Tag Archives: #yields

A Bad Taste

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For weeks, things appeared to get better
As yields slipped and helped every debtor
But we’ve seen some changes
With yields breaking ranges
And oil back to the pacesetter

So, stocks are not really embraced
While bonds have left all a bad taste
The dollar’s moved higher
While gold’s back to dire
With analysts worldwide disgraced

Investors are not as happy this morning as they had been for the past several weeks as the situation in Iran and the Middle East appears to be deteriorating again.  The US continues to attack Iranian missile launchers and fortifications on a daily basis while Iran continues to fire missiles at targets throughout the Gulf region.  As well, the Houthis are back at it in the Red Sea restricting oil flows through there as well.  Arguably the chart below of oil (+4.0%) is the most descriptive view of what is driving everything.

Source: tradingeconomics.com

Crude is higher by 29% in the past month and back above $90/bbl.  This makes things tough on everybody but the oil companies.  Does this mean we are running out of oil?  I don’t think that is the case.  Rather, the short-term impediments to shipping it are driving the price.  But the price is rising nonetheless and that is impacting everything else.  If you recall when things kicked off in this war back in March, the oil price was the primary catalyst for movement in every market. As things seemed to settle down and it appeared there was an opportunity for a resolution, focus turned back to things like earnings for equities and interest rate differentials for currencies with oil in the background.  But it appears we are back to, as oil goes, so goes every other market.

For instance, here is a chart of oil and 10-year Treasury yields over the past month.  As you can see, the trajectory, especially over the past several sessions, is quite similar.

Source: tradingeconomics.com

But if we look at 10-year yields across Europe, we can see that they are all climbing in sync as well.

German yields have reached their highest level in 15 years according to Bloomberg.

The entire moderation story is falling apart.  So, now instead of conversations discussing the relative merits of AI and whether it will be a boon for mankind or end it, we are discussing the probability that the world will end soon.  I guess it’s no surprise that risk is under pressure.  Of course, the latter conversation doesn’t seem that coherent to me as if there is concern over the end of the world, I would have thought gold would have a better bid!

At any rate, oil is the main story and the driver of every market.  It underpins the question of whether the ECB will hike rates today (they won’t) or whether the FOMC will do so next week (also, they won’t) but the probabilities for those moves have risen.  It has also detracted from the earnings stories, or perhaps exacerbated the negatives, or perceived negatives.

For instance, Alphabet reported last night and Q2 revenues beat estimates coming in at $119.8 billion.  But all the talk is of free cash flow, which in this Bloomberg chart shows how much they are spending on the AI buildout.

Here’s my question, is it bad that Alphabet is spending its money to improve its future?  If it recognizes the criticality of AI to the future of its own existence, it seems like a reasonable move.  Of course, the naysayers claim that spending all that cash is a waste.  I don’t know the answer, and I suspect nobody does yet, but companies spending their cash flow on improving their business seems to be the whole idea behind having companies in the first place.  

It begs the question, on what did investors base the value of Alphabet before AI?  If it was seen as only a cash cow, it certainly traded at a very high multiple for a boring business.  But today, it will be tarred with the oil brush along with all stocks.

Ok, I have gone far afield here, let’s get back to markets overnight.  Yesterday’s lackluster US session was followed by strength throughout most of Asia.  Tokyo (+0.5%), China (+0.25%), HK (+1.3%) and Korea (+4.4%) all had solid sessions with Korea continuing to define what volatility means in equity markets.  Look at the expansion in the daily ranges in this barchart.com chart of the KOSPI over the past month.  It’s remarkable!

European bourses, though, are having a much rougher go of things this morning as Brent crude approaches $100/bbl.  France (-1.1%), Italy (-1.9%), Spain (-0.6%) and Germany (-0.6%) are under real pressure this morning as earnings numbers there have been lackluster and the broader macro picture deteriorates all the while.  As to US futures, right now (7:40), they are pointing lower led by the NASDAQ (-1.2%) although it has not yet breached that critical support level as per the below chart.

Source: tradingeconomics.com

We’ve already discussed bond markets, with yields higher this morning by between 2bps and 3bps across Treasuries and all European sovereign markets.  Turning to the metals, while we had a couple of days where they rallied alongside oil, this morning they have reversed course with gold (-1.3%), silver (-2.6%) and copper (-0.7%) all under pressure.  It seems the interest rate story is today’s discussion as higher yields are the topic du jour.

Finally, the dollar is stronger across the board this morning, although most of this strength just materialized over the past few hours with the Asia session broadly unchanged.  But no matter how you slice it, the dollar is firmer vs. all its G10 counterparts by about 0.25% and almost all of its EMG counterparts by a similar amount.  The exceptions this morning are BRL (+0.25%) and KRW (+0.3%).  Regarding Brazil, you must remember they are an oil exporter, so benefit from high oil prices and have amongst the highest real interest rates around, so draw capital for that as well in the carry trade.  The real has appreciated about 8.5% during the past year, so this is nothing new.  As to KRW, the government’s efforts at internationalization continue to be paying off and a look at the chart below shows that this trend is quite strong right now.

Source: tradingeconomics.com

There was an interesting article in Bloomberg this morning explaining how the dollar’s weakness vs. LATAM currencies has begun to bite for local companies but I find it quite interesting when it comes to discussions about the dollar; some find it too strong and are looking for it to tumble while others complain it is too weak!  Seems nobody is ever happy here!

On the data front we see Chicago Fed National Activity (exp 0.14) as well as Initial (212K) and Continuing (1809K) Claims.  Of course, we have the ECB announcement shortly, although no change is expected.  Something getting very little press is the fact that Crude Oil stocks rose in the US last week, but I guess that doesn’t suit the narrative!

This market is entirely focused on oil, and as it moves, so will everything else.  If oil keeps climbing, look for stocks and gold to fall while yields and the dollar rise.  If oil reverses, so with those moves.

Good luck

Adf

Humbling

Posted on by 
The ceasefire seemed to be crumbling
And stocks all around started tumbling
Then late in the morning
Trump issued a warning
To Bibi that clearly was humbling

So, Lebanese fighting decreased
Though, so far, it has not yet ceased
The door’s now ajar
For peace near Qatar
Thus, risk appetite rose like yeast

Which takes us to data today
With March CPI on the way
It surely will show
That prices did grow
But how long will increases stay?

As you can see from the below chart showing oil (inverted) and the S&P 500, about 11:00 yesterday morning, the news hit that Israel was going to stop its ongoing fighting against Hezbollah in Lebanon, which the Iranians claimed was a violation of the ceasefire and had undermined general, and market, belief that the ceasefire would hold at all.  The impact was instant with a substantial rally in the S&P, 1% within an hour, while oil prices tumbled about 6% in the same span (given oil’s volatility is so much higher, that discrepancy is not surprising at all.)

Source: tradingeconomics.com

This is the lead-in to the first face-to-face talks between the US and Iran that are due to occur today in Karachi, Pakistan.  Hopefully, they will lead to a lasting peace with the upshot that Iran will no longer be a sponsor of terrorism, but I must admit, I’m not holding my breath for that outcome.  The overnight market reaction was pretty much exactly what you would have expected with a generally positive view of risk almost everywhere in the world.  Obviously, if the talks lead to a peace and a reopening of the Strait of Hormuz, the strong belief is that things will eventually revert to the prewar stance, at least from an energy and economic perspective.  We shall see.

Which takes us to the other piece of news that markets are going to need to absorb this morning, the March CPI data.  Yesterday we saw the February PCE data and while it was released at expected levels, those levels (2.8% Headline, 3.0% Core) are already far above the Fed’s 2.0% target.  In fact, as you can see from the chart below, it has been a full five years since Core PCE was at or below their target.

Source: tradingeconomics.com

And now, we get March CPI this morning which will include a substantial rise in oil prices as the average in February was $64.51/bbl vs. March’s $93.58/bbl.  Obviously, that is going to have a major impact on headline CPI, but the question is just how much of an impact will it have on core?  Expectations are for Headline to rise 0.9% M/M and 3.3% Y/Y, while the Core rises just 0.3% M/M and 2.7% Y/Y.  Now, we are coming halfway through April and oil prices have not retreated yet, so we are likely going to see continued upward pressure on core prices going forward as those high oil prices feed their way into other things.  But that is for the future.  For today, all eyes are on the data to see if it will be enough to concern central bankers.

In fact, next week is World Bank / IMF week in Washington DC and Kristalina Georgieva, the IMF’s Managing Director, expressed concern that the global economy is going to slow down because of the impact of higher oil prices, but implored central bankers around the world to be patient and not hike rates right away, while asking governments not to subsidize fuels and increase demand.  It is, of course, much easier for her to make these comments as she doesn’t face an electorate that is angry about rising prices.

At any rate, other than the virtually infinite number of takes on the Iran war and the CPI data, there’s not much else to discuss, so let’s see how markets have responded to the latest and where they sit ahead of the data.

Yesterday’s early declines in the US were reversed, as per the chart at the top with all three major indices rallying more than 0.6%.  in Asia, weirdly just Australia (-0.15%) and New Zealand (-0.7%) were the outliers on the downside with the rest of the region all in the green, some substantially so.  Tokyo (+1.8%), China (+1.5%), Korea (+1.4%), Taiwan (+1.6%) and India (+1.2%) all had very strong sessions.  Arguably, the weakness Down Under may be a reflection of their energy policies heading into the Iran war as neither nation has a substantial reserve (fossil fuels were deemed bad so their governments didn’t want to buy them) and both economies could suffer far worse than anyone else because of those decisions.  

In Europe, markets are higher across the board although the gains are far more muted with France (+0.5%) the leader followed by Germany (+0.4%) and Italy (+0.4%) then the UK (+0.2%).  While, certainly better than losses, they are hardly inspirational.  As to US futures, at this hour (7:15), they are also pointing slightly higher, about 0.2% or so.

In the bond market, yields are backing up this morning with Treasuries (+2bps) the least impacted while European sovereign yields are higher between 5bps (Germany) and 8bps (Italy) with the rest of the continent somewhere in between.  It is difficult to ascribe a particular story here other than rising concerns about general inflation being higher due to elevated energy costs.  The market is pricing about 59bps of rate hikes by the ECB this year, perhaps a sign that investors don’t believe energy prices in Europe are going to decline as much as they will elsewhere.  Given the continent-wide energy policies they have in place, I believe they are correct.

Turning to commodities, oil (0.0%) is unchanged this morning after sliding on the Lebanon news yesterday morning.  The truly interesting thing is to watch NatGas (-0.6%) which continues to slide. Back toward its multi-year lows as it continues to be produced as an associated product alongside all the oil drilling that is ongoing.  

Source: tradingeconomics.com

I cannot look at the above chart and reconcile the massive energy advantage the US has with basically the rest of the world and conclude that the US economy is going to be at any disadvantage with other economies going forward, and hence the dollar seems very likely to remain in good stead going forward.  Meanwhile, metals, too, are little changed this morning (gold 0.0%, silver +0.4%, copper +1.3%) with the latter a bit of a surprise after Argentina just passed legislation that will allow for more drilling in the Andes where Chile’s major copper deposits lie.  That is a long-term prospect though, I must admit.

Finally, the dollar is mixed this morning, with very few significant movers in either direction.  In the G10, +/-0.2% is the name of the game with the most noteworthy thing, I think, the yen (-0.25%) which is back above 159 this morning, although not yet threatening the perceived line in the sand of 160.  In the EMG bloc, KRW (-0.6%) and ZAR (-0.4%) are the laggards although it is hard to ascribe specific news to either move.  Rather, looking at the recent trading action, where both currencies have been rebounding sharply, these moves look like position squaring ahead of the weekend.

In addition to CPI, we also see Michigan Sentiment (exp 52.0) and Factory Orders (-0.2%) at 10:00.  There are no Fed speakers so today is shaping up to be data dependent unless we hear something from the talks in Pakistan.  However, it seems far too early for anything of substance there.  I imagine if core CPI is firm, that could be an equity negative as that would encourage more thought of the Fed hiking, but I have a feeling that despite the broader importance of the number, markets are not going to do much today.

Good luck

Adf