international forum run by the Peterson Institute that really pissed off President Xi.  Gao Shanwen said the quiet part out loud when he claimed that actual GDP growth in China for the past several years has likely been much closer to 2% than the 5% published.  That story has been widespread in the West, although has never been given official credence.  And for Xi, 2% growth is not going to get it done, what with the property bubble still imploding and consumption declining despite promises of more stimulus.  Stay tuned to this story to see if we start to see more Western analysts reduce their expectations.  Elsewhere in Asia, the picture was mixed with gainers (Korea, Australia, Singapore) and laggards (Taiwan, Malaysia, Philippines).

In Europe, red is today’s color, led by the CAC (-1.0%) although we are seeing losses across the board. Eurozone data showed declining Consumer Confidence, Economic Sentiment and Industrial Sentiment all while inflation expectations remain stubbornly high.  That stagflationary hint is typically not an equity market benefit so these declines should be expected.  The story on the continent is not a positive one and I maintain that the ECB is going to have to cut rates more aggressively than their inflation mandate would suggest.  That might support equities a bit, but it will be hell on the euro!  Finally, US futures are a touch softer (-0.2%) at this hour (7:05) although they were higher most of the overnight session before this.

As mentioned above, bond yields are higher with Gilts (+9bps) leading the way as not only is the economy suffering from some very poor policy decisions by the Starmer government, but it seems that the ongoing political crisis regarding grooming gangs has investors shying away.  But yields continue to rise across the board with continental yields up between 3bps and 6bps, Treasury yields higher by another 1bp this morning after a 10bp rise in the previous two sessions, and JGB yields, as mentioned, higher by 5bps.  This trend is very clear!

In the commodity markets, oil (+0.5%) keeps on keeping on, as API data showed a greater than 4mm barrel draw on inventories, far more than expected and indicating a reduced supply around.  Cold temperatures are keeping NatGas (+5.0%) firm as well.  In the metals markets, both precious and base are under a touch of pressure this morning, down less than -0.2%, largely in response to the dollar’s rebound.

Speaking of the dollar, it is higher against all its counterparts this morning with the pound (-1.2%) the G10 laggard although weakness on the order of 0.5% is pretty common this morning.  In the EMG bloc, ZAR (-1.5%) is the worst performer, after weaker than expected PMI data called into question the economic path forward.  But here, too, we are seeing weakness like MXN (-0.9%), CLP (-0.8%), PLN (-0.8%) and KRW (-0.5%).  I would be remiss to ignore CNY (-0.25%), which is trading below (dollar above) 7.3600 in the offshore market, and is now 2.4% weaker than last night’s fixing rate.  This is also the weakest the renminbi has been since it touched this level back in September and then November 2007 prior to that.  Those Chinese problems are coming home to roost for President Xi.

On the data front, ADP Employment (exp 140K) leads the day followed by Initial (218K) and Continuing (1870K) Claims.  These are being released this morning because of tomorrow’s quasi holiday regarding the late President Carter, when US markets will be closed.  This afternoon, the FOMC Minutes arrive and will be scrutinized closely to see just how hawkish they have become.  We also hear from Governor Waller this morning with caution being the watchword from virtually every Fed speaker of late.

It is all playing out like I anticipated, with the ISM data showing strength yesterday, not just in the headline number, but also in the Prices Paid number.  The Fed will have no chance to cut rates again, and I look for the dollar to continue to rise.

Good luck

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