Tag Archives: #Takaichi

Most Enthralling

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Some fractures are starting to show
In markets, as Trump’s blow by blow
Attack on the Danes
And friends, really strains
The view ‘Twenty-Six will lack woe
 
So, equities worldwide are falling
While bond yields, much higher, are crawling
The buck’s in a rut
While oil’s a glut
Thus, gold is the thing, most enthralling

 

“Something is rotten in the state of Denmark.”  So said Marcellus, when Shakespeare introduced him to the world in 1603(ish) in one of his most brilliant works, Hamlet, and it seems true today, 423 years later.  By now, you are likely aware that President Trump has imposed 10% tariffs, to begin on February 1st, on Denmark, Norway, Sweden, France, Germany, Finland, the Netherlands and the UK as he presses his case for US ownership of Greenland.  This is not the venue to discuss the relative merits or pitfalls of the strategy, so I won’t bore you with my views on the subject.  

Rather, this is a venue to discuss the market impacts and how they may evolve, in one poet’s eyes, going forward given the new starting condition.  As I type this morning, investors around the world are extremely unhappy, at least holding paper claims on either assets or governments.  However, holding real assets, notably gold (+1.15% and at new all-time highs), silver (+0.9% and at new all-time highs) and platinum (+1.45%, not quite at new highs yet) are feeling much better.

It is interesting to me that the WEF is meeting this week, and likely no coincidence that President Trump escalated things ahead of the meeting where he is scheduled to speak tomorrow.  It seems that the protagonists in this latest drama are set to meet while in Davos as well, so all these views are subject to change at a moment’s notice.  But for now, since there really is no other story that matters, let’s look at how markets have (mis)behaved since we last saw them here in the US on Friday.

As you can see from the chart below combining the Nikkei 225, the DAX and the S&P 500 futures, the move has been consistent since the close in NY on Friday, with all three main indices lower by between -1.75% (Japan) and -3.1% (Germany), with the US (-2.1%) in the middle.  

Source: tradingeconomics.com

In fact, that price action has been widespread across the rest of the G10 markets and many EMG markets as well. Only China (-0.2% since Friday) has bucked the trend and remains little changed.  Of course, that makes sense given this spat has nothing to do with China, on the surface.  At this point, I expect that all equity markets are going to remain under pressure until there is some resolution.  While Europe has threatened to invoke its Anti-Coercion Instrument on the US if those tariffs come into being, one must wonder will that do more damage to the US or Europe?  FWIW, I expect some type of resolution to be achieved before the Feb 1 deadline but could easily be wrong about that.  One last thing about tariffs; remember last week when expectations were high that the Supreme Court was going to rule on the legality of the ones already imposed?  That has suddenly gone very quiet.  My take there is the longer we don’t hear anything, the more likely they are not going to stop them.

Perhaps, though, the bond market is the more interesting place to look this morning with government bonds around the world getting sold aggressively.  While all eyes have been focused on the US (+6bps and well above the top of the previous range) and Europe (Germany +5bps, UK +7bps, France +6bps) perhaps the real activity is happening in Japan (+9bps).  In fact, Japanese 30yr yields have exploded higher by 40 basis points since Friday’s close, and I’m confident that has nothing to do with Greenland!

Source: tradingeconomics.com

In fact, it appears that JGB holders are getting increasingly concerned that PM Takaichi is going to really run it hot, with more unfunded fiscal stimulus and are responding accordingly.  The latest Takaichi proposal for the upcoming election is that they are going to remove the GST (VAT tax) on food for 2 years to help alleviate inflation problems.  I certainly like that better than capping prices, but fiscally, it’s a tough road to follow.  

One other bond market story that is making the rounds is the idea that Europeans would attack the US by simultaneously unloading their US Treasury holdings.  We have heard this story before with respect to China, and if you look across all of Europe, between central banks and private investors, there are likely upwards of $2 trillion held there.  But the question I ask every time I hear something of this nature is…what will they do with the proceeds if they were somehow able to coordinate the sales?  First, in the worst case, the Fed would buy them to prevent the market from collapsing.  And second, now they would have a whole lot of dollars that need to be invested elsewhere.  Which markets can absorb that amount of flow?  US equities?  Sure, but would that achieve their goals?  I think not.  If they converted them into euros, a one-way flow of $2 trillion into euros in short order would pretty much render all European manufacturing uncompetitive right away as the euro rose to 1.50 or 1.60 or higher.  Gold?  Think $10k/oz or higher.  Ain’t gonna happen.

Let’s hit the dollar next, which is under pressure across the board.  As I type (7:20), the DXY has fallen -1.0% this morning, a very large move for that index, but remains within the trading range that we have seen since October.

Source: tradingeconomics.com

The sell-off in the dollar is almost universal, although interestingly, ZAR (-0.5%), MXN (-0.3%) and CLP (-0.3%) are all bucking that trend.  I understand the nervousness, but it strikes me that none of this conversation is a positive for Europe, excepting the idea they sell all their Treasuries and convert the dollars into euros and pounds, an idea I tried to squash above.  

Finally, let’s look at commodities where the metals, as discussed above are soaring while oil (+0.8%) is picking back up off its end of week lows and currently sits just below $60/bbl.  The Iran situation remains murky, at best, and my sense is we have not heard the last of the situation there, although from what I have seen on X, the rioting has been quelled to some extent.  However, I think there is still enormous pressure on the government there and would not be surprised to see some type of US intrusion. 

But I’m confident the one thing almost all of you are feeling this morning is the bitter cold that has enveloped most of the US as per the weather.com map below.

Given natural gas is the most common fuel for heating homes, we cannot be surprised that its price has skyrocketed today, jumping 24% in the session so far, although it is now simply back to where it was this time last year.  however, a key issue in this market is Europe, which since they virtually shut off Russian gas, is now highly reliant on US LNG to heat their homes.  It turns out that their storage has fallen to slightly less than 50% of capacity, well below their average storage level for this date of 60% – 65%.  European TTF gas, on a like for like basis, currently costs ~$12.25/MMBtu compared to $3.85/MMBtu in the US, even after the massive jump.  Again, Europe has some issues going forward.

On the data front, there is really nothing today or tomorrow of note although Thursday brings GDP amongst other things.  I will review them tomorrow because, after all, markets right now are far more beholden to President Trump and Europe than to data.

Fear is growing more widespread and will likely continue to do so until there is some type of resolution over Greenland.  But then, it will dissipate quickly as consider, two weeks ago we were all Venezuela experts and today, nobody even cares about that nation anymore!

As to the dollar, I expect that when the resolution arrives, the dollar will make up lost ground, but given we are in the midst of a White House bingo game, one needs to play things close to the vest.  Hedges are crucial here.

Good luck

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Under Damocles’ Sword

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It turns out the market ignored
Chair Powell, though many abhorred
The idea the Fed
May soon need to shred
Its views under Damocles’ Sword
 
So, stocks rose and set more new highs
And bonds ignored all the shrill cries
But metals retained
The heights that they gained
How long ere the bears euthanize?


 
Yesterday, of course, the big news was the Powell video describing the subpoenas that he and the Fed received on Friday.  This continues to be seen as an attack on the Fed’s “independence” and the talking heads remain aghast.  I couldn’t help but chuckle at 12 current central bankers from around the world putting out a statement that this was a terrible precedent.  Consider that most people have no idea who any of the signees are, so they hold no reverence for their views, and the people who do know them, are already in the camp.  Of course, I cannot help but remember the statement by 51 former FBI/CIA security apparatus people explaining that Hunter Biden’s laptop had all the earmarks of Russian disinformation.  My point is this type of response is not necessarily the unvarnished truth.  I wasn’t at the Senate committee meeting and do not recall what he said, if I ever heard it, so am in no position to judge what went on.  I guess, that’s what a grand jury is all about, to determine if there are sufficient grounds to go forward with a charge.  Again, this is a Washington DC grand jury, who will be biased against anything President Trump’s administration is doing.  I put it at 50/50 that any charges are even brought.
 
Meanwhile, despite all the angst, equity markets rebounded all day to close higher, bond markets absorbed a 10-year auction with little concern and yields were within 1bp of the morning levels while the dollar, which had initially fallen about -0.4% to -0.5% on the news, clawed back a part of that loss, and is slightly firmer this morning.  The only real outlier here were the precious metals markets where both gold and silver had monster days trading to new highs.  Such was yesterday.
 
Takaichi-san
Like a hungry boa, wants
To tighten her grip

First, my error in yesterday’s note regarding the Japanese stock market on Monday, which was actually closed for Coming of Age Day, but overnight did jump 3.1% on the news that PM Takaichi, she of the 70+% approval rating, is going to call for snap elections to try to consolidate her power more effectively in the Lower House of the Diet.  While the announcement has not officially been made, it has been widely reported that on January 23rd, she will dissolve parliament and seek an election on either February 8th or 15th.

The market response here was quite clear.  Aside from the jump in equity prices based on more government support for her fiscal spending, the yen (-0.5%) fell to its lowest point in more than a year and now, trading near 159, is seen as entering the ‘intervention range’.  A look at the chart below shows that in July of last year, the last time the yen weakened to this level, we did see the BOJ enter the market and it was quite effective in the short run.  If I recall correctly, there was a great deal of discussion then about the end of the carry trade.  Of course, that didn’t happen, and even though the BOJ has increased rates to 0.75% in the interim, I assure you, the carry trade is still out there in very large size.

Source: tradingeconomics.com

I expect that this evening we will hear more from the FinMin and her deputies regarding concerns over ‘one-sided’ moves and the need for the yen to represent fundamentals, but I sincerely doubt that there will be any activity before 160 trades, and maybe even 165.

Perhaps of greater concern for Takaichi-san is that JGB yields rose sharply on the news with the 10yr (+7bps) rising to a new high for this move, while the super long 40-year traded to 3.80%, higher by 9bps and a new all-time high for the bond.  Japan has serious financing issues and has had them for quite some time.  However, two decades of ZIRP and NIRP hid the problems as financing costs were virtually nil.  As a net creditor nation, they also have inherent strengths with respect to international finance, although it remains to be seen if the population there will accept the idea that their savings need to be used to pay down government debt.

As we have seen across many markets, the old rules and relationships don’t seem to apply these days.  The fact that Japanese yields are climbing far more quickly than US yields, with the spread narrowing dramatically, in the past would have seen a much stronger yen.  As well, rising yields tend to undermine equity markets, and yet, they sit at record highs.  This is not the world in which many of us grew up.

Ok, as we await this morning’s CPI data, let’s see how other markets behaved overnight.  While yesterday’s US gains were modest across the board, they were gains after a terrible start.  Meanwhile, in addition to Tokyo’s rally, we saw HK (+0.9%), Korea (+1.5%), Taiwan (+0.5%) and Australia (+0.6%) all rally although both China (-0.6%) and India (-0.3%) lagged.  It appears the latter two suffered from some profit-taking (although Indian shares have not really performed that well) while the gainers all benefitted from the US rally and ongoing excitement over tech shares.  In Europe, though, every major market is softer this morning although only Paris (-0.6%) is showing any substance in the decline. Elsewhere, declines of -0.1% to -0.3% are the order of the day, hardly groundbreaking, and given most of these markets have had a good run, it seems there has been some profit-taking ahead of this morning’s CPI data.  As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, this morning yields are edging higher everywhere with Treasury yields (+2bps) now touching the top of its forever range at 4.20%.  European sovereign yields are uniformly higher by 2bps as well although there has been no data of note nor commentary to really offer a rationale.  Of course, 2bps is hardly earth shattering.  

In the commodity markets, while precious metals (Au -0.2%, Ag +0.75%, Pt -1.1%, Cu +0.5%) have been the headline story, the oil market has taken a back seat.  Quickly, on the metals side, it seems that the supply scarcity remains the main driver overall, and the fact that there is limited new exploration, let alone new mines coming online, ongoing, my take is these have further to climb.  

But oil is quite interesting.  You all know my view that the trend remains lower, but today, it is bucking that trend with WTI (+1.9%) up nicely and back above $60/bbl for the first time since mid-November.  A look at the chart below shows that using my, quite imperfect, crayon if I ignore the massive Operation Midnight Hammer spike, even after a few solid up days, oil remains well within its down trend.  I am no technician, so others will draw lines as they see fit, but I am looking at longer term views, not day-to-day or intraday.  

Source: tradingeconomics.com

My take is that the Venezuela story has evolved into increased production from there will take quite a long time, so ought not pressure prices lower.  Rather, I would lean toward the ongoing uprising in Iran as the proximate cause for today’s recent gains.  After all, if the regime falls, and the Mullahs exit for Moscow, it is unclear who will fill the power vacuum and what will come next.  As such, it is easy to anticipate a reduction in Iranian supply, which is currently about 3.2mm to 3.5mm barrels/day (according to Grok), and if that goes missing, or even is cut in half, would have a significant short-term impact on the price.  

Regarding this situation, obviously I have no special insight.  However, the most interesting thing I read, and why I believe this will indeed be the end of the theocracy, is that the protestors have burned down 350 mosques, a direct attack on the belief system of the Ayatollah.  This appears quite widespread, and it would not surprise me if the regime falls before the end of the month.  Good luck to the people of Iran.

Finally, the dollar is little changed this morning other than against the yen.  For the dollar bearish crowd, which is quite large as doom porn about the end of the dollar’s hegemony remains quite popular, yesterday’s decline was tiny.  In fact, if we use the DXY as our proxy, it is higher by 0.1% this morning and trading just below 99.00 as I type.  Once again, if we look at the chart below, it has been 9 months since the DXY has traded outside the 97/100 range in any substantive manner and we are basically right in the middle.  Nobody really cares right now.

Source: tradingeconomics.com

Turning to the data this morning, CPI (Exp 0.3%, 2.7% Y/Y) for both headline and core leads the list.  This is December data, so as up to date as we will get.  We also see stale New Home Sales data, but it is hard to get excited about that.  The NFIB Small Business Optimism Index already printed right at expectations of 99.5.

It’s funny, despite all the discussion of the Fed regarding the Powell subpoena, Fed speakers don’t seem to be getting much traction.  Yesterday, three speakers indicated that rates seemed to be in a good place, and, not surprisingly, all defended Chairman Powell.  My view at the beginning of the year was that the Fed was going to become less important to the market dialog and in truth, that remains my view.  Rate cut probabilities have fallen to 5% for this month with the next cut priced for June.  Obviously, that is a long time from now and much can happen, but if the data showing GDP is accurate, it seems hard to understand why there would be a cut at all.  Too, remember one of the key theses behind dollar weakness was Fed dovishness.  If the Fed is not so dovish, tell me again why the dollar should decline.

It’s a crazy world in which we live.  Hedgers, stay hedged.  The rest of you, play it close to the vest.

Good luck

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Soon Will Feel Pain

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The future arrived yesterday
As Amazon’s cloud went astray
Along the East Coast
Much business was toast
The question is, who’s forced to pay?
 
Meanwhile, contradictions remain
In markets, which rose once again
Both havens and risk
Have seen, buying, brisk
I fear one side soon will feel pain

 

Arguably, the biggest story yesterday was the outage of Amazon Web Services on the East Coast yesterday morning with the impact dragging through the day.  Apparently a supposedly minor code update had an error of some sort, and that was all it took.  For every business that has been convinced that it is much cheaper and more efficient to move their computing capacity to the ‘cloud’ (and it certainly is on a daily operating basis), this is the risk being taken.  Ease and convenience are wonderful when they are there, but businesses are inherently more fragile because of the movement.  I guess the finance question comes down to how much do businesses save by outsourcing their computing vs. how much does it cost when those systems go down?

I am sure there will be lawsuits galore vs. Amazon for recompense.  I have no idea what the AWS contract looks like, and if they leave themselves an out for situations like this, a sort of force majeure, but you can bet we will hear a lot about it going forward.  Interestingly, Amazon’s stock price rose 1.6% yesterday despite the issue.  Clearly nobody is worried yet.

Speaking of rising stock prices, I continue to observe the ongoing equity rally alongside the ongoing bond market rally and wonder.  As you can see from the chart below, for the past three to four months, the S&P 500 has rallied alongside 10-year bonds (yields falling as the price rose).  For a very long time, those two markets were negatively correlated.  In fact, that was the very genesis of the 60:40 portfolio being a lower risk way to remain invested.  

The thesis was when stocks were rallying (the 60), things were good and while yields might rise, the gain in stocks would outperform the loss in bonds.  Meanwhile, in tough times, when stocks suffered declines, bonds would rally to mitigate some of the losses.  But lately, the two have traded synchronously.

Source: tradingeconomics.com

Perhaps, if we zoom out a little further, though, and look at this behavior over the past five years, we can make an observation.  Here is the same chart since late 2020.

Source: tradingeconomics.com

Now, who can remember anything that changed in 2022 in the economy?  That’s right, inflation re-entered the conversation in a very big way.  It turns out that the 60:40 portfolio, and all its adjuncts, like risk parity and volatility targeting, were all designed when inflation was low and stable.  But it appears that once inflation moves above the 3% level, the correlation that was the underlying basis of all those strategies flips.  I’m sure you all remember how awful 2022 was for most investors with both stocks and bonds showing negative returns.  As inflation continues to rise, and there is no reason to expect it to stop that I can see, be prepared for 2022 redux going forward.  Maybe not quite as dramatic, but similar directionally.

The one thing that can change that would be the reintroduction of QE or YCC or whatever they decide to call it, as that would, by definition, prevent bonds from selling off dramatically.  Of course, that will only stoke the inflationary fires, so there will still be many issues to address.

In the meantime, let’s see how markets behaved overnight, with the truly noticeable movement continuing in the precious metals space.  Markets are funny things, with the ability to move very far very quickly for no apparent reason.  With that in mind, a case can certainly be made that there is a serious amount of intervention in the precious metals markets lately.  While I am not expert in these markets, I am well aware of the stories that there are a number of major banks, JPM among them, that are running large short positions in these metals and have been charged with preventing the prices rising too far.  The concern seems to be the signal that a runaway gold or silver price would be to markets and people in general.  Last Friday was a major option expiration in the SLV contract and it was remarkable to see the price of silver tumble below a number of large open strike prices. Seemingly to prevent calls to deliver.  A look at the chart below, showing how quickly the price declined into the close, and it is easy to understand the genesis of those conspiracy theories.

Source: tradingeconomics.com

Yesterday, the metals all rallied nicely, but this morning, they are all, once again, under severe pressure (Au -2.2%, Ag -4.1%, Cu -1.5%, Pt -4.3%).  Generally, I follow the precious metals as a signal of overall market sentiment, as I believe they are better indicators of fear than bonds.  But I cannot get these movements out of my head as straight up price manipulations and so any signals we are getting are very murky.  This will not last forever, but for now, I expect them to remain quite volatile.  As to oil (+0.8%) it is getting a respite after a really tough run lately, with the price testing its recent lows and a growing chorus of analysts looking at the private data coming out and calling for a US recession.  I don’t know about that, but things are not fantastic, that’s for sure.

But equity markets feel no pain.  After yesterday’s US rally, with all three major indices rising by more than 1%, we saw gains throughout Asia (Nikkei +0.3%, Hang Seng +0.7%, CSI 300 +1.5%) as Takaichi-san was elected PM, as widely expected and investors believe that China is getting set to add fiscal stimulus as an outcome of their Fourth Plenum, with a focus on domestic demand, rather than exporting.  While it is certainly possible that is what they will do, I believe this is the third time, at least, that has been the narrative, and thus far, anything they have done has been ineffectual at best.  Remember, they still have a massively deflating property bubble which is weighing on the domestic economy there.  In the rest of the region, almost all bourses were higher, certainly those of larger nations, with Indonesia (+1.8%) the leader.

In Europe, gains are also widespread, albeit far less impressive with the CAC (+0.4%) the leader and the rest of the major indices higher by between 0.1% and 0.2%.  At this hour, (7:40) US futures are unchanged.

In the bond market, yields around the world continue to edge lower with Treasuries (-1bp) showing the way for all of Europe and for JGBs as well.  it is a bit surprising that JGBs are holding in so well given Takaichi-san’s platform of more unfunded spending.  Perhaps the BOJ is supporting there.

Finally, the dollar is firmer this morning rising against all its G10 counterparts with JPY (-0.8%) the laggard.  It seems the FX market has listened to Takaichi’s plans even if the JGB market hasn’t.  But otherwise, declines of -0.2% to -0.4% are the order of the day in the G10.  In the EMG bloc, ZAR (-0.5%) is feeling the weight of the precious metals rout, while KRW (-0.65%) is under pressure as well with lingering concerns over a trade deal with the US being reached.  Otherwise, though, that -0.2% level is a good proxy for the entire bloc.

The only data today is API oil inventories, and for some reason, despite the Fed’s quiet period, Governor Waller will be speaking today, although he will be making opening remarks at the Payments Innovation Conference in Washington, so will probably not focus on monetary policy.

And that’s really the story.  The government remains shut down with no end to that in sight.  Metals markets are a mess with stories rampant about who is manipulating them, but through it all, stocks go higher, and the dollar remains right in the middle of its recent trading range.  I’m not sure what it will take to change that dynamic and I suspect it will be a gradual situation rather than a single catalyst.  In the end, though, I still like the dollar better than most other currencies.

Good luck

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Alone in the Wilderness

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Takaichi-san
Alone in the wilderness
No partners will play

 

In a major blow to Japan’s largest political party, the LDP, their long-time partner, Komeito, has withdrawn from the twenty-five year coalition.  Ostensibly, Komeito asked Takaichi for a commitment to address the financing corruption issue that was one of the reasons for the Ichiba government’s collapse and she either could not or would not do so immediately.  There seems to be a bit of he said, she said here but no matter, it is a major blow to the LDP.  While it remains the largest party in both Houses, it doesn’t have a majority in either one and there is the beginning of talk as to how a coalition of other parties may put forward a PM candidate leaving Ms Takaichi on the outside looking in.  

The one thing I have learned over the years is that all politics is temporary, at least when it comes to Western democracies.  So, whatever the headlines blare today, the opportunity for Komeito to rejoin the LDP remains wide open.  Additionally, after twenty-five years sharing power, I am pretty certain that they are unlikely to simply walk away and cede that benefit.  My take, and this is strictly from my observations of how politics works everywhere, is that this spat will be overcome and Takaichi-san will, in fact, become Japan’s first female Prime Minister.  

Japanese equity markets (-1.0%) were already closed ahead of the long weekend there (Japan is closed for Sports Day on Monday) when the news hit the tape, so it is not surprising that Nikkei futures fell further, another -1.25% (see chart below from tradingeconomics.com), but if I am correct, by Tuesday, all will be right with the world again.  As an aside, Japanese share weakness was a follow on from US equity weakness, and that sentiment was pervasive across all of Asia (China -2.0%, HK -1.7%, Thailand -1.8%) with only Korea (+1.7%) bucking the trend as it reopened for the first time in a week and was catching up to the rally it missed.

The Bureau of Labor Statistics
Though staffed by what often seems mystics
Has called some folks back
So that they can track
Inflation’s key characteristics

It turns out, the cost-of-living adjustments for Social Security payments are made based on the September CPI data which were originally due to be released on October 15th.  Of course, the government shutdown, which now heads into its second week, resulted in BLS employees being furloughed alongside many others.  However, it now appears that several of them have been called back into the office in order to prepare the report to be released some time before the end of the month, if not on the originally scheduled date.  One added benefit (?) of this is that the Fed, which meets on October 28thand 29th may have the data at the time of their meeting to help with their decision making.  Of course, the market continues to price a very high probability of a cut at that meeting, currently 95%, despite a continued mix of comments from Fed speakers.  Just yesterday, Governor Barr urged caution on further cuts, although we also have heard from others like Chicago Fed president Goolsbee, that the labor situation is concerning and that further cuts are appropriate.  Regarding the Fed, I think the doves outnumber the hawks and a cut is coming, if for no other reason than it is already priced in and they are terrified to surprise markets on the hawkish side.

Away from those two stories, all the market talk yesterday was on the early spikes in precious metals (gold touched $4058/oz, silver $50.93/oz) before they fell back sharply on what seemed to be either serious profit-taking or, more likely, a massive attempt to prevent these metals from rallying further.  There have long been stories that major banks have been manipulating prices, especially in silver, as they run huge short futures positions in their books.  I do not know if those stories are true or apocryphal, but there is no doubt that someone sold a lot during yesterday’s session.

Source: tradingeconmics.com

My friend JJ (Alyosha’s market vibes) made the observation that the price action felt as though suddenly algorithms, which have ignored these markets because they haven’t offered the opportunities that equity markets have, were involved.  If that is the case, it is very possible that we are going to see a very different characteristic to metals markets going forward, with much more controlled price action.  Food for thought.

Ok, let’s recap the rest of the markets ahead of the weekend.  The US equity declines were early with modest rallies into the close that left the major indices only slightly lower on the day.  We have already discussed Asian markets and looking at Europe, price action has been limited although Spain (+0.4%) is having a decent day for no particular reason.  Elsewhere, though, +/-0.2% describes the session.

Treasury yields (-3bps) are leading all government bonds higher (yields lower) with all European sovereigns seeing similar yield declines and even JGBs slipping -1bp.  The only data from the continent was Italian IP (-2.4%) which seems to be following in the footsteps of Germany.  Too, Spanish Consumer Confidence fell to 81.5, which while a tertiary data point, extends its recent downward trajectory.  In this light, and finally, the probability of an ECB cut at the end of the month has moved off zero, albeit just to 1%, but prior to today, futures were pricing a small probability of a rate hike!

Oil (-1.2%) has fallen back to the bottom of that trading range ostensibly because the Middle East peace process seems to be holding.  This is a wholly unsatisfactory thesis in my mind given my observation that the Israel/Gaza conflict seemed to have no impact on prices for a long time because of its contained nature.  Rather, Russia/Ukraine seems like it should have far more impact.  But then, I’m just an FX guy, so oil markets are not my forte.

Finally, the dollar, which continues to rally in the face of all the stories about the dollar’s demise, is consolidating today after a pretty strong week.  Using the DXY as our proxy, this week’s trend is evident as per the below chart from tradingeconomics.com

A popular narrative amongst the ‘dollar is doomed’ set is that a look at dollar reserves at central banks around the world shows a continuing reduction in holdings with central banks exchanging dollars for other currencies, (euros, pounds, renminbi, Swiss francs, etc.) or gold.  Now, there is no doubt that central banks have been buying gold and that has been a key driver of the rally in the barbarous relic’s price.  But the IMF, who is the last word on this issue, makes very clear that any change recently has been due to the FX rate, not the volume of dollars held.  As you can see below, in Q2 (the latest data they have) virtually the entire reduction in USD reserves worldwide was due to the dollar’s first half weakness.

There are many problems in the US, and the fiscal situation is undoubtedly a mess, but as of now, there is still no viable alternative to holding dollars, especially given the majority of world trade continues to be priced and exchanged using the buck.

And that’s all for today.  We do get the Michigan Confidence number (exp 54.2), which is remarkably low given the ongoing rally in equities.  As you can see from the below chart overlaying the S&P 500 (gray line) with Michigan Confidence (blue line), something has clearly changed in this relationship.  This appears to be as good an illustration of the K-shaped economy as any, with the top 10% of earners feeling fine while the rest are not as happy.

Source: tradingeconomics.com

As we head into the weekend, with US futures pointing higher, I have a feeling that yesterday will be the anomaly and the current trends will reassert themselves.

Good luck and good weekend

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