Olivia

In the aftermath of their invasion of Ukraine, the US and its coalition partners agreed to isolate Russia by sharply restricting trade; and with Russia being among the largest exporters of crude oil and natural gas, the sanctions caused buyers of these products to face critical energy shortages. Prices for these commodities had been rising even before Russia’s invasion on February 24th, but they really spiked in the weeks following. Futures market price data offer the most transparent and reliable picture of market price history for these two commodities, generally; but pricing differences due to variations in quality and location certainly exist. In any case, before the invasion, the August crude oil futures contract had been trading in the mid-$80 range per barrel; but by early June, the price reached $120. Since then, the price has fallen back down into the mid-$90s. A similar story applies to natural gas. In February, the August natural gas contract was trading in the mid-$4 per mmbtu. The price more than doubled by early June, but it’s since settled back to the low $6 per mmbtu range. The history for both commodities certainly contributed to the still high pace of inflation we’ve experienced through… Read More »Making senses of Yellen’s oil cap proposal

In the aftermath of their invasion of Ukraine, the US and its coalition partners agreed to isolate Russia by sharply restricting trade; and with Russia being among the largest exporters of crude oil and natural gas, the sanctions caused buyers of these products to face critical energy shortages. Prices for these commodities had been rising even before Russia’s invasion on February 24th, but they really spiked in the weeks following. Futures market price data offer the most transparent and reliable picture of market price history for these two commodities, generally; but pricing differences due to variations in quality and location certainly exist. In any case, before the invasion, the August crude oil futures contract had been trading in the mid-$80 range per barrel; but by early June, the price reached $120. Since then, the price has fallen back down into the mid-$90s. A similar story applies to natural gas. In February, the August natural gas contract was trading in the mid-$4 per mmbtu. The price more than doubled by early June, but it’s since settled back to the low $6 per mmbtu range. The history for both commodities certainly contributed to the still high pace of inflation we’ve experienced through… Read More »Making senses of Yellen’s oil cap proposal

Gold stocks declined by about 31.5%, which perfectly fits my previous analogy to 2008. If history is to rhyme, we can expect a corrective upswing soon. 2008, is that you again? History tends to repeat itself. Not to the letter, but in general. The reason is that while economic circumstances change and technology advances, the decisions to buy and sell are still mostly based on two key emotions: fear and greed. They don’t change, and once similar things happen, people’s emotions emerge in similar ways, thus making specific historical events repeat themselves to a certain extent. For example, right now, gold stocks are declining similarly to how they did in 2008 and in 2012-2013. The Russian invasion triggered a rally, which was already more than erased, and if it wasn’t for it, the self-similarity would be very clear (note the head-and-shoulders patterns marked with green). Since the latter happened, it’s not as clear, but it seems that it’s still present. At least that’s what the pace of the current decline suggests. I used a red dashed line to represent the 2008 decline, and I copied it to the current situation. They are very similar. We even saw a corrective upswing… Read More »Gold stocks are heavily oversold – A rebound is likely soon

EUR/USD softens as ECB hikes lag behind The euro hovers over parity as the ECB is expected to kick off its tightening cycle this week. The ECB will likely deliver a 25 bp increase next week but may have limited impact on the single currency. The modest hike is more of a concession that policymakers’ hands are tied given the energy price shock and the fragmentation risk. Traders might focus on how the central bank would support peripheral bonds to avert another debt crisis as borrowing costs rise. The euro may struggle to maintain the parity milestone as the ECB cannot afford to normalise in a decisive manner. 0.9800 could be next with 1.0400 as a fresh resistance. USD/JPY soars as BoJ sits on sidelines The Japanese yen fell to a 24-year low against the US dollar as the Bank of Japan vowed to stay dovish. Governor Kuroda has repeatedly shrugged off the idea of tightening and gone contrarian instead. The BoJ may even consider further easing to support the recovery. Inflation shot above 2% mainly due to soaring fuel costs, and unless wage growth gains a foothold, the central bank has leeway to leave its policy loose. After the… Read More »ECB to deliver modest rate hike

The Chinese economy is experiencing a sharp slowdown, raising a reasonable doubt that GDP will be able to grow by the initially planned 5.5% this year. Fresh data showed that China’s economy was only 0.4% higher in the second quarter than a year earlier.  The half-year increase is 2.5% compared to the same period a year earlier. A new round of problems for property developers and an increasing boycott by mortgage borrowers to pay their debts is becoming a bigger problem. Government intervention with massive infrastructure stimulus, for example, through nationalising troubled properties, looks logical. The flip side of the stimulus is an increase in the money supply and a weaker exchange rate. Technically, we have been seeing pressure on the Chinese renminbi against the dollar since the end of last week, and an analysis of the fundamentals suggests that this downward momentum has just begun. This is not the first time China had had to deflect against the wind by tightening policy when the world economies softened in 2020-2021. The developed countries are quickly taking money off the table, and China is again trying to offset the external downturn with domestic consumption. And this is bad news for the… Read More »China’s slowdown weakens the yuan

Summary Consumer sentiment rose a scant 1.1 points from last month's all-time low, but the REAL takeaway is that inflation expectations cooled. That is welcome news for Fed policymakers and it makes the pressure to “go big” at the next meeting less intense after this week's scorching CPI report. Read the full report here

The massive monetary binge is over. The Fed is taking the punch bowl away. The hangover is coming. The best cure is – except for the broth – gold. No Longer Doves 75 basis points! This is how much the FOMC raised interest rates in June. As the chart below shows, it was the biggest hike in the federal funds rate since the 1990s. Due to this huge move, the target range for the federal funds rate returned to the pre-pandemic level of 1.50-1.75%. Given how dovish and gradual the US central bank normally is, we may conclude that the inflation threat is really serious. The Fed has been so far behind the inflation curve that it must raise rates at the fastest pace in more than a quarter of a century! Last month, the US central bank also started reducing the size of its enormous balance sheet. Until September, the Fed will be cutting $45 billion a month from its massive holdings, and it will increase to $95 billion, almost twice as much as it did in the previous episode of quantitative tightening. As the chart below shows, the value of the Fed’s assets has already peaked, reaching $8.95… Read More »When the Fed takes the punch bowl away, stick to gold

Overview: The higher-than-expected US CPI and the strong expectation of a 100 bp hike by the Fed in two weeks is propelling the dollar higher. It jumped to almost JPY139.40 and the euro is off more than a cent from yesterday's high (though holding above parity). Even where there has been favorable economic news, like the strong jobs report in Australia, it failed to dent the greenback. Most of the large bourses in the Asia Pacific regions advanced. Hong Kong is a notable exception, and the Singapore and Philippines' stocks fell after the surprise tightening moves. Europe's Stoxx 600 is extending yesterday's 1% slide and is off around 0.8% in late morning turnover. The S&P and NASDAQ futures are trading lower. They have fallen in the first three sessions this week. The US 10-year yield is a few basis points higher around 2.96%. European benchmark yields are 8-18 bp higher, with Italian bonds getting hit by political concerns. But the peripheral premium more generally is widening. Gold is returning to its lows after being turned back from around $1750 yesterday. August WTI is trading at its lowest level in three months near $93.40. Higher gasoline prices in the US have… Read More »Market prices in more aggressive Fed and is more confident of rate cuts by the end 2023

Overview: The higher-than-expected US CPI and the strong expectation of a 100 bp hike by the Fed in two weeks is propelling the dollar higher. It jumped to almost JPY139.40 and the euro is off more than a cent from yesterday's high (though holding above parity). Even where there has been favorable economic news, like the strong jobs report in Australia, it failed to dent the greenback. Most of the large bourses in the Asia Pacific regions advanced. Hong Kong is a notable exception, and the Singapore and Philippines' stocks fell after the surprise tightening moves. Europe's Stoxx 600 is extending yesterday's 1% slide and is off around 0.8% in late morning turnover. The S&P and NASDAQ futures are trading lower. They have fallen in the first three sessions this week. The US 10-year yield is a few basis points higher around 2.96%. European benchmark yields are 8-18 bp higher, with Italian bonds getting hit by political concerns. But the peripheral premium more generally is widening. Gold is returning to its lows after being turned back from around $1750 yesterday. August WTI is trading at its lowest level in three months near $93.40. Higher gasoline prices in the US have… Read More »Market prices in more aggressive Fed and is more confident of rate cuts by the end 2023

Inflation spikes again confounding investors and policymakers. 100 basis point hike priced to near certainty before Waller and Bostic get all doveish. Recession is now priced to near certainty by money and commodity markets but not yet equities. Interesting to always note how the narrative is twisted to support exactly what the market wants to do. Last month the University of Michigan's Inflation expectations were cited by the Fed for its knee-jerk panic into hiking rates by 75 basis points. In the immediate aftermath, commentators pointed out how limited the survey is in its scope being based as it is on a few hundred survey responses. Now that the same survey this month shows a modest and it is very modest reduction, everyone is citing it as gospel. Inflation is cured, it's transitory, rally back on for risk assets. Excuse the sarcasm but we are not out of the woods by a long long long way. Equity markets are always the last ones to know and it looks like that feat is repeating itself if the latest developments are anything to go by. Inflation remains on fire and in fact rising and broadening its base. That broadening is the most… Read More »Week Ahead on Wall Street (SPX) (QQQ): Mr. Market prices inflation as transitory, we know how that worked out