Tag Archives: #trump

One Sixty

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The asymptote nears
Will they act at One Sixty?
Can they afford to?

Yesterday saw the yen edge ever closer to the 160 level, the point at which the MOF/BOJ acted in April.  Frankly, looking at the chart, it reminds me of an asymptotic limit from calculus, but the one thing we know is there is no natural limit, only whatever artificial one is imposed (or tried to be imposed) by the Japanese government.

Source: tradingeconomics.com

The market continues to price a high probability, ~86% according to the OIS market, of a 25bp hike by the BOJ next week, and I’m confident they will do that.  But to me, the question is, will it matter to the FX markets?  Here’s the thing about FX, typically there are two separate, but related, drivers of the relative value of one currency vs. another.  The most common discussion is about short-term interest rate differentials, typically proxied by central bank base rates.  Below is a chart of the past ten years of data for Fed funds (grey line), BOJ base rate (blue line) and USDJPY (brown line).

Source: tradingeconomics.com

It is abundantly clear that there is a strong relationship here, as US rates shot higher in the post-Covid inflation bout and USDJPY shot higher as well.  Now, since the Fed started cutting rates back in September 2024, while Japanese rates have edged higher over the same time frame, it would be reasonable to assume that USDJPY should retreat somewhat.  However, as you can see in the first chart, that is just not happening.  In fact, the pressures are the other way, with far more weakness than strength.

Why, one might ask, is this the case?  This takes us to the other major factor in FX rates, relative capital flows.  Nations that see substantial inflows in capital will typically see their currencies appreciate.  Now, ask yourself, which nation sees the biggest inflows of capital in the world?  Yes, the US, as the capital account surplus is the mirror image of the massive current account deficit that we run.  In fact, if you look at the below chart, it shows the relative current accounts of Japan (grey bars) and the US (blue bars) in percentage of GDP which most recently showed -3.6% for the US and +4.7% for Japan.

Source: tradingeconomics.com

Now, let’s do the math.  US GDP is ~$28.8 trillion while Japanese GDP is ~$4.4 trillion.  3.6% of $28.8 trillion = ~$1.037 trillion of capital inflows.  4.7% of $4.4 trillion = $202 billion of capital outflows.  Of course, we know that everybody in the world is piling into US technology stocks, and that is where the capital is mostly flowing, but in order to do so, they are buying USD.  This is true of Japanese investors as well as others around the world.  

There is a narrative that is developing that claims as the Japanese raise interest rates, the massive, short yen positions that exist to fund many speculative trades will unwind, and with that, the yen will strengthen dramatically as well as we will see many other markets sell off sharply as those positions unwind.  But the NASDAQ is up 21% YTD and 40% in the past year.  If you are an investor and you are funding a speculative position at 0.75% annually that rises to 1.00% while you are returning 40% on the other side, do you really care?

To my eye, for the yen to change course, intervention is irrelevant, and so is a 25bp rate hike.  We need to see a wholesale change in the combination of Japanese fiscal and monetary policies as well as changes in those policies in the US.  Historically, a tight monetary and loose fiscal policy combination will strengthen a currency (something that the US currently has), but can Japan afford to tighten monetary policy that much?  My money is on no, and while 25bps seems pretty certain next week, I would not be looking for USDJPY fall very far, if at all.  And remember, the market is pricing a 50% chance of a Fed hike by the end of the year.  Don’t be taken in by this story in my view.

Away from this issue, it is difficult to find other critical news.  Yes, there was another skirmish in Iran straining the concept of a ceasefire, but all-out war has not resumed.  The elections in California and LA will take several weeks to determine who will be on the ballot in November, which, when you think about it, sums up the incompetence of California governance writ large.  

So, oil is higher along with the dollar and yields, but so are stocks, while metals slip.  Let’s look at the overnight activity.  Another set of equity records in the US was followed in Asia by broad based strength as Tokyo (+2.5%), China (+0.5%), Korea (+0.2%) and Taiwan (+2.0%) all continued to climb. Both HK (-1.6%) and India (-0.4%) were not as robust with the former seeing profit taking after a few strong sessions while the latter felt pressure from those rising oil prices.  One outlier here was Indonesia (-4.5%) which suffered after weaker than expected trade data, higher than expected inflation data, and a weakening rupiah which set another record low (dollar high), touching 18,000.

European bourses, meanwhile, are mostly under pressure after President Trump has devised a new way to impose tariffs on nations that allow “forced labor” which is defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.”  One must give the president props for his continuous efforts to impose tariffs, if nothing else.  At any rate, Germany (-0.9%) is leading the way lower, followed by Italy (-0.3%), France (-0.2%) and the UK (-0.2%) although Spain (+0.5%) is bucking that trend on the strength of the earnings for Inditex (Zara clothing parent) which is one of the largest companies in the nation.  US futures, at this hour (6:40) are mixed.

In the bond market, yields are rising again on the back of the oil price rise with Treasury yields (+4bps) gaining alongside the entire European sovereign market, all of which have risen a similar amount.  Last night, JGB yields also rose 6bps, as they respond to the oil market as well as pending rate hikes by the BOJ.

In the commodity market, if you think back to late May, you may recall an announcement that a deal with Iran was close which prompted a gap lower in oil prices as you can see in the chart below.  Well, that gap has now been filled.

Source: tradingeconomics.com

Just as nature abhors a vacuum, markets abhor a gap and seek to fill it whenever possible.  My take here, though, is now that the gap is filled, there is less reason to see oil rally much further and a consolidation before a slow decline is in the cards.  As to metals markets, gold (-0.8%), silver (-1.2%) and copper (-1.1%) are all softer on the day, with their negative correlation to oil intact.

Finally, the dollar is firmer this morning, keeping in line with its recent relationship with other markets.  However, the movement remains relatively muted with most G10 currencies softer by -0.2% or so as only SEK (-0.6%) and NOK (+0.1%) really buck that trend.  NOK is clearly benefitting from the oil price rise while SEK seems to be suffering from a slightly higher beta to the broad dollar move.  In the EMG bloc, KRW (-0.9%) is the laggard as it continues under pressure and trading to its lowest levels (highest dollar) since 2009.

Source: tradingeconomics.com

But otherwise, most of these currencies are slipping a similar amount to the G10 bloc, on the order of -0.2% or so.

On the data front, this morning brings ISM Services (exp 53.8) as well as Factory Orders (4.6%, 0.8% ex-Transport) and then the EIA crude oil inventories with another sizable draw anticipated.  At 2:00, the Fed’s Beige Book is released which should make for some interesting reading.  Yesterday’s JOLTs data was surprising in that it showed a significant jump in job openings, 700K more than expected which does not portray a weakening labor market.

Overall, equity markets seem to be disconnected from the impact of oil prices, something that very few analysts would have forecast in February.  But the dollar remains closely linked to those prices for now.  As we all sit here, waiting for the next headline, I cannot help but look at the US data and consider that the economy continues to tick over pretty well.  Ultimately, I believe that bodes well for the dollar over time, or at least until some other major economy shows it can perform well.

Good luck

Adf

Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

Close to a Deal

Posted on by 
Said Bessent, we’re close to a deal
Though not yet the President’s seal
Both sides have agreed
That two months they’ll need
To see if this outcome is real

It can, though, not be too surprising
That stock markets have resumed rising
While oil has slipped
And bond yields, down, dipped
All told, risk is quite appetizing

The major story, although it has been questioned by many, is that there is positive movement toward a deal to end the conflict in Iran.  While I’m sure you will have seen the terms, a quick recap shows that there is to be a 60-day ceasefire to work out the final details.  One of the things I saw this morning was that Iran would send its nuclear material to China, rather than the US, as a compromise, and frankly, that seems like a fine solution.  After all, China enriches the stuff all the time, has many nukes and has never used one.  While we may have disagreements with China on a geopolitical basis, Xi Jinping is not a religious fanatic.  While Treasury Secretary Bessent made the announcement yesterday, he cautioned that President Trump has not yet agreed the details, but it is certainly a hopeful situation.  

Of course, you know who saw it as a hopeful situation?  Risk takers.  The Bloomberg screenshot below is indicative of how things are going, with gains everywhere except China, where it appears that concerns over China-EU trade tensions are weighing on companies there.  With the US having dramatically reduced its market for Chinese exports, Europe had effectively become the major dumping ground, and now that Europe is starting to push back, the question is what will become of all the stuff they continue to produce.  Beggar thy neighbor policies are tougher to inflict on nations that also utilize those same policies.  Just sayin’.

Of course, you won’t be surprised that oil prices have fallen further this morning on the news, down another -1.6% and firmly below $90/bbl, actually below $88/bbl as I type as per the chart below.

Source: tradingeconomics.com

Now, clearly, prices are still substantially above levels seen prior to the Iran conflict, but as of now, the most apocalyptic predictions have simply not materialized.  I saw two interesting comments on this subject this morning with very opposite takes.  First, Javier Blas, the Bloomberg energy analyst/reporter, posted the following chart for jet fuel in Europe.  You may recall that early on, there were many forecasting Europe would run out of fuel and planes would stop flying.

The price action does not indicate a market concerned by imminent shortages of the stuff.  In fact, my understanding is that refineries are cracking so much oil to make jet fuel, that there is actually “excess” gasoline being produced, which would help explain my point yesterday about falling gasoline prices as you can see in the below chart.  Since May 18, wholesale prices have slipped 19%.

Source: tradingeconomics.com

However, there is another side to the argument, the apocalyptic side, which was recently made by Neil Chapman, an Exxon SVP at a conference as per the below X post.

Here’s the thing about comments like this.  First, I have no doubt that Mr Chapman is highly competent and explaining what he sees happening.  I would never suggest he has any motive other than conveying information he believes is important.  But I also have learned, over many years of experience, that arguing with the market is a very painful thing to do.  As Mr Keynes reputedly said almost 100 years ago, “markets can remain irrational a lot longer than you and I can remain solvent.”

So, what to think?  No matter the pedigree of the individual calling for a significantly different outcome than is current, it is very difficult for me to side with the apocalypse if the market disagrees.  And clearly the market disagrees with this thesis.  My understanding is refineries are running flat out right now, which means they have plenty of oil to process.  If, and it’s a big if, the Iran conflict is truly coming to an end, $70/bbl oil and $3.50/gallon gasoline will be with us by Labor Day.  At least that’s my view, and I’m pretty positive on it.

Looking elsewhere, it can be no surprise that bond yields around the world are slipping with Treasuries sliding -4bps yesterday, although they are unchanged this morning.  European sovereign yields were also softer yesterday but are now struggling between the positive idea of the end of the Iran conflict and the negative reality that inflation in Europe continues to rise as reported this morning (Italy 3.3%, Germany 2.6%, Spain 3.6%, France 2.8%), which has the ECB set to hike rates at their meeting as per their own market watch tool.

The problem with this is that economic activity across the continent continues to slow (GDP in Italy 0.8% Y/Y, France 0.9% Y/Y), and hiking rates on the back of a supply shock, especially one that has a fair chance of ending soon, would seem to be a catastrophic error in the making.  Of course, Madame Lagarde is no stranger to catastrophic errors, so, we should assume they will, indeed, hike rates in two weeks’ time.  Even the Fed, no stranger to catastrophic errors, is not prepared to hike rates, although cuts appear to be off the table for now.

Elsewhere, precious metals (Au +0.8%, Ag +0.1%) appear to have put in a short-term bottom while copper (-0.5%) is consolidating after its continued remarkable run.  

And finally, the dollar is stronger this morning, not aggressively so, and not universally, but on net I would say.  NZD (+0.5%) is bucking that trend as further hawkish comments from the RBNZ Governor have traders looking for a rate hike there while INR (+0.9%) has been the biggest beneficiary from the decline in oil prices as India has been one of the most severely impacted nations from the conflict.  Lastly, a note about the yen, where the MOF disclosed that they spent ¥11.73 trillion (~$73.6 billion) intervening in the FX markets last month, a larger amount than had been assumed by the market.  Here’s the problem, as evidenced by the chart below, it didn’t do much good, from the peak print of 160.72 on April 30th(the wick of the huge red candle), the yen is not even 1% stronger as of this morning.  As well, looking at the chart, you can see their subsequent minor interventions as the spikes down.  As I have repeatedly said, if they don’t change policy, the currency will continue to weaken.

Source: tradingeconomics.com

Otherwise, FX is dull and boring today.

Turning to the data, this morning brings the Goods Trade Balance (exp -$86.5B) and then Chicago PMI (50.5).  We also hear from 3 more Fed speakers, but it is hard to believe there is any change in viewpoint there.  Yesterday’s data was, on the whole, better than expected, I would say.  While GDP was a touch soft, Durable Goods was quite robust at 7.9% headline, 1.1% ex Transports.  PCE was as expected to a tick softer, although remains well above 3%, let alone the Fed’s alleged 2% target.  The biggest concern was Personal Income was flat, although Spending (+0.5%) continues apace.  Much has been made by analysts about how the savings rate is collapsing and this presages an economic collapse.  But these are the same folks who keep telling us that oil prices are going to explode as inventories collapse.  Maybe they are right, but as of now, there is no evidence that is the case, at least based on the data.

What to make of it all?  The idea that the Iran conflict is on course to end is clearly the top issue for the market and the economy.  I expect that if this is the case, things will get back to “normal” far more quickly than the pessimists insist as the one thing we have learned is that the ability to resume economic activity is quite robust.  If risk is warmly embraced, then one would assume that yields will decline and the dollar with them, at least for now.  But that also implies that funds will continue to flow into the US markets, which will prevent any significant decline.  And I cannot help but look at Europe with the prospect of hiking rates into an economic slowdown and wonder, again, why anybody wants to hold the euro.

Good luck and good weekend

Adf

The Great Denouement

Posted on by 
While talks in Qatar carry on
No outcome, as yet, is foregone
Thus, traders are waiting
Before speculating
As all seek the great denouement

Range trading remains the norm, except for the S&P 500 which continues to make new highs almost every day.  At least that is true in US markets.  The KOSPI in Korea is also rocketing higher.  In fact, when comparing the percentage movement over the past 5 years, the S&P looks quite ordinary, but that is because the KOSPI has been insane!

Source: Bloomberg.com

But away from a few select equity markets, it is getting increasingly difficult to find markets that are doing much more than chopping back and forth.  This is especially true if we take a step back and look at movement over the past several years.  

For instance, if we look at the 10-year Treasury, where we saw all sorts of angst last week when it traded to its highest level, near 4.70%, in a year, realistically, we have been rangebound for more than two years as per the chart below.  And prior to that we were in the massive abnormality of ZIRP.  So, if we go back over a longer time frame, the current 10-year yield is right around the long-term average as per the second chart.  It is really hard to get excited about this movement.

Source: tradingeconomics.com

Source: finance.yahoo.com

Perhaps we ought not be surprised that bond market volatility is heading lower again as per the below chart of the MOVE Index from Hedgeye

The same story exists in currencies, where major currencies have been in a range for more than a year as per the below chart of the DXY from tradingeconomics.com.

Now, there are currencies that have seen substantial movement over the past year, in both directions.  For instance, both KRW and INR have been weakening consistently for the past five years, and this is despite a massive equity rally in both nations, although, in fairness, India’s market has not kept up over the past few months.

Source: tradingecoomics.com

At the same time, BRL has been broadly rallying vs. the dollar for almost 18 months, as per the below chart, as it remains a favorite in the hedge fund community for its high interest rates.  And the fact that they continue to find more oil offshore is only helping things.

Source: tradingeconomics.com

But these currencies are secondary in the FX market, which has generally been dull.

Meanwhile, the oil story appears to be one of increasing belief that a deal is going to be done soon.  This morning, WTI (-3.7%) is falling again and back to $90/bbl.  Obviously, this is higher than where things were before this all started, but if there really was a shortage of the stuff, I expect prices would be much higher.  From what I have read this morning, the two sides continue to talk with Iran looking for a release of frozen financial assets while the US still wants the nuclear material.  

To me, the interesting thing is the tone of the comments from both sides.  President Trump continues to highlight the positive view of a deal coming, although assuring us he won’t make a bad deal.  Iran, though, continues with its apocalyptic rhetoric, threatening extremely painful revenge for every US action, although not really doing much at this point.  It appears to me that both sides are speaking to the domestic audience, not each other.  Trump needs to show progress and a victory, however defined, is near.  Iran needs to show they are strong and will not be beaten by their sworn enemies.  But at this point, I think both sides really need this to end.  The fact that Iran is now talking about money is the tell.  They know they are just about broke, and if there is no money to pay their armies, will their armies fight for the leadership?  I maintain my July 4th deal timeline. 

And that’s really today’s market story; oil’s slide is supporting other markets as we all await the end game.  Elsewhere in the news, there is far more excitement over the NY Knicks winning the NBA’s Eastern Conference than there is over the political stories of primary elections which are ongoing around the country.  While the mid-term elections are coming up in less than six months, the fields are not yet set, so it is difficult to handicap.  

On the data front, there is little of note today in the US although we do hear from several more Fed speakers.  But I maintain that their comments, today it is Governors Cook and Jefferson, are largely irrelevant and that can best be seen by the fact that the WSJ barely mentions any of their speeches anymore.  They are no longer newsworthy.  These two, though, will be an interesting case as both are avowed doves, but also hate President Trump, so will they vote with their belief set (rates should always go lower) or with their politics (Trump wants lower rates so they cannot vote that way)?  I guess we’ll find out in a few weeks at the next FOMC meeting.

One aside on central banking was last night the RBNZ met, left rates on hold at 2.25%, but were more hawkish than anticipated in their comments indicating rate hikes were coming.  This did help NZD to rally nearly 1%, an outlier in today’s market.

And that’s really it, I think.  Until the next headline on Iran, I cannot see a reason to trade in anything.

Good luck

Adf

Actively Chided

Posted on by 
Ostensibly, talks are ongoing
However, some fighting is sowing
The seeds of more doubt
That they’ll work it out
Ere Tehran’s surroundings are glowing

But markets have clearly decided
An outcome will soon be provided
Thus, risk is embraced
And stocks, higher, chased
While bond bears are actively chided

I hope everyone had a nice Memorial Day weekend, although until Monday afternoon, I must admit the weather here in NJ was less than we might have hoped.  Of course, a few raindrops are nothing compared to the “defensive” attacks executed by US forces, sinking two Iranian boats while they were trying to lay mines in the Strait.  Apparently, Iran’s response, several volleys of surface-to-air missiles was met with the destruction of those launchers as well.  

There is nothing better, though, than the language Iran uses in situations like this.  According to the WSJ, the head of the national security committee of Iran’s parliament, Ebrahim Azizi, explained that any attacks on the country’s armed forces would be met with “a decisive, crushing and regrettable response.”  It certainly sounds impressive, but it is not clear they can back up those words that effectively.  I guess we shall see.

In the meantime, the other newsworthy item from the weekend was that the Supreme Leader, Mojtaba Hussein, was killed in a military strike and yet talks appear to be continuing.  President Trump explained that the framework for a deal was getting close and that was enough for traders to don their rose-colored glasses as oil gapped lower by more than $5/bbl when futures markets opened Sunday night and despite the recent “defensive” strikes mentioned above, remains far below levels seen last week.

Source: tradingecomomics.com

Not surprisingly, as Monday night trading in Asia gets underway, risk is back on with equities and metals higher, and bond yields lower.  

And as we awaken Tuesday morning, very little new has occurred.  The market continues to believe in the idea that the war is over in all but the details, at least the Iran war.  Ukraine continues, alas.  

On Friday, the latest Fed Chair
A man with a full head of hair
Was sworn to uphold
The idea that gold
To dollars, must never, compare

Before the weekend began, Kevin Warsh was sworn in as the new Fed Chair and the man has a tough job, that is for sure.  As another indication that the Fed is not an apolitical institution (as if any institution based in Washington DC could be apolitical), he hadn’t even gotten the keys to the office before two Fed governors were out opposing his very existence. The WSJ editorial page had a nice summation here which explained that Michael Barr, the erstwhile Vice Chair for Supervision who oversaw the collapse of Silicon Valley Bank (perhaps not the best credentials) was adamant that shrinking the balance sheet would lead to problems, as though he could foresee them!  Then Chris Waller, who was in the hunt for the Chairman’s seat, reversed his recent views on interest rates, explaining hikes were likely in order.  I’m sure there are no sour grapes there!

From this poet’s perspective, the financialization of the economy has been one of the biggest long-term problems we have seen and part and parcel of that financialization has been the Fed bloating expanding its balance sheet from <$1 trillion prior to the GFC to nearly $9 trillion at the height of the Covid madness and still well above $6 trillion today.  It is much harder to financialize things if there is less money around.  I fully support the idea that shrinking the Fed’s balance sheet would be a good thing.  Alas, that will be a tough road to hoe for Mr Warsh.  Good luck to him.

And with that, there are few other stories of note, so let’s look at the market response to the latest peace initiatives.  While we’ve already discussed oil above, gold saw the initial move you would have expected, jumping sharply, but has since given back much of those gains, as per the below chart, and is now about 0.5% higher than Friday’s close.

Source: tradingeconomics.com

Silver has seen similar price action as has copper.  Certainly, if a deal is signed, I believe we can expect oil to head back toward $75 – $80 per barrel and gold and silver to rebound sharply as well.  

The other noteworthy mover was the bond market, which saw yields fall sharply on the news of the deal framework getting close.  You may recall the apocalyptic prognostications just last week when 10-year Treasury yields climbed near 4.70% with many discussions regarding the steepening of the yield curve and the trouble ahead for the economy.  But as I type this morning at 7:00am, the 10-year yield has dipped back below 4.50% in sync with the oil move lower as some of those inflation fears seem to be mitigating.

Source; tradingeconomics.com

Now, as I look across European sovereign markets, they all show modest rises in yields this morning, but that is because yesterday, they fell so sharply.  Net, over the two days, yields are lower across the board.  As an example, the chart below shows both German and Italian 10-year yields and I highlighted Friday’s closing levels.  As you can see, both fell sharply yesterday and bounce a bit this morning but remain much lower.

Source: tradingeconomics.com

Moving on to equity markets, we have observed the same phenomena there, where there was a gap opening higher on Sunday night in futures markets which continued in cash markets while the US markets were closed for Memorial Day.  So, while last night, the Nikkei (-0.25%) slipped, that was after a more than 3% rally on Sunday night/Monday.  Ultimately, given the US holiday and the news cycle over the weekend, we need to look at the movement since Friday to get a sense of things.  So, below is a chart of both the Nikkei and the German DAX showing the rally from Friday’s late trading.  Again, risk is back baby!!

Source: tradingeconomics.com

Finally, the dollar is, well, it is all over the place this morning.  I look at tradingeconomics.com as my source for currency prices as they are all in one place.  One of the weird things this morning is that the EUR (-0.1%), GBP (-0.2%), JPY (-0.15%), CAD (0.0%), CHF (-0.2%) and SEK (-0.2%), the components of the DXY, are all flat to weaker this morning, the DXY itself is also weaker.  I have no explanation for that.  Generally, I would say the dollar is a bit firmer overall this morning with one notable exception, KRW (+0.7%) which saw demand alongside the sharp rally in the KOSPI overnight.  but otherwise, the dollar is modestly higher against most of its counterparts.  Lastly there has been a lot more noise than signal here.

On the data front, the short week does bring some important information.

TodayChicago Fed National Activity-0.3
 Case-Shiller Home Prices1.0%
 Consumer Confidence92.0
ThursdayInitial Claims211K
 Continuing Claims1780K
 Durable Goods3.5%
 -ex Transport0.5%
 Personal Income0.4%
 Personal Spending0.5%
 GDP Q12.0%
 PCE0.5% (3.8% Y/Y)
 Core PCE0.3% (3.3% Y/Y)
 New Home Sales670K
FridayGoods Trade Balance-$87.0B
 Chicago PMI49.7

Source: tradingeconmics.com

Now, with PCE coming, we are going to have to get a new line there as Chairman Warsh likes trimmed-mean PCE, which not surprisingly, has been lower of late, as the key metric for the Fed to follow.  I assume that will become the newest thing to watch.  Of course, it is far too early to have any sense of anything at the Fed now, other than the fact that there will be lots of politicking going on.

So, what have we learned?  Markets are still hopeful that the Iran conflict will end soon with a satisfactory (meaning no SOH problems) conclusion.  In that circumstance, risk will be the ongoing preferred stance, and I expect the dollar will come under pressure in that scenario, at least for a time.

Good luck

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The Drumbeat

Posted on by 
The drumbeat grows louder each day
Catastrophe’s soon on its way
Yet markets ignore
The impact of war
On how things, in future, will play

Right now, Iran says they need U
Although one might ask what they’ll do
As well, on the Strait
They want a toll gate
Methinks this deal, Trump, will eschew

So, are oil tanks running dry?
Will phosphate’s price rise to the sky?
Will food soon run out?
Again, I’m in doubt
But pundits, good times, need deny

This is either setting up to be the greatest market pricing mistake of all time, or the global situation is not as bad as many pundits would have you believe.  There are a bunch of very smart analysts out there who have great expertise in the commodity space, who have continuously explained that the closure of the Strait of Hormuz is setting the world up for catastrophe.  Amongst them are Luke Gromen (@lukegromen), Craig Tindale (@ctindale), Adam Rozencwajg (from Goehring & Rozencwajg Associates) and Javier Blas from Bloomberg.  I read all of them periodically as they have some excellent insights as to what is going on in commodity markets.  And, to a man, they are all singing the same tune that even if the Strait were reopened tomorrow, the damage done is so great that we are heading into a major global economic recession.

Undoubtedly, all of them are smarter than me, a simple FX poet, and while I read a lot, market price action is far too important to ignore, especially as the current situation is not exactly hidden from traders and investors.  Thus, at the end of the day, while I understand their thesis, market prices are telling a completely different story.  Oil and gas production is growing elsewhere in the world and deals are being signed all over the world for new opportunities (Alaska, Brazil, Guyana, Venezuela).  The oil market remains in a steep backwardation which is another sign that markets are not overly concerned about the future.  I’m sorry, I cannot get worked up about this stuff without some clearer price signals, perhaps WTI at $150/bbl or something like that.

As to the Iran news, it is impossible to tell truth from fiction regarding the negotiations as it remains unclear, who in Iran is negotiating and what power they have.  The uranium issue remains key, in my mind, as a nuclear weapon cannot be considered defensive, and given their stated goals of destroying the great Satans of Israel and the United States, I very much fear if they were to create one, they would launch it the next day.  Even Xi agreed they cannot get one.  

All this leads me to believe that there is still quite a bit more back and forth before things end, and if I had to pick a date, I am still in for July 4th as a time to announce an agreement.  We shall see.

So, given we are not going to solve the Iran conflict here, it’s time to observe how markets are behaving.  And frankly, there is not very much to observe.  Starting with equity markets, as you can see from the Bloomberg screenshot below, things look pretty good right now, regardless of the Iran situation.  Yesterday’s US rally (the concerns raised regarding Iran and its uranium were set aside, it seems) were followed by strength in Asia and this morning in Europe.

Earnings data continues to be released in a generally positive manner, and despite the ongoing angst amongst the punditry, as discussed above, there is, as yet, no sign that fear is growing amongst the investing set.  Below is a chart of the CNN Fear and Greed Index over the past year.  the current reading is 57, firmly in the Greed bucket and as you can see, the fear over the war began to dissipate at the end of March. 

If you think about it, this is really no different than the Ukraine War, which for a relatively short time was seen as catastrophic, and eventually faded into the background.  Honestly, when was the last time you saw an article on the subject?

As to the bond market, it continues its recent uncertainty as to what the future holds.  This morning yields are lower across the board with Treasuries (-2bps) after slipping -3bps yesterday, while European sovereign yields are all lower by between -4bps and -6bps.  The bond market appears to be caught between fears of rising inflation because of the impact of higher oil prices, not only on direct things like transportation, but also secondary impacts as those costs are passed on and adding in the potential for higher food prices if the fertilizer situation is as bad as some forecast.  However, the other side of that coin is the potential for a significant recession, which historically has resulted in substantially lower yields as governments around the world add both monetary and fiscal stimulus.  Place your bets!

Turning to the oil market, while WTI is higher by 1.8% this morning, as you can see in the chart below, it continues to go nowhere overall.  If the apocalypse is coming, the market is certainly not ready.  Either that, or there is a lot more oil around than people give it credit for.

Source: tradingeconomics.com

Of course, as has been the case, when oil’s price rises, gold (-0.6%) and silver (-1.1%) slide as that negative correlation has become firmly entrenched.  Copper (+0.7%) though, is bucking that trend this morning, albeit hardly running away.  I expect that these relationships are likely to hold until there is a resolution of some sort in the Gulf.

Finally, the dollar is generally firmer this morning despite the decline in yields.  In fact, if we look across markets, bonds are today’s outlier.  But back to FX, in the G10, all the currencies are weaker by between -0.1% and -0.3% although in the EMG bloc, there are two more substantial movers, INR (+0.5%) as the RBI continues its intervention process amid fears the rupee will collapse, while KRW (-0.8%) continues to see foreign outflows despite its equity market continuing to be one of the best performing in the world as you can see in the Bloomberg chart of the KOSPI below.

And that’s really it as we head into the weekend.  Perhaps the conflict will heat up during the long weekend, which would likely drive some real movement.  But for now, there is nothing new under the sun.

On the data front, yesterday saw generally solid data with the Philly Fed the lone, weak, exception.  Last night, Japanese CPI was released at a much lower than expected 1.4% for both headline and core.  While there is still a strong expectation that the BOJ is going to raise rates next month, if inflation is truly at 1.4%, that seems like it might be a mistake.  This morning we see Michigan Sentiment (exp 48.2) and Leading Indicators (-0.2%).  Here’s the thing about the Leading Indicators, though, as you can see from the chart below from the Conference Board’s website, it appears they may not be telling us the whole story anymore.

After all, they have been declining steadily since early 2022 despite an economy that has grown solidly during that period.  Again, maybe this truly is a harbinger for the future, but I am not convinced.

And that’s all there is.  Have a wonderful Memorial Day weekend and let’s see what the world looks like on Tuesday morning!

Good luck and good weekend

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The Strait’s Dead

Posted on by 
The president’s on his way home
And pundits with TD Syndrome
All say that the trip
Did not flip the script
And still see the world in a gloam

But markets, one thing, seemed to hear
That though China wants Hormuz clear
The President said
To him the Strait’s dead
And markets responded with fear

With President Trump on his way back home from his trip to Beijing and meeting with Chinese President Xi, we can now expect reams of stories about all the things that he either did or didn’t accomplish.  Much has been made of Xi’s opening comments about Taiwan and how it is a critical issue that cannot be mishandled or it would impact the relationship between the two nations.  But as I think about Taiwan and China, I certainly understand Xi’s interest in having the island reintegrate into China as it would bring an enormous number of technological skills and abilities in areas currently absent on the mainland.  And, of course, Xi will point to history and claim it has always been part of China, yada, yada, yada.

However, ask yourself why any Taiwanese would want to become part of China.  After all, per capita income in Taiwan is ~$42K annually compared to ~$14K on the mainland.  That is a serious reduction in living standards.  Add to that the ability to vote in free elections and the accompanying belief that one’s voice can be heard, and that is a powerful argument to remain independent.  Now, as TSMC builds out is fabs in Arizona and elsewhere in the world, it seems to me that the US will lose interest in the Taiwan independence issue overall because, especially for President Trump, who views almost everything transactionally, if the US can get its semiconductors from elsewhere with no problems, notably domestically, defending an island on the other side of the world, one that is decidedly not in the Western Hemisphere, seems far less critical. 

Here’s a forecast, by the end of Trump’s term, with TSMC fabs up and running in Arizona, Japan and even Germany, we can see a Taiwan deal similar to the Hong Kong deal, which will sound great but over time China will absorb it in the same way it has done Hong Kong, removing freedoms and its appeal as a manufacturing center.

On to the other part of the trip that has had a much larger impact on markets, when Mr Trump explained, “We don’t need the Strait of Hormuz open.”  While the comments from the trip were that China wants it open and agrees tolls are inappropriate, the last throwaway line is what has markets on edge this morning.  And on edge, they certainly are!

Thus, without further ado, let’s take a look with pictures serving their purpose.  As of 7:15 this morning, here are the major equity index futures from tradingeconomics.com

The caveats here are that Toronto’s TSX and Brazil’s IBOVESPA futures markets are not yet open, but I’m confident both will open lower.  Russia’s MOEX is irrelevant which makes the Swiss Market Index the only equity market anywhere that is not falling.  Perhaps more than the Swiss franc, their stock market has achieved some haven status.

The thing to remember about this sell-off, though, is that we have had a remarkably strong week overall, and so this feels more like a profit taking retracement than the beginning of a new move lower, at least to me.  

In the bond market, sellers are the dominant force with yields higher everywhere around the world as per the below Bloomberg screenshot.

Much has already been written about 10-year Treasury yields trading at their highest level in almost exactly a year, and 30-year Treasury yields now firmly above 5.0% and how that spells the end of the good times in the US.  Maybe that is the case, but I am not convinced.  My take of the biggest problem is in the UK, where PM Starmer is under even more pressure this morning after several moves where a key cabinet member, Wes Streeting, resigned to open his path to run for PM as well as where a Labour party member stepped aside so that the very popular Andy Burnham, who is Mayor of Manchester, can now run for parliament and be in a position to become PM.  The issue here is that since Starmer will do all he can to hold on to his seat, and the Chancellor, Rachel Reeves, is in his corner, we will see even more deficit spending there to try to help Starmer stay in power.  Apparently gilt investors are not impressed with that potential.  Of course, neither is anybody holding pounds as a position as is apparent in the FX markets.

While the pound (-0.25%) is only modestly lower this morning, since Monday, as you can see below, it has fallen 3 cents and does not yet seem to have found a bottom.

Source: tradingeconomics.com

But this is of a piece with the dollar writ large this morning, which is higher virtually across the board.  In fact, as you can see, in what may be my most frequently printed chart to dispel the idea that the dollar is dying, the DXY remains firmly in its range for the past year and is now heading toward the upper band.  If you look at the calculated mean/variance of the DXY, you can see the trend line (the black line in the center) is completely flat, i.e. the dollar is trending neither higher nor lower over the past year.

Source: tradingeconomics.com

Looking at specific currencies, AUD (-1.0%) and NZD (-1.45%) are the worst performers in the G10, although NOK (-0.9%) and SEK (-0.9%) are giving them a run.  Kind of surprising for NOK given oil is much higher this morning.  in the EMG bloc, ZAR (-1.0%), CLP (-1.0%), MXN (-0.8%), and KRW (-0.5%) are the laggards in their respective regions with ZAR suffering from the commodity movements, as is CLP with copper sharply lower this morning.  MXN seems to be reacting to the news that the US has been stepping up its aggressive tactics against the drug cartels there and concerns about how that will end up.

Finally, on to commodities where oil (+3.0%) has responded exactly how you would expect to the Trump comment about his cares about Hormuz.  Meanwhile, the metals are back in full negative correlation mode with oil as all of them are sharply lower this morning (Au -2.0%, Ag -5.9%, Cu -4.3%, Pt -4.0%).  The one thing you have to admit about the commodities markets these days is that they are living up to their reputation of extreme volatility.

On the data front, this morning brings Empire State Manufacturing (exp 7.5), IP (0.3%) and Capacity Utilization (75.8%), none of which typically have a big impact and given the oil/Hormuz fears extant this morning, will almost certainly be completely ignored.  There are no Fed speakers today but I do want to mention one from yesterday, Governor Michael Barr, who directly contradicted everything Chairman Warsh has been saying about the size of the Fed’s balance sheet, explaining that if they move away from their current ‘ample reserves’ model, it could have very negative impacts on the functioning of money markets.

There is an irony here as prior to the ‘ample reserves’ framework, there was a very active Fed funds trading market on an interbank basis and banks were able to borrow from each other whatever they needed for liquidity purposes.  The Fed has usurped that role ever since the GFC and are now clearly concerned (afraid?) about going back.  The thing is, it seems to me that there continues to be a tremendous amount of liquidity around and it would be quite feasible to create an intraday loan market to help alleviate those concerns.  In fact, cash rich corporates (Berkshire Hathaway anyone?) could be part of the market as it would be entirely interbank and those corporates would know the counterparties quite well.  Suffice it to say that Mr Warsh will have quite a time getting his way at this stage.

And that’s what we have going into the weekend.  Gloom and doom about the near future, or profit taking, I’m not sure which.  As I have said all along, play it close to the vest, in think.

Good luck and good weekend

Adf

Greatly Vexed

Posted on by 
For weeks it appeared that the war
Was something we all could ignore
As equities rallied
And most people tallied
Their gains as those prices did soar

But yesterday, things took a turn
And suddenly, stocks, folks, did spurn
While oil went higher
As missiles did fire
And UAE oil did burn

The question today is what’s next?
Will Hormuz soon wind up annexed?
Or will Iran’s forces
Back up their discourses
And keep Mr Trump greatly vexed?

For nearly two weeks, it appeared that the market was completely willing to accept the narrative that the Iranians were on their last legs and that the Strait would be reopened soon, thus relieving the pressure on the oil markets, and global markets in general.  After all, US equity markets, as well as those in Korea and Taiwan, were making new all-time highs regularly despite the ongoing stress in Iran.  

But yesterday, those happy thoughts were called into question as evidenced by the equity markets’ collective sharp decline throughout Europe and the US.  Of course, most of Asia was closed on Monday, but the few markets that were open performed well then.  Alas, last night was a different story with more losers (HK, India, Australia, New Zealan, Singapore) than gainers (Malaysia, Indonesia).  Even if markets don’t decline much further, there has been a distinct change in sentiment about things, at least in my view.

The timing of the progress in potential negotiations and the question of potential escalation of fighting again are suddenly weighing more heavily on investor perceptions than they had for the last several weeks.

In the meantime, if we turn our attention to economic data, yesterday’s Factory Orders came in much stronger than expected, just the latest in a line of “surprisingly” strong data points from the US.  If we look at the chart below from macromicro.me, showing the Citi Surprise Index and their earnings index, we can see that both the economic indicators and US corporate earnings results are moving higher.  This seems at odds with the narrative of imminent collapse that is still making the rounds but is likely the cause of the equity market’s resilience.

In fact, this morning, markets are once again pointing in a more favorable direction as yesterday’s skirmishes in the Gulf have been quickly forgotten, it seems, and European bourses are all higher (Germany +1.0%, France + 0.6%, Spain +1.1%) recouping yesterday’s losses although UK equities (-1.0%) are suffering on a combination of yesterday’s concerns as well as a surprisingly negative HSBC earnings report.  And US futures are also higher at this hour (5:45) by about 0.4% across the board.  It is difficult to get markets downbeat for very long these days, which is remarkable given the sentiment indicators which have consistently been reading quite poorly.

This dichotomy is quite interesting to me as I am currently reading “Narrative Economics” by Robert Shiller, where he describes how social narratives have, throughout history, led to economic outcomes, whether positive or negative.  His implication is that the data tends to follow the current zeitgeist, and then almost regardless of any government efforts to change that narrative, the zeitgeist is what drives the economy.  For those of us who have been observing markets for any extended length of time, I don’t think this is a surprising revelation, although Shiller does a great job highlighting all the different times the narrative drove the bus.  

And that is what makes the current situation so remarkable, the narrative is that things are terrible with the nation dramatically split politically while gasoline prices have risen so much and inflation is a major problem.  You can see that in the Michigan Sentiment Survey and the political polls.  Yet Retail Sales remain firm and we just saw those strong Factory Orders, two things which one would expect to soften given the current narrative.

Perhaps what we have seen is the impact of social media and ‘influencers’ whose goal is to show the good life and why/how you should live it.  Given they only maintain their followers if they show an ideal situation, there will be no shaming for ostentatious consumption, that is their stock in trade.  So, while during the Great Depression, social pressures were such that buying anything new, like cars or houses, was seen as inappropriate, today, buying new cars is seen as a requirement, the more expensive the better.  Or going on an expensive holiday, or some other extravagance.  I wonder if the gloomy narrative will end up overcoming the influencers.  I suppose much will depend on just how much longer the war in Iran continues, as a clear end soon would almost certainly see a major sentiment change and another wave higher in risk assets while the longer it drags on, the more likely negativity overwhelms.

But this morning, having already looked at equity markets, we see a key piece of that story is oil (-2.0%) having slipped back.  Perhaps the fact that there have been no new skirmishes has people back to a brighter outlook.  Or perhaps, as the conspiracy theorists would explain, governments are in manipulating the price lower again.  As I look at the chart, though, it remains remarkable to me that despite the Strait having been closed for two months now, oil prices have not risen further.

Source: tradingeconomics.com

The question at this point is how quickly things can return to any semblance of normal when the hostilities end.  From what I have read, and I am not an expert, it almost seems like every day the Strait remains closed will require one and a half days more before things get back to the pre-war situation.  Of course, even if that is the case, if the war ends, the zeitgeist will change far faster and that will likely be overlooked.

Meanwhile, given the current gold/oil relationship, we cannot be surprised that gold (+0.6%) and silver (+1.3%) are higher this morning.

In the bond market, after yields rose sharply yesterday (Treasuries +8bps), this morning, things are less dramatic with 10-year Treasury yields slipping -1bp and European sovereign yields all softer with Greece and Italy (-5bps) seeing the largest declines although German bunds (-1bp) were more in line with Treasuries.  There has been much discussion lately about 30-year Treasuries and how they have traded back above 5.0% again, indicating it is a sign of the apocalypse.  However, if you look at the chart below, you can see we have been at or above that level several times in just the past year.  I understand 5.0% is a big round number, but I don’t see this as an imminent disaster because of the move. (Don’t misunderstand, the US fiscal situation is a major problem with many potential problems going forward, I just don’t think this is the final straw.)

Source: tradingeconomics.com

Finally, turning to the dollar, after modest gains yesterday, it is little changed this morning.  The RBA raised rates by 25bps, as expected and AUD is unchanged, as are the euro and pound.  With the BOJ on holiday, JPY (-0.2%) is slipping slightly, but not showing any major activity.  However, we have seen several EMG currencies improve with MXN (+0.3%) and BRL (+0.4%) both benefitting from the increased risk appetite we are seeing in overall markets.  The thing about the dollar is it has not been interesting for quite some time, trading within a fairly narrow range.  However, while we continue to hear many pundits describe the dollar’s ultimate demise, there is an interesting story in the FT about the dollar’s dominance in global markets as can be seen in the chart below from Kobeissi on X.

This is not a demonstration of the world shunning dollars, just sayin!

On the data front, this morning brings the Trade Balance (exp -$60.5B) along with ISM Services (53.7) and JOLTs Job Openings (6.83M).  We also see New Home Sales (668K) and hear from two Fed governors, Bowman and Barr.

But it is all still about the war and oil, and until something definitively changes there, I expect we will chop with every headline.

Good luck

Adf

Ere Fears They Shed

Posted on by 
The status is still very quo
As ships still cannot come or go
However, Iran
Proposed a new plan
With nukes as a part of the show

But thus far, whatever they said
Has not moved discussions ahead
So, oil’s crept higher
As traders require
More certainty ere fears they shed

While President Trump has announced a new plan to help escort ships trapped in the Persian Gulf through the Strait of Hormuz, thus far, none have taken the chance.  Over the weekend, Iran ostensibly put forth another peace proposal, and this time their nuclear activities were part of the plan, a major change, although President Trump has rejected it overall.  To me, though, this is major progress as it demonstrates that there is a negotiation ongoing.  

My armchair analysis, FWIW, is that Ahmed Vahidi is watching his nation crumble and beginning to really feel the pinch of the US naval blockade as his revenues shrink rapidly.  While there are many estimates of how long Iran can withstand a lack of revenue, and I have no idea what that answer is, I feel it is reasonable to assume that if he doesn’t have enough to pay his soldiers, many of them will simply go home.  Already I have read reports that many of their payments to soldiers and proxies have been dramatically reduced as the US continues to tighten the financial screws via sanctions on banks and companies that have been acting as Iran’s middlemen.  I believe it is widely agreed on all sides of the conversation that the Iranian economy has been virtually collapsing with the rial having fallen 95% in value, access to basic staples limited and suffering widespread.  

The one thing of which I feel certain is that Vahidi wants to remain in power, and I would estimate as the pain increases, and the money stops flowing, his grip on power is slipping.  Staying in power without nuclear weapons is likely much preferred to being deposed.  

In the end, like every negotiation, the parties start far apart and get closer over time.  Now, my view is likely not worth all that much, but the oil market’s view is worth billions of dollars and if we look at how the price of oil has behaved, while uncertainty remains, (especially after a report this morning that Iran fired on and struck a US naval vessel, although that report has been denied), the market does not appear to believe that this is going to continue that much longer.  

Source: tradingeconomics.com

Several things continue to occur as at $100/bbl; there is some level of demand destruction; production elsewhere in the world continues to grow (I read that Venezuelan production rose to 1.25 mm bpd ,more than had been assumed prior to the Iran war); and the Saudi east-west pipeline is now pumping its capacity 7 million bpd, thus the amount of oil ‘missing’ has been reduced from the initial headline 20 mm bpd to somewhere along the lines of 12 mm bpd, still extremely painful to the global economy, but obviously not (yet) catastrophic.  However, since oil prices remain around $100/bbl, and have not risen to $150/bbl or $200/bbl as many pundits had forecast, there remains a great deal of confidence that this is going to end before too much more time has passed.  I certainly hope so for everyone’s sake.

Away from that, there is precious little other news to note as Asia is basically on holiday until Thursday and the UK is closed today, so market activity has been more muted.  But let’s take a look.  In the equity markets, weirdly HK (+1.2%) was open despite both China and the UK being closed and given HK’s history, I would have thought it would have responded to one of those situations.  But the big news was Korea (+5.1%) which was dramatically higher on rallies in Samsung and SK Hynix shares, both of which have been major beneficiaries of their semiconductor businesses booming alongside AI demand.  I guess we shouldn’t be surprised Taiwan (+4.6%) followed that path and in truth, there were more positive outcomes (India, Philippines, Malaysia, Singapore, New Zealand) than laggards (Australia).  Remarkably, everything I read is that Asia is the region most negatively affected by the Iran war, yet here we continue to see equity markets rising.

In Europe, things are less optimistic this morning with red across the screen led by Spain (-1.6%) and France (-1.0%) although both the UK and Germany are nigh on unchanged.  One of the weekend stories is that the US is now going to be raising tariffs on European auto imports to 25% from the 15% initially agreed as Trump claims the Europeans weren’t following the agreement.  As to US futures, this morning they are marginally lower as I type (7:30) but remain just ticks away from the all-time highs set last week.  Again, it is difficult to accept the idea that the world is about to end based on the market’s current behavior.  Look at the chart below and worry does not seem to be prevalent, nor has it been for any extended length of time in the past 5 years.

Source: tradingeconomics.com

In the bond market, yields are higher this morning with Treasuries (+4bps) leading the way and European sovereigns all higher by between 3bps and 4bps as well.  It’s interesting that this is the behavior but I suppose it has to do with the Keynesian view that higher economic activity leads to higher rates.  If we look at the PMI data from around the US and Europe, manufacturing has been doing quite well.  Look at the ISM Manufacturing chart below for the past 3 years and it is clear that investment is growing there.

Source: tradingeconomics.com

It is a similar tale in Europe with Manufacturing PMI data this morning all being released healthily above the 50 level and rising from last month.  The market response to lift yields seems anachronistic, but such is life.  However, it is worth highlighting that if we take a bit of a longer-term perspective on 10-year Treasury yields, while they are pushing toward the top of a 4.00% – 4.50% range, you can see that range has largely been intact for the past 3 years.  It is not clear to me that it is time to panic on yields yet.

Source: tradingeconomics.com

In the commodity space, with oil (+3.3%) having risen on the reports of a US ship being attacked, we cannot be surprised to see gold (-1.2%) and silver (-2.6%) both slipping along with copper (-1.6%). This is especially true with China and most of Asia on holiday as official buying of gold is probably on hold for now.  

Finally, the dollar is firmer this morning as risk is under pressure across the board.  US futures are lower, European stocks are lower and oil is higher.  So, gains of 0.25% for the dollar against most currencies are the norm.  There was a very sharp appreciation in the yen early in the overnight session and another one a few hours ago, as you can see in the chart below, with many believing the BOJ was in again during quiet markets, but it has completely reversed.  My take is the BOJ would not have spent reserves like this and would have been far more emphatic if they wanted to move the market again.

Source: tradingeconomics.com

But, as market in Asia were quite thin, any large sell order would have been able to force a move like these.  In addition, with the dollar now several percent below their level of concern, I suspect they will save their ammunition.  In the EMG bloc, ZAR (-0.5%) continues to feel most of the pressure from Iran as the combination of higher oil prices and lower gold prices are a double whammy.  As well, NOK (+0.35%) continues to respond positively to the oil price.   Net, the dollar remains in demand for now.

On the data front this week, it is a mixed week until Friday’s NFP data is released.

TodayFactory Orders0.5%
 -ex Transport0.7%
TuesdayTrade Balance-$60.5B
 ISM Services53.7
 JOLTs Job Openings6.83M
 New Home Sales668K
WednesdayADP Employment99K
ThursdayInitial Claims205K
 Continuing Claims1800K
 Nonfarm Productivity1.4%
 Unit Labor Costs2.6%
 Consumer Credit$11.0B
FridayNonfarm Payrolls60K
 Private Payrolls73K
 Manufacturing Payrolls5K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.8% y/Y)
 Average Weekly Hours34.2
 Participation Rate61.7%
 Michigan Sentiment49.5

Source: tradingeconomics.com

In addition, Fed speakers are back on the circuit (I sure hope Warsh shuts them all up) with 12 speeches from 9 different speakers.  The funny thing is, we already know their views, Miran wants to cut and everybody else is on hold, so what are they going to say?

The war remains the only thing that matters right now, so watch for headlines that an agreement is coming closer.  If that happens, oil will slide along with yields and the dollar while metals and stocks will rally.  (Of course, apparently, we don’t need anything else to get stocks to rally!)

Good luck

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Disconcerting

Posted on by 
The third time, it wasn’t a charm
As thankfully, Trump saw no harm
But it’s disconcerting
The left keeps on flirting
With killing Trump by firearm

But absent more news on the war
Investors, most stocks, still adore
And there’s still a call
The dollar should fall
Though so far, they’re down on that score

It is certainly disconcerting that there have been three bona fide assassination attempts on President Trump in the past two years, something I fear speaks loudly about his opponents.  Fortunately, this one also failed.  Interestingly, as this occurred at the White House Correspondents Dinner, the entire Washington press corps, who largely detest the man, were there.  I wonder if this experience will alter their rhetoric, which I would argue has been the key driving force behind these attempts.  Alas, I fear that will not be the case, at least not for more than a few days at best.  

But that was a far more exciting weekend than anybody imagined as there is no new news regarding the Iran war with potential talks never occurring over the weekend.  Neither have the marines moved in on Kharg Island, so the status quo, a US naval blockade, remains the primary situation.  This leads to two questions; first, how long can Iran withstand the lack of revenue with the government, or more accurately the military, still operating effectively? And second, how long before Iran’s oil wells need to be shut in, which is likely a death sentence on those wells, and by extension, on Iran’s long-term revenue stream?

Frankly, that’s what the weekend brought, so let’s turn to markets.  While the DJIA lagged on Friday, both the NASDAQ and S&P 500 rallied to yet further new all-time highs as US corporate earnings remain robust and the market looks ahead to this week where 5 (MSFT, GOOG, AMZN, META, AAPL) of the Mag7 report earnings this week on Wednesday and Thursday.  As well, Wednesday brings the FOMC decision, with no change expected.  As to US futures this morning, as I type (6:50), they are essentially unchanged.

Overnight, Asia’s session was mixed with Japan (+1.4%) putting in a nice performance along with Korea (+2.15%), India (+0.8%) and Taiwan (+1.8%) although there were laggards (HK, Australia, Indonesia, Singapore) as well, with much smaller declines.  China was basically unchanged.  Perhaps the biggest news was that an oil tanker from the US arrived in Japan for the first time, although certainly not the last time.  European bourses are all a bit firmer this morning, seemingly responding to decent earnings throughout many nations there.  Thus, Germany (+0.6%) is leading while Spain, France and Italy (+0.5% each) lag slightly and the UK (+0.1%) brings up the rear as King Charles prepares to visit President Trump and the US starting today, ostensibly trying to resurrect the once special relationship that has deteriorated over time.

In the bond market, nothing continues to happen with Treasury yields higher by 1bp this morning and similar price action across all of Europe.  JGB yields (+4bps) were the big mover as market participants await three key central bank meetings this week, the Fed, ECB and BOJ.  But here’s the thing, of all the major economies around, Japan’s is the only one where the bond market is offering any real signal.  The below chart from tradingeconomics.com shows US (blue line), German (tan line) and Japan (green line) 10-year yields over the past 5 years.

While we all remember the pain in markets when the Fed, and then all other central banks, figured out that the Covid policy inflation wasn’t going to be as transitory as they hoped and pushed rates up at a historically fast pace in 2022, since then, it is pretty easy to make the case that neither US nor Germany (and by extension the rest of Europe) have seen any substantive change in their bond markets.  I am speaking in a big picture reference here, not the day-to-day noise that we see.  Meanwhile, Japan has finally begun to feel the pressure of a massive debt/GDP ratio and rising inflation.

Contrary to popular belief, Treasury bonds remain the reserve asset of choice around the world as every nation needs to hold a certain amount of USD simply to function in the world today (which is why there is so much recent discussion regarding USD swap lines for numerous countries).  While it sounds great for the panican set to discuss how Chinese “official” holdings of Treasuries have collapsed and that is a signal they are selling bonds, the reality is they have switched their custodians from the Fed to Clearstream and Euroclear in Brussels and Luxembourg while many of those assets are now held in large Chinese ‘private’ banks rather than on the PBOC’s balance sheet.

Source: @Brad_Setser

Notice the large grey bar at the right, foreign assets of the state banks.  Which brings us to the central bank meetings this week where no major central bank is expected to change policy.  Japan seems the diciest call, but the word was put out last week that June is the likely date. As well, the ECB’s own market watching website is now looking at June as a probable rate hike as per the below from ecb-watch.eu.

For the FOMC, no change today and now that the DOJ has referred the cost overrun investigation to the IG at the Fed, the hold on Kevin Warsh by Senator Tillis has been lifted.  I expect he will be confirmed in time for Powell to leave on his scheduled date.  It remains to be seen if Powell will stay on the FOMC (his term technically runs until January 2028), but historically, once a Fed chair leaves that role, they step away completely.  Ultimately, until the markets begin to understand that inflation is going to be structurally higher than in the past, I suspect bond yields are going to remain range bound.

In the commodity space, oil (+0.7%) is a touch higher as the market seems to be becoming increasingly concerned that the impacts of the closure of the Strait of Hormuz are going to be longer lasting than previously assumed.  However, the futures curve remains steeply backwardated as per the below chart form tradingview.com.

Personally, I see this as confirmation of my own view that oil prices are likely to decline over time as more and more supply becomes available with new projects.  If anything, this war has accelerated that process.  Meanwhile, metals prices are essentially unchanged this morning, biding their time for the next big piece of news.

Finally, the dollar is under modest pressure this morning, down about -0.2% across the board as risk appetites continue to build with the war receding in traders’ collective mindset.  But here, too, just like in the bond market, it is difficult to make the case that anything of note has happened to the dollar, writ large, over the past year.  I know I show this chart frequently, but it is simply to hammer home the idea that the dollar is not collapsing.  It has basically had a 3.5% range 96.50 – 100.00 for the past twelve months.  I’m sorry, that is not a death omen!

Source: tradingeconomics.com

On the data front, there are a total of 5 central bank meetings with no changes expected anywhere, and then PCE data later on.

TonightBOJ Rate Decision0.75% (unchanged)
TuesdayCase-Shiller Home Prices1.1%
 Consumer Confidence89.2
WednesdayHousing Starts1.4M
 Building Permits1.39M
 Durable Goods0.5%
 -ex Transport0.4%
 Goods Trade balance -$86.0B
 BOC Rate Decision2.25% (unchanged)
 FOMC Rate Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 ECB Rate Decision2.0% (unchanged)
 Q1 GDP2.2%
 Personal Income0.3%
 Personal Spending0.9%
 Initial Claims215K
 Continuing Claims1820K
 PCE0.7% (3.5% Y/Y)
 Core PCE0.3% (3.2% Y/Y)
 Chicago PMI53.0
 Leading Indicators-0.1%
FridayISM Manufacturing53.0
 ISM Prices Paid80.0

Source: tradingeconomics.com

It remains difficult to get too excited about the data, though, as war stories remain top of mind.  Until something changes there, I suspect we will see equities continue to rally on earnings data with the rest of the markets doing very little overall, data be damned.

Good luck

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