Tag Archives: stocks

It Won’t End Well

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From Europe, we’re hearing some squawks
They’ve not been included in talks
‘Bout war and Ukraine
So, to inflict pain
They’ve threatened a US detox
 
It seems they believe if they sell
All Treasuries held we would yell
Please stop, it’s too much
And lighten our touch
Methinks, for them, it won’t end well

 

Markets continue to be dull these days.  While we are clearly not in the summer (it is 15° here in NJ this morning), doldrums certainly seem to be descriptive of the current situation.  Equities bounce back and forth each day, neither trading to new highs, nor falling sharply.  The same is true with the dollar, with oil, with gold of late and even, on a slightly longer-term view, of Treasury bonds.  I guess that could be the exception, depending on your horizon, but as you can see from the chart below, it has been several months since 10-year yields have traded outside the 4.0% – 4.2% range.

Source: tradingeconomics.com

Now, much digital ink has been spilled trying to explain that the latest 15bp rise in yields is a signal that the US economy is about to collapse under the weight of its $38+ trillion in debt, but I sense that is more about reporters trying to get clicks on their articles than a reflection of reality.

However, this morning I saw a story that I think is worth discussing, even though it is only a hypothetical.  Making the rounds is the story that Europe and the UK are extremely unhappy with President Trump’s approach to obtaining a peace in Ukraine and so have threatened their so-called ‘nuclear option’ of selling all their Treasury holdings to crash the US bond market and the US economy alongside it.  From what I have seen, if you sum up all the holdings in Europe and the UK it totals $2.3 trillion or so, although it is not clear if that is controlled by the governments, or there are private holdings included.  My strong suspicion is the latter, although I have not yet been able to confirm that.

But let’s assume those holdings are completely under the control of European central banks and governments and they decide that’s what they want to do.  What do you think will happen?  Arguably, much depends on how they go about selling them.  After all, it’s not as though there is anybody, other than the Fed, who can step up and show a bid on the full amount.  So how can they do this?  I figure there are only two viable options:

  1. They can sell them slowly and steadily over time, perhaps $200 billion/day (FYI daily Treasury market volume averages about $900 billion).  That would clearly put significant downward pressure on prices and push yields higher but would likely encourage the hedge fund community to double up on the bond basis trade thus slowing the decline.  However, if they did that for 11 days, US yields would undoubtedly be higher.  Too, remember that if the market started to get unstable, the Fed would step in and absorb whatever amount they deemed necessary to prevent things from getting out of hand.
  • Perhaps, since their ostensible goal is to destabilize the US bond market, they would literally all coordinate their timing and try to sell them all at once.  At that point, since nothing happens in the bond market without the Fed being aware, it would likely have an even smaller impact as the Fed would certainly step in and take down the entire lot.  After all, through QT, their balance sheet has shrunk about $2.3 trillion over the past 18 months, so they have plenty of capacity.

My point is, I believe this is an empty threat, as it seems most European threats tend to be.  Consider that the Eurodollar market remains the major source of funding throughout Europe, and it requires collateral (i.e. Treasury bills and bonds) in order to function.  If Europe no longer had that collateral, it feels like they might have a lot more problems funding anything on the continent.  

Another issue is that if we assume they successfully sell all their Treasuries, that means they will be holding $2.3 trillion in cash.  Exactly what are they going to do with that?  If they convert it into euros and pounds, the dollar will certainly fall sharply, meaning both the euro and pound will rise sharply.  Please explain how that will help their economies and their exporters.  They are getting killed right now because their energy policies have made manufacturing ridiculously expensive.  See how many cars VW or Mercedes sells overseas if the euro rallies 15%.

Now, the article linked above is from the Daily Express, not a website I trust, but they reference a WSJ article.  However, despite searching the Journal, and asking Grok to do the same, I can find no actual article that mentions this idea.  Ostensibly, if you want to search, it came out on December 1st, although if that is the case, why is it only getting press now?

It is a sign of the absence of market news that this is a story at all.  With market participants inhaling deeply so they may hold their breath until 2:00 tomorrow afternoon when the FOMC statement is released, they need something to do.  I guess this was today’s distraction.  As I said above, this is clickbait, not reality.

Ok, let’s tour markets. US equity market slipped a bit yesterday and Asian markets were dull as well with modest gains and losses almost everywhere.  The exception was HK (-1.3%) which suffered based on concern the FOMC will provide a ‘hawkish’ cut tomorrow and that will be the end of the road.  But China (-0.5%) was also soft despite hopes that when the Politburo meets in the next weeks, they will focus on more domestic stimulus (🤣🤣) just like they have been saying for the past three years.  Australia (-0.5%) slipped as the RBA left rates on hold and sounded more hawkish, indicating there were no cuts in the offing.

European bourses are mixed, although starting to lean lower.  The CAC (-0.6%) is the laggard here although Italy and Spain are also softer while Germany (+0.2%) leads the gainers after a slightly better than expected Trade Balance was reported this morning.  The hiccup here is that the balance improved because imports fell (-1.2%) so much more than exports rose (0.1%).  Hardly the sign of economic strength.

We’ve discussed bonds on a big picture basis, and recall, yields rose yesterday in both the US and Europe.  This morning, though, yields are little changed in the US and in Europe, with sovereign yields, if anything slightly lower.  JGB yields also slipped -1bp last night and the big mover was Australia after the RBA, with yields climbing 5bps.

In the commodity markets, while the trend remains slightly lower in oil (+0.3%), as you can see from the chart below, $60/bbl is home.  As I have written before, absent an invasion of Venezuela or peace in Ukraine, it is hard to see what changes this for now.  I guess if China stops filling up its SPR, demand could shrink and that would accelerate the decline.

Source: tradingeconomics.com

In the metals markets, $4200/oz has become gold’s (+0.3%) home lately while silver (+0.9%) has found comfort between $58/oz and $59/oz.  Neither is seeing much in the way of volatility or new interest, but both trends remain strongly higher. 

Finally, the dollar, which rallied a bit yesterday, is little changed this morning.  USDJPY is interesting as it has traded back above 156 this morning, contradicting all that talk of a Japanese repatriation trade.  Again, it is difficult for me to look at the yen chart below and conclude the dollar has peaked.

Source: tradingeconomics.com

Elsewhere in the space, this is one of those days where 0.2% is a major move.  Historically, December is not a time when FX traders are active.

On the data front, the NFIB report rose to 99.0 this morning, its highest reading in three months and the underlying comments showed a modest increase in optimism with many businesses looking to hire more people but having trouble finding qualified candidates.  This is quite a juxtaposition with the narrative that small businesses are firing workers that I have read in several different places and is backed by things like the recent Challenger Gray survey which indicated that US businesses have fired more than 1.1 million workers so far this year.  This lack of clarity is not going to help the FOMC make decisions, that’s for sure.  As to the rest, the ADP Weekly Survey is due to be released as well as JOLTS Job Openings (7.2M) and Leading Indicators (-0.3%) at 10:00.

The very fact that the biggest story I could find was a hypothetical is indicative of the idea that there is nothing going on.  Look for a quiet one as market participants await Powell and friends tomorrow.

Good luck

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Remarkable Fragility

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JGB yields have
Risen to multi-year heights
Is this why stocks fell?

 

Yesterday I highlighted that 10-year JGB yields had risen to their highest level since 2008.  As you can see below, the same is true for 30-year JGBs and essentially the entire curve there.

Source: tradingeconomics.com

Ostensibly, this move was triggered by comments from BOJ Governor Ueda indicating that a rate hike was coming this month.  However, the thing I find more interesting is that this move in JGB yields has become the bête noire of markets, now being blamed for every negative thing that happened yesterday.  

For instance, Treasury yields yesterday rose 7bps despite ISM data indicating that manufacturing activity remains sluggish at best.  In fact, the initial response to that data was that it confirmed the Fed will be cutting rates next week.  But the narrative seems to be that Japanese investors are now willing to repatriate funds, selling Treasuries to buy JGBs, in order to invest locally because they are finally getting paid to do so.  Certainly, looking at the chart above shows that Japanese yields had been tantamount to zero for a long time prior to 2024, and even then, have only started to show any real value in the most recent few months.  Of course, real 10-year yields in Japan remain significantly negative based on the latest inflation reading of 3.0%.  The upshot is, rising JGB yields are deemed the cause of Treasury market weakness.

Turning to risk assets, the story is the same for both stocks (which saw US equities decline across the board yesterday) and cryptocurrencies, notably Bitcoin.  Ostensibly, the rise in yields, and the prospect of a rate hike by the BOJ (to just 0.75% mind you) has been cited as the driver of an unwinding in leveraged trades as hedge funds seek to get ahead of having their funding costs rise thus crimping their margins.  

There is no doubt in my mind that the yen has been a critical funding currency for a wide array of carry trades, that is true.  In fact, that has been the case for several decades.  But is 25 basis points really enough to destroy all the strategies that rely on that process?  If so, it demonstrates a remarkable fragility in markets, and one that portends much worse outcomes going forward.  

If we look at the relationship between Bitcoin and 10-year JGBs, it appears that there has been a significant change in tone.  For the past two months, while JGB yields have continued to climb, BTC has broken its correlation with JGBs and has fallen dramatically instead. (see below chart from tradingeconomics.com). When it comes to crypto, I am confident that leverage levels are higher than anywhere else, in fact that seems part of the attraction, so it should not be as surprising to see something of this nature.  But again, it speaks to a very fragile market situation given there was no discernible change in the Japanese yield trend to drive a Bitcoin adjustment.

The upshot here, too, is that rising JGB yields are claimed to be the reason Bitcoin is declining.  In fact, nearly all the commentary of late seems to be focusing on JGBs as the driver of everything.  While I concede that Japanese yields are an important part of the USDJPY discussion, it is difficult for me to assign them blame for everything else.  I have seen numerous commentators explaining that the Japanese have been selling Treasuries because they don’t trust the US, and this has been ongoing for years.  I have also seen commentators explain that because Japanese surpluses had been invested internationally for years and funding so much of the world’s activity, now that they can invest at home, liquidity everywhere will dry up, and asset prices will fall.  

Responding to the first issue, especially with new PM Sanae Takaichi, I do not believe that is a concern at all.  If anything, I expect that the relationship between the US and Japan will deepen.  As to the second issue, that may have more import but the one thing of which we can be sure is that central banks around the world will not allow liquidity to dry up in any meaningful fashion.  Remember, the Fed ended QT yesterday and it won’t be long before the balance sheet starts to grow again, adding liquidity to the system.  One thing I have learned in my many years observing and trading in markets is, there doesn’t need to be a catalyst for markets to move in an unexpected direction.  Certainly not a big picture catalyst.

And with that, let’s look at how markets responded overnight to yesterday’s risk-off session in the US.  Looking at the bond market first, yesterday’s rise in yields was nearly universal with European sovereigns all following the Treasury market’s lead.  And this morning, across the board sovereigns are higher by 1bp, the same as Treasury yields.  While JGB yields didn’t budge overnight, we did see Australia and other regional yields catch up to yesterday’s rise.  I fear bond investors are stuck as they see the potential for inflation, but they also see weakening economic activity as a moderator there.  As an example, the OECD just reduced its US GDP forecast for 2026 to 2.9% this morning, from 3.2%.  Personally, I don’t think anything has changed the run it hot scenario.

In the equity markets, Asian bourses were mixed with Korea (+1.9%) and Taiwan (+0.8%) the notable gainers while elsewhere movement was much less substantial (Japan 0.0%, HK +0.2%, China -0.4%).  There was no single story driving things there.  As to Europe, things are brighter this morning led by Spain (+1.0%) and Italy (+0.5%) although there is no single driving issue here either.  US futures are edging higher at this hour as well, +0.2%, so perhaps yesterday was more like a little profit taking after last week’s strong rally, than anything else.

In the commodity sector, oil (-0.3%) is slipping after yesterday’s rally.  I suppose the potential peace in Ukraine is bearish, but that story has been dragging on for a while so I’m not sure when it will come to fruition.  In the metals markets, after a gangbusters rally yesterday, with silver trading to $59/oz, we are seeing a modest retracement this morning across the board (Au -0.6%, Ag -1.2%, Pt -2.0%) although copper (+0.4%) is holding its gains.  Nothing indicates that these metals have topped.

Finally, the dollar is little changed as I write, giving back some early modest strength.  JPY (-0.3%) continues to be amongst the worst performers, and although it has bounced from its recent lows, remains within a few percent of those levels.  My take here is we will need to see both a more aggressive Fed and a more aggressive BOJ to get USDJPY back to 150 even, let alone further than that.  If we look at the DXY, it is sitting at 99.45, and still well within its trading range for the past 6+ months as per the below.  For now, the dollar remains a secondary story.

Source: tradingeconomics.com

On the data front, here’s what comes the rest of this week:

WednesdayADP Employment 10K
 IP0.1%
 Capacity Utilization77.3%
 ISM Services52.1
ThursdayInitial Claims220K
 Continuing Claims1960K
 Trade Balance -$65.5B
FridayPersonal Income (Sep)0.4%
 Personal Spending (Sep)0.4%
 PCE (Sep)0.3% (2.8% Y/Y)
 -ex food & energy0.2% (2.9% Y/Y)
 Michigan Expectations51.2
 Consumer Credit$10.5B

Source: tradingeconomics.com

As the Fed is in its quiet period, there are no Fed speakers until Powell at the presser next week.  Given the age of the PCE data, I don’t see it having much impact.  Rather, ADP and ISM are likely the things that matter most for now.

Ultimately, I believe more liquidity is going to come to the market via central banks around the world, and that will support risk assets, as well as prices for the things we buy.  Nothing has changed in my view of the dollar either.

Good luck

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The Whisperer’s Roar

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Most focus is still on the Fed
And what every Fed speaker said
But do not ignore
The Whisperer’s roar
That Jay’s got the votes, rates to shred
 
And this is why markets are soaring
While bond vigilantes are snoring
But, too, it’s why gold
Is bought and not sold
The question is, whose ox Jay’s goring?

 

One thing that is very clear right now, the demand for lower interest rates is extremely widespread, regardless of one’s political persuasion.  People may despise everything that President Trump has done or claims he will do, but those same folks are desperate for him to be able to force the Fed to cut rates further.  At least that’s my observation.  

But putting that aside, the narrative around next month’s FOMC meeting seems to be coming to a clearer point; a cut is in the cards, but a potentially long delay in the next move will follow.  While there were no Fed speakers on the calendar, at least the calendar I use, yesterday, we did hear from two more, the presidents of San Francisco and Boston, and though the former, renowned dove Mary Daly, was far more forthright in her views a cut was appropriate, the latter, centrist Susan Collins, clearly was amenable to the idea, though not forcefully so.  But we know that Chair Powell cares since the Fed Whisperer, Nick Timiraos, got top billing in this morning’s WSJ with the following article, “Fed Chair Powell’s Allies Provide Opening for December Rate Cut.”  

As this story was coming into view yesterday, we saw equity markets rise sharply in the US, or at least the tech portion (the DJIA managed only a 0.4% gain compared to the NASDAQ’s 2.7% jump).  We also have seen the Fed funds futures market up the pricing of a rate cut to 81% as of this morning, with the concerns last week about Powell’s hawkishness quickly forgotten.  One other thing of note was the strong rally in precious metals, with gold (0.0% this morning, +1.8% yesterday) and silver (-0.3% this morning, +2.6% yesterday) responding to the imminent further debasement of the dollar.  While both remain somewhat below their October highs, nothing indicates that their trends higher have ended.

Source: tradingeconomics.com

There continues to be a lot of discussion on two fronts, the state of the economy and the rationale for further equity market gains, and interestingly, they are completely independent discussions.  For the former, the dribs and drabs of data that have been released since the end of the government shutdown have been inconclusive as to what is going on, at least officially.  Yesterday brought nothing new, although this morning we are due to see September data on Retail Sales (exp 0.3%, 0.3% ex autos), PPI (2.7% for both headline and core) and House Prices (+1.4% Case Shiller) along with November Consumer Confidence (93.5, down slightly from last month).  It hardly seems this will change any views

But the market conversation is completely different.  Between talk of a Santa rally, the popping of the AI bubble (assuming there is such a thing) and growing certainty that a Fed cut will help goose the stock market, that economic uncertainty means nothing.  There remains a large swath of investors who are certain the Fed will not allow equity markets to fall in any meaningful fashion and who are prepared to continue to buy the dip.  

Interestingly, the place where these two issues meet, earnings forecasts, shows that while fixed income investors may feel uncertain about the economy’s future, 2026 earnings estimates of 14% growth have equity investors in a very different place.  While I don’t know which side is correct, I suspect that the ‘run it hot’ philosophy which has been driving everything this administration does will favor equities over bonds.  While a correction is still likely in my mind, there is still nothing to stop this train!  

Ok, let’s turn to market performance overnight.  Japan (+0.1%) didn’t love the US tech story, which is somewhat surprising, although that may be because there continues to be growing concern regarding the JGB market and the spat with China.  China (+1.0%) and HK (+0.7%) however, both rallied on the US rate cut plus tech rally story.  Taiwan (+1.5%) and Thailand (+1.3%) also liked that story, but the rest of Asia was nonplussed, and more exchanges saw weakness than strength.  As to Europe, nobody there has a strong view this morning with every major bourse +/- 0.15% or less.  The only data was German GDP, which rose to…0.0% for Q3 and clocked in at +0.3% Y/Y! Look at the history of German economic activity over the past 3 years below and ask yourself if this is the powerhouse of Europe, why would anyone want to own any European assets?

Source: tradingeconomics.com

As well, the increased focus on a potential peace in Ukraine may be a negative for the continent.  While it has the potential to help them on the energy side, much of the rally seen across these nations was predicated on the military buildup that was coming.  However, if there is peace, I sense it will be difficult for a group of nations that are massively in debt to convince their populations to borrow more to defend themselves since the threat has abated.  After all, I’m willing to wager there isn’t a single person in the EU who if given the choice between defense spending for a potential future threat or an increased pension will opt for the former.  As to US futures, at this hour (7:25) they are unchanged.

In the bond market, Treasury yields are unchanged this morning after slipping another few basis points yesterday and are sitting at 4.03%.  Either the market is sanguine about the ongoing federal deficit spending or…everybody assumes the Fed is going to restart QE in some form or another if things start to deteriorate.  European sovereign yields are slipping this morning, down between -1bp and -3bps, with the UK on the larger end despite (because of?) tomorrow’s Budget announcement.  

While you may think the US has a fiscal problem, and it does, at least it has the global reserve currency and with it, the ability to live beyond its means for a long time.  The UK, however, simply has the first part, a fiscal problem, which they have exacerbated by adopting the most idiotic energy policies in the world (who would ever have thought that solar power made sense in the UK given the fact it rains, on average, 50% of the days in the year.)  It is unclear to me what the UK can do to right the ship with the current government and its stated priorities.  I suppose that we will see new regulations requiring UK financial institutions to hold more Gilts as otherwise nobody will buy them.  Before I leave this asset class, I cannot ignore the JGB market where back-end yields continue to climb.  As you can see from the below chart, the 10-, 30-, and 40-year yields are all at record highs and show no signs of stopping their multi-year rise.

Source: tradingeconomics.com

I had a long conversation with Charlie Garcia on Substack, someone you should all follow as he has very sharp ideas, on the causes, ramifications and potential outcomes of this unprecedented rise in yields there.  Needless to say, the end game will not be very good for anyone, but the timing remains in question.  As Keynes warned us all, markets can remain wrong longer than you can remain solvent.  But Japan has its own, unique fiscal problems along with every other nation in the world.

Turning to commodities, oil (-0.3%) continues to be the least interesting thing around, drifting slowly lower, but at an increasingly leisurely pace.  The glut narrative has calmed down, but I think there is more concern over the weakening economic story.  Hard for me to say from the outside, but lower is the direction of travel here.  The opposite is true for NatGas (-3.3%) which despite today’s decline is up 55% since October 16th!

Finally, the dollar is under modest pressure today with both the euro and pound stronger by 0.2%, a move that describes almost the entire G10.  One outlier here is NOK (-0.2%) which is clearly suffering on oil’s ongoing weakness.  In the EMG bloc, though, there has been more substantial movement with KRW (+0.7%) rising as traders position for the BOK to remain on hold while the Fed gets ready to cut, thus reversing some of the recent 7% decline in the won over the past quarter.  The CE3 have also rallied nicely, on the order of 0.5%, as they continue to demonstrate their excessive beta with the euro and even CNY (+0.3%) is moving this morning on the back of a potential thaw in relations between the US and China after Presidents Xi and Trump spoke by phone yesterday.  While my long-term perspective on the dollar remains positive, if the Fed does get aggressive, the greenback can certainly come under short-term pressure.

And that’s really all there is today.  With Thanksgiving coming, I expect that volumes will begin to decline so keep that in mind when trying to execute any trades.

Good luck

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Divergent Views

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This morning, we all must feel blessed
Nvidia is still the best
Its’s earnings were great
Which opened the gate
For buyers, much more, to invest
 
But contra to that piece of news
The Minutes showed divergent views
On whether to slash
Next month, rates for cash
Or else wait for more weakness clues

 

Whatever your view of AI and the entire discussion, one must be impressed with Nvidia’s performance as a company, and as an equity.  Last night’s earnings release was clearly better than expected as CEO Jensen Huang indicated that revenues for Q1 should grow to ~$65 billion as there is still significant demand for the buildout of data centers.  He also pushed back on the idea that AI was a bubble.  Of course, he would do that given he is at the center of the discussion.  Nonetheless, after modest gains in US equities yesterday, despite much more hawkish than expected FOMC Minutes (discussed below), US futures are rising sharply this morning, with NASDAQ futures currently higher by 1.6% (6:15) and taking all the indices with it.  Life is good!

Which takes us to the FOMC Minutes and our first look at dissention in the Eccles building.  I think the following paragraph, directly from the Minutes [emphasis added], does a good job in describing the wide range of views that currently exist around the table at the Fed, and make no mistake, I am hugely in favor of a wide range of views as I would contend it has been the groupthink in the past that led us to the current, unfavorable situation.

“In considering the outlook for monetary policy, participants expressed a range of views about the degree to which the current stance of monetary policy was restrictive. Some participants assessed that the Committee’s policy stance would be restrictive even after a potential 1/4 percentage point reduction in the policy rate at this meeting. By contrast, some participants pointed to the resilience of economic activity, supportive financial conditions, or estimates of short-term real interest rates as indicating that the stance of monetary policy was not clearly restrictive. In discussing the near-term course of monetary policy, participants expressed strongly differing views about what policy decision would most likely be appropriate at the Committee’s December meeting.”

Below I have copied the dot plot from the September meeting, which contra to most previous versions shows a particularly wide range of views regarding the future level of Fed funds.  I have to wonder, though, after reading the Minutes, if those dots will be stretched even wider apart from top to bottom in the December report.

Of course, our interest is how did the market respond to this release?  Well, it can be no surprise that the Fed funds futures market repriced further and is now showing just a 32% probability for a cut next month and 78% probability of the next cut coming in January.  That said, the market remains convinced that rates must go lower over time, something that does not appear in sync with equity market growth expectations and seems to be completely ignoring the announced inward investment flows to the US from around the world.

Source: cmegroup.com

As to the equity market response, the two vertical lines show the release of the Minutes and then the release of Nvidia earnings.  You can see for yourself which matters more to the market.

Source: tradingeconomics.com

Between the GDPNow data, which continues to show growth remains robust, and more announcements of inward investment on the back of trade deals, with the Saudis ostensibly promising $1 trillion after the recent White House dinner, I will take the over on future economic activity.  Remember, too, the government is actively supporting mining, drilling and manufacturing and all of that is going to feed into economic growth here.  My view is the Fed funds futures market is completely wrong, and we will not see rates back at the 3.0% level anytime in the next few years.  I’m not suggesting we won’t see an equity market correction, just that the end is not nigh.

Each day the yen slides
Intervention creeps closer
Yen traders beware

Turning to the dollar, it continues to strengthen across the board with the DXY trading back above 100 this morning, and now that the Fed seems more hawkish, looking like it may have legs.  But let us focus on the yen, quite beleaguered of late, as it appears to be accelerating its downfall.  Not only is this evident on the chart below, but we also have heard concerns for the third time, as per the following quotes from Minoru Kihara, the chief cabinet secretary:

“The yen is experiencing sudden, one-way movements that are concerning and which require close monitoring.  Excessive fluctuations and disorderly movements in exchange rates must be monitored with vigilance.  We are concerned about the recent one-way and sudden movements in the foreign exchange market. It’s important for exchange rates to remain stable, reflecting fundamentals.”

In the past six months, the yen has fallen >10% vs. the dollar and is lower by nearly 4% in the past month.  At the same time, JGB yields are starting to accelerate higher, trading to yet another 20-year high at 1.82% and the price action there is remarkably similar to that of USDJPY as per the below chart.  The problem for the JGB market is the BOJ already owns more than 50% of the outstanding debt, so buying more doesn’t seem to be a solution, whereas buying JPY in the FX market will have an impact, albeit short-term if they don’t change policies.   

Source: tradingeconomics.com

The upshot of all this is the world is awash in debt, with global debt/GDP exceeding 3x.  The lesson is that not all this debt will be repaid, in fact probably not that much at all.  Be careful as to what you hold.

Ok, let’s briefly tour the markets I have not yet touched.  Tokyo equities (+2.65%) loved the Nvidia earnings as did Korea (+1.9%), Taiwan (+3.2%) and most of Asia although China (-0.5%) and HK (0.0%) didn’t play along last night.  I guess the ongoing restrictions on sales of Nvidia chips to China is still a negative there, as are recurring concerns over the property market as there is talk of yet another attempt to fix things by the government.  Europe, too, is firmer this morning, although clearly not on tech bullishness given the lack of tech on which to be bullish.  But there is talk of a Russia/Ukraine peace deal which may be a benefit.  At any rate, gains are widespread on the order of +0.6% or so across the board.

In the bond market, Treasury yields rose a couple of ticks yesterday and are higher by 1 more basis point this morning, but still at just 4.14%.  The front of the curve rose by more on the back of the Minutes.  European yields are also higher this morning, between 2bps and 3bps with UK gilts the outlier, unchanged on the day, as softer inflation has traders expecting a rate cut at the next BOE meeting on December 18th.

Oil (+1.0%) has rebounded off its recent lows and is trading back at…$60/bbl, the level at which it is clearly most comfortable these days.  Meanwhile, gold (0.0%) gave back yesterday’s overnight rally to close mostly unchanged with the same true across the other metals although this morning silver (-0.7%) is slipping a bit further.

Finally, other currency movements beyond the yen (-0.3% today) are of a similar size across both the G10 and EMG blocs.  Using the DXY as proxy, this is the third test above 100 since August 1st with many analysts are calling for a breakout at last.  

Source: tradingeconomics.com

Perhaps this is true given the word is the Russia/Ukraine peace deal was negotiated entirely between the US and Russia without either Ukraine or Europe involved, demonstrating how insignificant Europe, and by extension the euro, have become.  Just a thought.

On the data front, the big news is the September employment report is going to be released this morning along with some other data:

Nonfarm Payrolls50K
Private Payrolls62K
Manufacturing Payrolls-8K
Unemployment Rate4.3%
Average Hourly Earnings0.3% (3.7% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%
Philly Fed-3.1
Existing Home Sales4.08M

Source: tradingeconomics.com

On the one hand, the data is stale.  On the other hand, it is all we have, so it will likely have greater importance than it deserves.  I have a hard time looking at the economy and seeing substantial weakness, whether because of corporate earnings, inward investment announcements or the Fed’s growing concern over higher inflation.  All that tells me the dollar is going to be in demand going forward.

Good luck

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Quelling the Strains

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The government shutdown remains
In place, as the House is at pains
To summon the will
For them to fulfill
Their mandate, while quelling the strains
 
Meanwhile, banks in China are lending
Out cash, though in fact, they’re pretending
But quotas from Xi
Mean he wants to see
More loans to encourage more spending

 

While the Senate has passed a CR that will fund government completely through January 30th and includes full year funding for Veterans Affairs, the Department of Agriculture and legislative activities (they paid themselves), with the rest yet to be completed, the House is meeting today to vote on the measure, at which point, assuming it passes, it will then be sent to President Trump for his signature.  It should be completed today, but this being Congress, with numerous members seeking to preen to their TikTok viewers, until it is done, we cannot be certain.

Now, get ready to hear a lot about how much the shutdown cost as we will get many estimates from various economists and analysts, and you can be sure that they will reflect the political bias of the estimator.  I have seen estimates ranging from 0.2% of GDP to 0.6% of GDP for the quarter, with appropriate annualizations.  My personal view is the damage will be lesser, not greater, as all federal employees will be receiving back wages and most spending will have been delayed rather than destroyed.  We shall see.

Regarding the US economy, as we missed the first reading of Q3 GDP due to the shutdown, it seems we will be getting our first look at the end of this month.  Now, the Atlanta Fed did not stop working and their GDPNow estimate for Q3 remains quite robust at 4.0% as per the below chart from their website, atlantafed.org, but the damage, of course, will fall in Q4, so we won’t really know until sometime in January with the first look at that data.

However, it is important to understand that an increasing number of analysts are explaining that the economy is slowing rapidly.  Their latest ‘proof’ is from yesterday’s ADP weekly data, an entirely new statistic with a track record of exactly…2 weeks, but which showed that 11,250 jobs were lost last week.  I am no econometrician (thankfully), but it seems to me that building your case on a statistic with 2 data points is weak sauce.  Ultimately, I think the main reason that there is so much uncertainty amongst analysts is the concept of the K-shaped economy, where the wealthy are doing fine, basking in the glow of their equity returns, while those less well-off are struggling with ongoing inflation and a less robust job market.

In fact, the Fed is having the same problem, looking at the economy with no consistency as there appears to be a pretty significant rift between the hawks and doves right now.  We got further proof of this (as if the two dissents at the last meeting, one for a bigger cut and one for no move wasn’t enough proof) in this morning’s WSJ where the Fed whisperer, Nick Timiraos, published an article explaining exactly that.  There are two camps, one focused on weakening employment and wanting to cut and one still focused on inflation (allegedly) and wanting to pause.  The Fed funds futures market has reduced the probability of a December cut to 65% as of this morning, but is a lock for that cut by January with a small probability of two more cuts by then.

Nothing has changed my view that they cut next month because I believe that they are essentially unconcerned about inflation at this point, believing 3% is close enough to 2% for government work, and remain entirely focused on the job market.

Turning to the most fascinating international story, it appears that Chinese banks have started to make “phantom” loans, or at least that’s what they are being called, as President Xi is very keen to goose economic activity and the large, state-owned banks have quotas to reach.  So, apparently, what they are doing is going to their best customers, begging them to take out a loan they don’t need, and then having the loans repaid within one month.  The banks are even going so far as to pay the interest so there is no actual impact on anything other than bank loan volume.  Of course, that is the quota being met, so I imagine this will continue.

But it makes you wonder, exactly how bad are things in China that banks are resorting to these games?  Perusing the Chinese data from the past month, things are clearly slowing as per the below from tradingeconomics.com:

Too, the PMI data was soft and Foreign Direct Investment is collapsing, falling -10.4% in September. Again, if you want to understand why President Xi was willing to agree a deal with President Trump, the answer is that the Chinese economy remains under intense pressure, and while the currency doesn’t reflect anything about the economy, the fact that Chinese yields are amongst the lowest in the world is a strong signal that things are not great.

Ok, let’s turn to the overnight activity and see how things behaved.  While the US had a mixed performance (NASDAQ fell although the other indices rallied), we continue to see more positive than negative outcomes in Asia on the back of the ongoing tech rally and the end of the shutdown.  Thus, Japan (+0.4%), HK (+0.8%), Korea (+1.1%), India (+0.7% despite a terrorist attack) and Taiwan (+0.6%) all continued their recent rallies.  China (-0.1%) had a much less impressive day. But these markets continue to benefit from the tech story, and I expect that to continue if the tech story continues to be positive.  As to Europe, bourses there are also benefitting from the imminent end of the US shutdown with gains across the board on the continent (DAX +1.2%, CAC +1.1%, IBEX +1.1%) although the UK (-0.15%) is struggling as concerns grow over the nation’s ability to come up with a viable budget that pays for services without raising taxes to a crippling rate.  As to US futures this morning, at this hour (7:30), they are nicely higher, 0.5% or more.

In the bond market, Treasury yields have slipped -4bps, ostensibly on that weak ADP number which has more investors expecting a much weaker economy here.  Europe though, has seen yields tick higher by 1bp across the board, with the UK the exception (+3bps) as concerns over UK finances continue apace.

In the commodity markets, oil (-1.1%) which rallied yesterday on growing concerns over the latest US sanctions on Lukoil and Rosneft, have given back those gains and are once again hovering around $60/bbl.  The IEA released their report on the future of energy use, specifically fossil fuels, and in another sign the climate crisis is ending (or at least that it is no longer a concern), they explained that fossil fuel use would now peak in 2050 under current policies, rather than prior to the end of this decade under stated policies.  The FT was kind enough to put together a little graphic showing the two different views, but we all know that stated policies are wishful thinking.

In a nutshell, more oil demand will drive more oil supply, count on it!  Turning to metals, the rally continues this morning with gold (+0.2%) and silver (+1.1%) pushing back toward the highs seen on October 20th.  I strongly believe these markets will continue to rally as the ‘run it hot’ philosophy will be enacted in as many places around the world as can get away with it.  

Finally, the dollar is a touch firmer this morning, with DXY (+0.1%) on the back of continued weakness in the pound (-0.3%) and the yen (-0.4%).  Elsewhere, the picture is mixed with the euro little changed while the rand (+0.5%) continues to benefit from the gold rally.  Otherwise, the dollar remains a back burner issue for most investors right now, although I have read that people are talking about the carry trade again, funding investments with short yen positions.  Certainly, the yen has been quite weak overall as evidenced by its trend over the past six months below.

Source: tradingeconomics.com

There is no data this morning although we will get bombarded with five Fed speakers, three of whom are confirmed doves (Miran, Williams and Waller) while the other two seem more middle of the road (Bostic, Paulson).  At this point, there is no consensus on the economy’s strength or direction and that is evident at the Fed as well as in the analyst community.  The only consensus seems to be that stocks and gold should both continue to rally.  As to the buck, what’s not to like?

Good luck

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A Day to Give Thanks

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

 

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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Like a Fable

Posted on by

It seems there’s a deal on the table
To end the shut down and enable
The chattering classes
To force feed the masses
A story that’s quite like a fable
 
Both sides will claim they have achieved
Their goals, though they were ill-conceived
But markets will love
The outcome above
All else, and we’ll all be relieved

 

While the shutdown is not technically over as the House of Representatives need to reconvene (they have been out of session since September 19th when they passed the continuing resolution) and adjust the bill so that it matches the one the Senate agreed last night and can be voted on in the House, it certainly appears that the momentum, plus President Trump’s imprimatur, is going to get it completed sometime this week. 

The nature of the deal is unimportant for our purposes here and both sides will continue to claim that they were in the right side of history, but the essence is that there appeared to be some movement on health care funding so, hurray!

As you can see in the chart below, while the story broke late yesterday afternoon and futures responded on the open in the evening session, the reality is the market sniffed out something was coming around noon on Friday.  In fact, the S&P 500 has rallied 2.4% since noon Friday.

Source: tradingeconomics.com

So, everything is now right with the world, right?  After all, this has been the major topic of conversation, not just by the talking heads on TV, but also in markets as analysts were trying to determine how much damage the shutdown was doing to the economy.  While I have no doubt that there were many people who felt the impact, my take is there were many, many more who felt nothing.  After all, the two main features were air travel and then SNAP benefits.  Let’s face it, on average (according to Grok) about 2.9 million people board airplanes in the US, well less than 1% of the population, although SNAP benefits, remarkably, go to 42 million people.  However, those have only been impacted for the past week, not the entire shutdown.

I’m not trying to make light of the inconveniences that occurred, just point out that from a macroeconomic perspective, despite the fact that the shutdown lasted 6 weeks, it probably didn’t have much of an impact on the statistics as all the money that wasn’t spent last month will be spent next month.  Different analyst estimates claim it will reduce Q4 GDP by between 0.2% and 0.5% with a concurrent impact on the annual result.  I am willing to wager it is much less.  However, it appears it will have ended by the end of the week and so markets are back to focusing on other things like AI, unemployment and QE.

Now, those three things are clearly important to markets, but I don’t think there is anything new to discuss there today.  Rather, I would like to focus on two other issues, one more immediate and one down the road, which may impact the way things evolve going forward.

In the near term, as winter approaches, meteorologists are forecasting a much colder winter in the Northern Hemisphere across both North America and Europe, something that is going to have a direct impact on NatGas.  Bloomberg had a long article on the topic this morning with the upshot being that the Polar Vortex may break further south early this year and bring a lot of cold weather along for the ride.  This is clearly not new news to the NatGas market, as evidenced by the fact that its price has exploded (no pun intended) higher by 43% in the past month!

Source: tradingeconomics.com

While oil prices have remained stuck in a narrow range, trading either side of $60/bbl for the past 6 weeks amid a longer-term drift lower as you can see in the below chart, oil is only utilized by ~4% of homeowners for heating with 46% using NatGas.

Source: tradingeconomics.com

Ultimately, I suspect that we are going to see this feed through to inflation as not only are there the direct costs of heating homes, but NatGas is also the major source of generating electricity, with 43% of the nation’s electricity using that as its source.  We have already seen electricity prices rise pretty sharply over the past months (I’m sure you have all felt that pain) and if NatGas prices continue to climb, that will continue.  Remember, the current price ~$4.45/MMBtu is nowhere near significant highs like those seen just 3 years ago when it traded as high as $10/MMBtu.  With all this price pressure, will the Fed continue down their path of rate cuts?  Alas, I believe they will, but that doesn’t make our lives any better.

Which takes me to the second, longer term issue I wanted to mention, European legislation that is seeking to effectively outlaw the utilization of cash euros.  This substack article regarding recent Eurozone legislation is eye-opening as the ECB and Europe try to combat the coming irrelevance of the euro.  For everyone who either lives in Europe or does business there, I cannot recommend reading this highly enough.  There are many changes occurring in financial architecture, and by extension financial markets.  Keep informed!

Ok, enough of that, let’s see how markets have responded to the Senate deal.  Apparently, US politics matters to the entire global equity market.  Green is today’s color with Japan (+1.25%), HK (+1.55%) and China (+0.35%) all performing well, although not as well as Korea (+3.0%) which really had a good session.  Pretty much all the other regional markets were also higher.  In Europe, the deal has everyone excited as well with gains across the board (Germany +1.8%, France +1.4%, Spain +1.4%, UK +1.0%).  As to US futures, at this hour (7:45) they are higher by about 1% across the board.

I guess with that much excitement about more government spending, we cannot be surprised the yields have edged higher.  This morning Treasury yields are up by 3bps, which is what we saw from JGB markets last night as well, although European sovereign yields are little changed on the day.  I suspect, though, if equities continue to rally, we will see yields there edge higher.

In the commodity space, oil (+0.5%) continues to trade in its recent range.  The most interesting thing I saw here was that the IEA is set to come out with their latest annual assessment of the oil market and for the first time in more than a decade they are not going to claim that peak fossil fuel demand is here or coming soon.  The climate grift is truly breaking down.  But the commodity story of the day is precious metals which are massively higher (Au +2.5%, Ag +3.3%, Pt +2.6%) with copper (+1.6%) coming along for the ride.  The narrative here is that with the government shutdown due to end soon, President Trump talking about $2000 tariff rebate checks and the Fed likely to cut rates in December (65% probability), debasement is with us and metals is the place to be!

Interestingly, the dollar is not suffering much at all despite the precious metals story.  While AUD (+0.6%), ZAR (+0.6%) and NOK (+0.6%) are all stronger on the commodity story, the euro is unchanged, JPY (-0.4%) continues to decline and the rest of the G10 is not doing enough to matter.  In truth, if I look across the board, there are more currencies strengthening than weakening vs. the greenback, but overall, at least per the DXY, the dollar is little changed.

There is still no data at this point, although it will start up again when the government gets back to work.  Actually, there has been much talk of the weakness in Consumer sentiment based on Friday’s Michigan Index which fell to 50.3, the second lowest in the history of the series with several subindices weakening substantially.  However, that was before the news about the end of the shutdown, so my take is people will regain confidence soon.  As well, we hear from 9 Fed speakers this week, with 5 of them on Wednesday!  Both dissenters from the October meeting will speak, so perhaps things have changed in their eyes, but I doubt it.

At this point, all is right with the world as investors anticipate the US government getting back to work while the Fed will continue to support markets by easing policy further.  In truth, the dollar should not benefit here, but I have a feeling that any weakness will be short-lived at best.  Longer term, I continue to believe the dollar is the place to be.

Good luck

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Cracks Have Shown Through

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

 

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

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

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

Source: @DavidBCollum on X

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

Source: tradingeconomics.com

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

Source: giphy.com

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

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

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

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

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Good luck and good weekend

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Curses and Squeals

Posted on by

Though data is scarce on the ground
This week has the chance to astound
Four central banks meet
And when it’s complete
Two cuts and two stays ought abound
 
Meanwhile, Mr Trump’s signing deals
In Asia, an act that reveals
His fervent desire
To drive markets higher
As foes let out curses and squeals

 

Some days, there’s very little to note, with the news cycle a rehash of stories that have been festering for weeks.  This is especially true in the political sphere, but also on the economic front.  As well, given the ongoing government shutdown and the lack of government data being released, a key market focus is missing.  But not today!

News across the tape moments ago is that President Trump has agreed a trade deal with South Korea, although the details of the deal are yet to be revealed.  When it comes to Trump and trade deals, it is always difficult to get through the hype to determine if things will actually improve, but if we use the KRW as a proxy for market sentiment, as you can see in the chart below, the announcement was seen as a benefit to the won.

Source: tradingeconomics.com

This is hardly definitive, and the nature of a trade deal is that it takes time to be able to determine its benefits for both sides, but for now, it appears markets are giving it the benefit of the doubt.  As well, it continues to be reported that Presidents Trump and Xi will be sitting down tomorrow (tonight actually) and that a trade framework has been agreed by Secretary Bessent and Chinese Vice Commerce Minister Li Chenggang which includes reduced tariffs, fentanyl, soybeans, semiconductors and rare earth minerals as key pieces of the puzzle.  

The ongoing competition between the US and China is not about to end with this deal, but perhaps it will be able to revert to a background issue rather than a headline one, and that is likely a positive for all.  Certainly, equity markets continue to believe that this dialog is a benefit as evidenced by their daily trips to new highs.

Which takes us to the other key discussion point in markets, central banks.  Over the next twenty-seven hours (it is 6:30am as I type) we are going to hear four major central banks explain their latest policy steps starting with the Bank of Canada (expected 25bps cut) at 9:45 this morning, then the FOMC at 2:00 this afternoon with their 25bps cut.  This evening at 11:00, NY time, the BOJ is expected to leave rates on hold, although there are those who believe a 25bps hike is possible, and then tomorrow morning at 9:15 EDT, the ECB will also leave rates on hold.  

While this is certainly a lot of new information, the question is, will it have any market impact?  Given the market pricing of these events, if any of the central banks do something different, you can be sure its markets will respond.  If I had to assess what might be different, both the BOC and FOMC could cut more than 25bps, and the ECB could cut 25bps rather than standing pat.  In all those cases, the currency would likely weaken sharply at first, although if all those things happened, I suppose it would simply create a new equilibrium.  But understand, I don’t think any of that WILL happen.

Regarding the Fed, though, there is another question and that is, what is going to happen to QT and the balance sheet.  Lately, there has been a great deal of discussion regarding how much longer the Fed will allow the balance sheet to shrink.  Last week I discussed the difference between ample and abundant reserves, but in numeric terms, the signals are coming from the SOFR (Secure Overnight Financing Rate) market, the one that replaced LIBOR.  It seems that there is increasing concern over the recent rise in the rate.  This is seen by numerous pundits, as well as by some in the Fed, as a signal that the reserve situation is getting tighter, thus offsetting the Fed’s attempts at ease. 

The below chart from the NY Fed shows the daily wiggles, but also, it is pretty clear that the recent trend has been higher.  You can see the September Fed funds cut in the sharp drop, and the first peak after that was September 30th, the quarter-end when banks typically look to spruce up their balance sheets, so borrow more aggressively.  But since then, this rate has been edging higher, an indication that there may not be sufficient reserves available for the banking system.

This begs the question; will the Fed end QT today?  Or wait until December?  My money is on today as they are growing concerned about the employment situation with the uptick in recent layoff announcements, and the pressure on SOFR is the best indicator they have that things have reached the point where their balance sheet no longer needs to shrink.  One other thing to keep in mind, at some point, it seems likely that the Fed is going to need to find more buyers of Treasuries as the market may develop indigestion given the amount being issued.  That pivot back to QE, whatever it is called, is easier if they are not simultaneously reducing their own balance sheet.

And one final point on the Fed.  Apparently, when they cut today, it will be the twenty-second time the Fed will have cut with stock indices at all-time highs, and of those previous twenty-one, twenty-one times equity markets were higher one year later.  Let’s keep that party rolling!

Ok, let’s look at how things have gone overnight.  Tokyo (+2.2%) was basking in the glow of all the love between President Trump and PM Takaichi, as it, too, traded to new all-time highs.  China (+1.2%) gained on the news of the trade framework, but interestingly, HK (-0.3%) did not follow suit.  And it should be no surprise that Korea (+2.1%) rallied on that trade news with India and Taiwan rising as well.  Australia (-1.0%) though, had a rougher go after a higher than forecast inflation print (3.5%) put paid to the idea that the RBA would be cutting rates again soon.

In Europe, Spain (+0.65%) is rallying on solid GDP data (1.1% Q/Q) although the rest of the continent is doing very little with virtually no change there.  In the UK, the FTSE 100 (+0.6%) is rallying on stronger corporate earnings from miners (metals are higher) and pharma companies.  As to US futures, at this hour (7:30) they are all nicely in the green, about 0.35% or so.

In the bond market, Treasury yields have backed up 2bps, but are still just below the 4.00% level, hardly signaling major concern right now.  European sovereign yields are all essentially unchanged this morning and overnight, only Australia (+5bps) moved after that CPI data Down Under.

Turning to commodities, oil (+0.5%) is bouncing after a couple of weak sessions, but net, we are right back to the $60 level which appears to be a comfortable level for both buyers and sellers.  It is also a high enough price to encourage continued exploration, so my take is we are likely to trade either side of this level for quite a while going forward.  My previous bearish views are being somewhat tempered, although I don’t foresee a major rally of any note.  

Source: tradingeconomics.com

In the metals markets, gold (+1.7%) is bouncing off its recent trading low and currently back above $4000/oz.  A look at the chart for the past month shows just how large the movements have been as the parabolic blow-off to near $4400 was seen through the middle of the month, and after a second try, the rejection was severe.  I don’t believe the long-term story in the precious metals has changed at all, the idea that fiat currencies are going to maintain their current status as reserve assets is going to be more and more difficult to defend with gold the natural replacement.  But in a market with a history of manipulation, don’t be surprised to see many more sharp moves ahead.

Source: tradingeconomics.com

As to the rest of the metals, they are all higher this morning with silver (+2.1%) leading the way and copper (+0.6%) and platinum (+1.6%) following in its wake.

Turning to those fiat currencies, the dollar is broadly firmer this morning, with only AUD (+0.15%) managing any gains against the greenback after that inflation print got traders thinking about higher rates Down Under.  But otherwise, in the G10, the dollar is ascendant.  In the EMG bloc, we already discussed KRW, but ZAR (+0.2%) is also gaining today on the back of the metals bounce.  Elsewhere, though, modest dollar strength is the rule.  What makes this interesting is the dollar is back to rallying alongside precious metals.

Ahead of the Fed, we only see EIA oil inventories with a small draw expected.  In theory, with President Trump in South Korea, one would expect him to be sleeping throughout most of today’s session, but apparently the man rarely sleeps.

The big picture is that run it hot remains the play, and that means equities should benefit, bonds should have a bit more trouble, but the dollar and commodities should do well.  I see no reason for that to change soon.

Good luck

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A Pox

Posted on by

The world is a wonderful place
We know this because of the chase
For more and more risk
Though Washington’s fisc
Continues, more debt, to embrace
 
Investors can’t get enough stocks
And bonds have found buyers in flocks
But havens like gold
Are actively sold
As though they’ve come down with a pox

 

I’m old enough to remember when there was trouble all around the world; war in Ukraine was escalating, anxiety over a more serious fracture in the trade relationship between the US and China was growing, and President Trump was building a ballroom at the White House!  Ok, the last one is hardly a problem.  But just two weeks ago, risk assets were struggling and havens seemed the best place for investors to hide.  But that is sooooo last week.

By now you are all aware that the delayed CPI report on Friday came in on the soft side, thus reinforcing the Fed’s plans to cut rates tomorrow.   While Fed funds futures pricing, as seen below, has not changed very much at all, with virtual certainty of cuts tomorrow and in December, plus two more by the April meeting next year, the punditry is starting to float the idea that even more cuts are coming because of concern over the employment situation and the fact that inflation appears under control.

Source: cmegroup.com

Now, it is a viable question, I believe, to ask if inflation is truly under control, but the problem with this concern is that Chairman Powell told us, back in September, that they are not really focused on that anymore.  The fact that the official payroll data has not been released allows the Fed to avoid specific scrutiny, but literally everything I read tells me that the employment situation is getting worse.  The latest highlight was Amazon’s announcement yesterday that they would be reducing corporate staff by about 14,000 folks in the coming months as, apparently, AI is reducing the need for headcount.

In fact, I would contend the answer to the question; if the economy is doing so well, why does the Fed need to cut rates, is there is a growing concern over the employment situation which has been masked by the lack of data.

But we all know that the economy and the stock market behave very differently at times, and this appears to be one of those times.  Yesterday, yet again, equity markets in the US closed at record highs as earnings releases were strong virtually across the board.  Adding to the impetus was the news that Treasury Secretary Bessent announced a framework for trade between the US and China had been reached with the implication that when Presidents Trump and Xi meet later this week, a deal will be signed.

Putting it all together and we see the concerns that were driving the “need” for owning havens last week have virtually all dissipated.  While the Russia/Ukraine situation remains fraught, I don’t believe that equity markets anywhere in the world have paid attention to that war in the past two years.  Oil markets, sure, but not equity markets.

There is a fly in this ointment, though, and one which only infrequently gets much airtime.  The US is continuing to run substantial fiscal deficits.  Lately, as evidenced by the fact that 10-year yields have slipped back to their lowest level this year, and as you can see below, are clearly trending lower, this doesn’t seem to be an issue.  But ever-increasing federal deficits cannot last forever, and if the Trump plans to boost growth significantly does not work out, there will be a comeuppance.  I have described before my view that the plan is to ‘run it hot’ and nothing we have seen lately has changed that sentiment.  I sure hope it works for all our sakes!

Source: tradingeconomics.com

Ok, let’s see if the euphoria evident in the US markets has made its way around the world.  The answer is, no.  Interestingly, despite a high-profile meeting between President Trump and Japanese PM Takaichi, where Trump was effusive in his support for the new PM and her plans to increase defense spending, Japanese equities were under pressure all evening, slipping -0.6%.  Too, both China (-0.5%) and HK (-0.3%) could find no traction despite the news that a trade deal was imminent.  In fact, the entire region was under pressure with losses in Korea, Taiwan, Australia and virtually every market there.  Was this a sell the news event?  That seems unlikely to me, but maybe.  As to Europe, pretty much every major index is modestly softer this morning, down between -0.1% and -0.2%, so not terrible, but clearly not following the US.  As to US futures, at this hour (7:30), they are little changed to slightly higher.

Global bond markets are quiet this morning, with almost all unchanged or seeing yields slip -1bp.  While US yields have been trending lower, in Europe, I would say things are more that yields have stopped rising and, perhaps, topped, but are not yet really declining in any meaningful fashion yet.  Germany’s bund market, pictured below, exemplifies the recent price action.

Source: tradingeconomics.com

One interesting note is that JGB yields slipped -3bps overnight, despite PM Takaichi reaffirming that the defense budget was going up with no funding mentioned.  Like I said, the world is a better place this morning!

In the commodity markets, gold (-1.5%) continues to get punished as all those who were chasing the haven story have been stopped out.  The price went parabolic two weeks ago, and price action like that cannot hold for any length of time.  This has taken silver (-1.1%) and copper (-0.5%) lower as well, and I suspect that there could well be further to decline.  Oil (-1.1%) meanwhile seems far less concerned about the sanctions on Lukoil and Rosneft this morning.  The conundrum here is if the economy is performing well, that would seem to be a positive demand driver.  I have not seen word of major new oil sources being discovered to increase supply dramatically, but if you think back to last week, the narrative was all about a glut.  I guess we will learn more with inventory data this week.

Finally, the dollar… well nobody really seems to care.  As you can see from the below chart of the DXY, it is approaching six months where the index has traded in a very narrow range, and we are pretty close to the middle.  I don’t know the catalyst that will be needed to change this story, but frankly, I suspect that nobody (other than FX traders) is unhappy with the current situation.

Source: tradingeconomics.com

It’s not that there aren’t currencies that move around on a given day, but there is no broad trend in place here.

On the data front, the key release today is the Case-Shiller Home Price Index (exp 1.9%) and then the Richmond Fed Manufacturing Index (-14) is also due later this morning.  However, all eyes are on tomorrow’s FOMC outcome with the focus likely to be more on QT and its potential ending, than on the rate cuts, which are universally expected.  One other thing, with the government shutdown ongoing, GDP and PCE data, which were originally scheduled for this week, will not be released.

Life is good!  That is the only conclusion I can draw right now based on the ongoing strength in risk assets, at least US risk assets.  Keynes was the one who said, markets can remain irrational longer than you can remain solvent, and I have a feeling that we are approaching some irrationality.  But for now, enjoy the ride and if FX is your arena, I just don’t see a reason for any movement.

Good luck

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