Tag Archives: #taiwan

Just Won’t Evanesce

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The RBA left rates on hold
And sounded quite dovish, all told
Meanwhile in Brazil
Old Lula is ill
With something much worse than a cold
 
In Syria, things are a mess
In Taipei they’re feeling some stress
With all this unfolding
It’s no shock beholding
Risk assets just won’t evanesce

 

Risk is the topic du jour as pretty much everywhere one looks around the world, things are afoot that can inculcate fear (and loathing) rather than embrace those animal spirits.  Perhaps the least frightful, but most directly impactful regarding markets, was the RBA meeting last night at which the committee left rates on hold, as universally expected, but appeared to turn (finally) to the dovish side of the ledger.  The policy statement explained, “Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close.  The board is gaining some confidence that inflation is moving sustainably toward target.”   However, the proof is in the pudding and a quick look at the AUD (-0.7%) shows that the market has come to believe the RBA is finally joining the central bank rate cutting party.

Source: tradingeconomics.com

The trend seems pretty clear and it is hard to make a case for a reversal absent a massive spike in inflation Down Under forcing the RBA to change direction or something coming from the US focusing on weakening the USD, but given nothing like that seems likely until Mr Trump is officially in office, I am concerned that the Aussie dog will live up to its nickname and make new lows going forward, perhaps testing 0.6000 before this is over.

Speaking of currencies under pressure, elsewhere in the Southern Hemisphere we find the Brazilian real which has fallen to new historic lows, with the dollar now trading above 6.08.  For those of you who hate to pay away the points in USDBRL to hedge your balance sheet assets, the reason that you need to do it is very evident from the chart below.

Source: tradingeconomics.com

While there were several short-term dips in the dollar during the past year, the spot rate (at which you remeasure your balance sheet each month) moved from 4.92 to 6.08 in 12 months, nearly a 24% decline in the real.  A one-year forward would have cost far less, something like 40-45 big figures, or less than half the actual move, and would have given you certainty as to the cost.  Hedging matters!

Now, why, you may ask is this happening?  Well, news that Brazilian president Lula da Silva had emergency brain surgery has clearly not helped the currency.  Suddenly there are many questions over who is running the country and how they will address the ongoing fiscal issues that are extant.  As an aside, this is likely another deterrent to the idea of a BRICS currency appearing any time soon, if ever.

Turning our gaze elsewhere, the situation in Syria continues to unfold with no clear outcome although increased concerns over what will happen with the beleaguered people of that nation and whether it will foment yet another immigration wave into Europe and elsewhere in the Middle East.  However, right now, the oil market remains nonplussed over this issue as evidenced by yet another day of quiet trading and a slow drift lower in the price (-0.55%).

However, we cannot ignore Taiwan, where China is currently in the process of military maneuvers that appear to be simulating a naval blockade of the nation.  Price action here has shown the TWD (-0.4%) sliding further and pushing back toward its weakest level in more than 15 years (since the GFC), while the TAIEX stock index (-0.65%) is also feeling a little heat, although the story there has been one of consistent gains over the past several years, following the NASDAQ higher given the breadth of technology companies there, notably TSMC.

Putting it all together leaves one wanting with respect to their risk appetite this morning as today seems like another step closer to that Fourth Turning.  So, it should be no surprise that after a down day yesterday in the US, with all three major equity indices declining, we have seen far more red than green on the screens overnight.  The exception to this rule was in Korea, where the KOSPI (+2.4%) rose sharply as it appears that things are starting to revert to more normalcy there politically.  President Yoon is under pressure to resign and seems likely to be impeached and the government is back to functioning in more of its ordinary manner.  But elsewhere in Asia, Hong Kong (-0.5%), Australia (-0.5%) and most of the smaller regional bourses were lower although the Nikkei (+0.5%) rallied on the back of the yen’s renewed weakness, and mainland Chinese shares (+0.7%) seemed to begin to believe that more stimulus is, in fact, on its way.  We shall see about that.

In Europe, the bourses range from flat (DAX, IBEX) to down CAC (-0.5%), FTSE 100 (-0.5%) with both these nations suffering from their own political distress.  French President Macron is trying to form a government but categorically refuses to include Marine Le Pen’s RN party so has no chance of a majority with concerns growing over the fiscal situation there.  Apparently, if they cannot get a financing bill passed, the French will get to experience the heretofore unique American experience of a government shutdown.  Meanwhile, PM Starmer is watching his ratings circle the drain as his government continues to try to raise revenues by raising taxes on the rich and finding out that one thing rich people are really good at is creating new methods of operations to avoid paying higher taxes.  While there is no vote necessary in the UK for years (remember, Starmer won election just this past July 4th) it certainly feels like his government is going to fall sooner rather than later.  Meanwhile, US futures are little changed at this hour (7:30).

In the bond market, yields are rebounding with Treasuries higher by 3bps this morning after a 3bp rally yesterday.  In Europe, there is very little change except for UK Gilts (+4bps) with concerns over inflation rising there while in Asia, Australian yields slipped 6bps on the dovish RBA.  Generally speaking, the bond market has not been very exciting lately which is one reason, I believe, that things have not fallen apart.  If we start to see more volatility here, watch out.

In the commodity markets, aside from oil’s modest decline, gold (+0.65%) continues to find support in this risk-off scenario although both copper and silver are little changed this morning after solid rallies yesterday.

Finally, the dollar is higher again this morning, with the DXY well back above 106.00 and every G10 currency declining led by NZD (-1.0%).  This is suffering from the RBA’s dovishness which is expected to allow the RBNZ to maintain, or even increase, its own dovishness.  But the whole bloc is softer.  In the EMG bloc, there are a few currencies that are holding their own vs. the dollar this morning, but only just, with MXN (+0.2%) arguably the strongest currency around while CNY (+0.1%) is also relatively strong.  But elsewhere in this bloc, ZAR (-0.7%), PLN (-0.55%), and CLP (-0.4%) are indicative of the type of price action we are seeing across the board.  This is a dollar day, though, not really focusing on individual currency foibles.

On the data front, we see only Nonfarm Productivity (exp 2.2%) and Unit Labor Costs (1.5%) and that is really it.  There was nothing yesterday and all eyes are truthfully turned toward tomorrow’s CPI data.  Things don’t feel very positive right now, so I expect risk to remain on its back foot to start the day.  However, given the number of uncertain situations that abound, anything can happen to either change that view or reinforce it.  Once again, this is why you hedge, to mitigate the markets’ inherent volatility.

Good luck

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Wronger

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The data was, once again, stronger
Reminding us higher for longer
Is still on the cards
Despite the diehards’
Beliefs that Chair Powell is wronger

As well, from two speakers we heard
And none of their signals were blurred
Said Daly and Mester
To every investor
All rate cuts are likely deferred

First, our thoughts are with the people of Taiwan which suffered a massive earthquake last night registering 7.4 on the Richter Scale.  The damage was substantial and while the early count of fatalities is relatively low, just seven so far, I fear there will be more.  From a business perspective, roads and rail lines were damaged and some of the semiconductor fabs were taken offline. The last issue matters greatly as it has the potential to drive up costs and thus prices of finished goods even further (remember what happened to auto prices during Covid when there was no availability of chips?).  It is still too early to determine what the ultimate impacts will be, but the risk is that this will add to inflationary pressures if anything.

However, away from that news, the market story from yesterday and overnight is that the data continues to point to stronger growth in the US (Factory Orders jumped 1.4%) and the latest Fed speakers we heard, Daly and Mester, explained that while three cuts are still possible this year, neither one yet has the confidence that inflation is truly heading back to their 2% goal.

And this is really the entire story for now.  It remains abundantly clear that the Fed is very keen to cut interest rates.  Their macroeconomic backgrounds look at all that has happened and given their underlying belief that the “proper” long-term interest rate is somewhere between 2.5% and 3.0%, they are concerned their current policy is too tight.  And yet, despite these views, virtually every data point that is released shows solid economic activity and no hint that things are slowing down, especially in the labor market.

So, despite that strong desire, they are wary of acting because they know, or at least Powell knows, that if they cut and inflation resurges, it is all on him.  Remember, Powell has made it clear multiple times that he wants to be Paul Volcker redux, not Arthur Burns redux.  The Fed funds futures market continues to price just 66bps of cuts by the December meeting, a telling statement about the difference between market beliefs and Fedspeak, at least yesterday’s Fedspeak.  Granted, we heard last week from two Fed speakers who thought either one or two cuts was the most likely outcome.

Today brings five more speakers including Chair Powell as well as both ADP Employment (exp 148K) and ISM Services (52.7), so there is ample opportunity for news to shake things up.  Based on everything we have seen regarding the US economic data; it seems the risks are for hotter data rather than softer data.  But of more importance, I believe, will be Powell’s comments.  If he accepts the idea that the economy continues to run fairly well with the current interest rate structure and says anything about less than three cuts being appropriate, watch out!

So, let’s look at what happened in markets overnight.  After a weak session in the US yesterday on the growing concern that monetary policy is going to remain tighter, Asia followed suit with declines across the sector.  The Nikkei (-1.0%) and Hang Seng (-1.2%) were both feeling the weight of this evolving narrative.  Surprisingly, mainland Chinese shares were also under pressure despite continued talk of more fiscal stimulus as well as a resurfacing of the idea that President Xi is willing to countenance some version of QE there.  It should be no surprise that virtually every regional market was in the red.

European bourses, though, are a different story this morning as they are higher after the initial read for Eurozone inflation fell to 2.4%, two ticks lower than expected while the Core reading fell to 2.9%, one tick lower than expected and the lowest since February 2022.  Equity investors saw this and decided that the ECB has far fewer impediments to cutting rates than the Fed.  In fact, the only market not behaving like this is the FTSE 100, which received no such news and is somewhat softer this morning.  As to US futures, they are essentially unchanged ahead of Powell’s speech today.

In the bond market, this dichotomy of policy views is also evident as Treasury yields continue to climb, edging up another basis point this morning while European sovereign yields are mostly lower, between 2bps (Spain) and 4bps (Germany) with one outlier, Italy (+2bps).  The Italian situation has to do with the European commission putting pressure on the nation regarding its budget situation which may fall afoul of the current regulations.

In the commodity markets, oil (+0.45%) continues to trade higher as the tensions in the Middle East show no sign of abating while Ukraine has been successful in interrupting Russian refinery production to some extent. Meanwhile. OPEC meets today and there is no indication that they will be changing their production restrictions.  Gold (-0.4%) which has been flying, is taking a breather today although the other metals continue to grind higher.  Nothing has really changed this story as the industrial metals continue to respond to brighter economic prospects while the precious sector continues to worry about the ultimate debasement of the fiat world.

Finally, in that fiat world, the picture is mixed this morning, although the best description is probably unchanged.  I’m hard pressed to look at my screen and see any exchange rate that is more than 0.1% different than yesterday’s levels.  Just like in the equity market, I believe traders are awaiting Chairman Powell’s comments today before taking any new positions.  Over the course of the past three weeks, the dollar has been quite strong, rallying about 3% on a DXY basis.  If the Fed continues to highlight that it is too soon to ease policy, and with today’s Eurozone inflation data, we start to hear more from ECB officials about the ability to cut, my sense is that we could see further strength in the greenback.

Overall, almost everything in markets continues to rely on Powell and the Fed.  Remember, Friday we will see the March payroll report.  If it continues the recent trend of >200K new jobs, it will be very difficult for any doves at the Fed to make their case effectively.  That could begin to weigh more heavily on the equity market but should support the dollar going forward.  Let’s listen to Chairman Jay today for our next clues.

Good luck
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Xi’s Heart Was Broken

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The Taiwanese people have spoken
And President Xi’s heart was broken
The DPP won
Convergence is done
And Xi’s wrath has like been awoken

The results of the first presidential election around the world in 2024 are in and Lai Ching-te, the ruling Democratic Progressive Party’s candidate, and sitting vice-president, has won.  This is absolutely not the outcome that Chinese President Xi Jinping was looking for as his administration apparently orchestrated a great deal of election interference in order to get the opposition candidate into the seat.  Overall, the DPP does not have a majority in the Legislature so getting things done will be a challenge for Mr Lai, but as sitting VP, he is clearly quite politically capable.  It is important to know that he has not advocated for independence, which is the brightest red line President Xi sees, but his attitude is quite interesting now with his view that Taiwan is already, de facto, a state, and therefore doesn’t need to declare independence.

At this time, it doesn’t appear as if there will be any change in the status quo in the Taiwan Strait.  I imagine that Xi will continue to order periodic harassment of Taiwanese shipping and encroach on their airspace, but it strikes that the odds of invasion, at least currently, remain extremely low.  If Xi learned nothing else about war from the Russian invasion of Ukraine, it is that things don’t always work out as assumed.  Add to this lesson Xi’s recent purging of numerous high-ranking military officers on corruption and incompetence charges, and I suspect that the stalemate here will continue.  As such, I don’t anticipate any economic impact of note from this particular situation going forward.  At least not this year or next.

In Iowa, temps are sub-freezing
In Davos, it’s not as displeasing
The difference is stark
As both places mark
Their efforts, control, to be seizing

As it is Martin Luther King Day here in the US, so banks and the stock market are closed, I thought it might be a good time to discuss two events that are occurring in very different parts of the world and with very different views of the world, namely the Iowa caucuses and the beginning of the World Economic Forum (WEF) in Davos, Switzerland.

Starting with Iowa, this is the official beginning of the Presidential election cycle in the US with the first votes and the first delegates to be allocated.  This year, for the first time, it is only the Republicans caucusing as it appears President Biden, who came a weak 5th there in 2020, decided that he didn’t want to be embarrassed and so essentially canceled the vote.  As to the Republicans, they will be braving sub-zero temperatures throughout the state with the latest polls I have seen, courtesy of Five thirty-eight.com showing former President Trump with 52.7% of the vote, followed by Nikki Haley (18.7%), Ron DeSantis (15.8%) and Vivek Ramaswamy (6.4%).  This result is in line with the national polls and certainly indicates that, as of now, President Trump is going to be the Republican nominee.

That prospect is anathema to the entire Democratic Party, as well as to many Republicans, but even more interesting is how the rest of the world finds the prospects so alarming.  In fact, it seems to be a major topic at WEF as President Trump was essentially dismissive of the WEF agenda when he was last in office and if we have learned anything about WEF, it is they cannot stand being dismissed, especially by world leaders.

I might argue that the biggest problem WEF has is their agenda is running into the realities of physics and economics.  It turns out that many people are not willing to give up material progress that requires the use of fossil fuels or farming, and that seems to run contra to the WEF stated goal of, you will own nothing, and you will be happy.  For now, despite the vast amount of wealth that individual members of WEF control, its direct impact on the macroeconomy has been felt through government policies.  In fact, it seems clear these policies have been a driving force in the rise in populism around the world completely to oppose those policies, and that is not about to change.  At least not until the other 39 elections due this year around the world have been completed.  This is a key reason I believe we are going to see far more populism in many places, and that will have real economic consequences.

Consider for a moment, what populist policies might look like.  They are very likely to increase government spending on things like healthcare and retirement to the detriment of spending on things like energy and defense.  There will be an increase in the amount of reshoring manufacturing and buy local programs and I suspect that there will be more isolationism as a theme.  One of the things all these policies have in common is they will all be inflationary.  And that is something which will need to be considered in both investment and hedging decisions going forward.

Ultimately, the one thing of which I am confident is that the idea of a secular deflation makes very little sense.  Rather, a combination of current and potentially populist future policies is much more likely to result in higher inflation across the board.  Governments will find this convenient as it will help depreciate the real value of their growing debt piles and encourage them to continue to spend on these populist policies.  However, viewing this from a business’s point of view, it will require a focused approach on managing costs and pricing products and services appropriately.  Keep your eyes on the big picture, not just the most recent result.

Despite the fact that the holiday is a US holiday, it seems that most markets have decided to take the day off as well.  While European equity markets are drifting lower, that seems to be in response to the fact that Germany fell into official recession last year and its prospects remain dim for 2024.  Japanese equities continue their run as interest rates in Japan are drifting lower as all the talk of the end of ZIRP slowly fades away alongside fading inflation in the country.

Arguably, the one place where things are moving is European bond markets where yields have risen between 6bps and 8bps across the board despite what appears to be weaker than forecast Eurozone IP data.  On the surface, the data today would have indicated a bond rally, not sell-off, but it seems inflation remains a concern there as well.

Oil prices have slipped a bit overnight but remain in the middle of their recent trading range despite the escalation of tensions after the US and UK bombed Houthi sites in Yemen at the end of the week.  More and more shipping companies are avoiding the area driving up shipping costs, extending lead times, and adding to upward inflation pressures.  As to the metals markets, gold is little changed, and copper and aluminum are acting independently with copper higher and aluminum lower although there are no obvious catalysts for either.

Finally, the dollar is a bit stronger this morning, with JPY (-0.6%) continuing its recent slide as the market removes higher interest rates from its collective bingo card.  But the buck is strong pretty much everywhere with a few EMG currencies also falling by -0.5% or more (BRL, KRW, TWD).  However, with the US out, I don’t anticipate much further activity.

There is no data today nor Fedspeak so for those of you who are working today, it should be quiet in markets overall.

Good luck
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