The Market Is A Harsh Mistress


Financial markets have given some stern lessons to the accepted story this week. Having been merrily unaware of U.S. inflation since the FOMC, the renaming of interim inflation pigeon, Jerome Powell, to the Federal Reserve Chairman has seen long-term bond yields rise this week. Markets are now battling for a faster Fed decline and earlier rates.

Oil jumps despite SPR release

Overnight, it was the turn of U.S. President Biden to receive a similar lesson. Markets thanked Mr. Biden for his early signal of an SPR oil release, picking up his pants and sending oil more than 3.0% higher overnight, after the President formally announced a release, along with other countries, totaling between 70 and 80 million of barrels. The devil is in the detail of course. The edition will be dropped gradually over the coming months. Considering that there is no way President Biden can interpret the current level of oil prices as a supply disruption, it is just a market with rising prices; this limits his ability to release more oil. The nightly announcement was a one-shot marvel, and markets responded appropriately. OPEC + refused to be worried, but I don’t expect them to fly too close to the sun and reduce their planned 400,000 bpd increase next month.

Today, the Reserve Bank of New Zealand raised its policy rate from 0.25% to 0.75% and signaled that interest rates have seen their declines. I would argue that we have seen the lows globally, and not just in New Zealand. The RBNZ signaled a steady rate of upward rise, but instead of rallying, the New Zealand dollar is 0.50% lower at 0.6915. This was despite the government announcing a relaxation of its totalitarian quarantine requirements for foreign visitors (and citizens), which should also be seemingly bullish. The street was priced at 0.25% and, like me, was probably looking for 0.50% to be significant.

Despite inflation concerns rising in the U.S. as if it were a new and critical development, gold is now about $ 90 an ounce lower than a week ago, at $ 1794.00 this morning. Bitcoin continues to look shaky as well. Both are supposedly inflationary hedges and so should surpass in this environment, both have pushed a stronger US dollar recently. I would argue that however, that gold, and perhaps infinitely, bitcoin, is just inflationary hedges when inflation really heats up and real yields collapse. That is not the case today. U.S. pre-term yields have risen in recent weeks in response, flattening the curve, and long-term yields have now begun to play a rebound. A faster Fed downgrade, eliminating QE repression, will help this process.

Technology stocks were under pressure this week and rising U.S. bond yields (and yields elsewhere), lie behind the concern. Technology valuations have long been suborbital, and they are thus more vulnerable to an upward adjustment of interest rates. It’s hard to justify paying 14285 P / E with a yield between -1.50% to 1.50% when you might be able to earn 2.0% with a “risk-free” U.S. government bond after a few months. I don’t call it the pinnacle in technology, moreover, there are a few oligopolies out there in space that will remain money-making machines. If the yield on U.S. bonds continues to rise, those of us, mere mortals, may finally be able to consider buying the dip, a real dip. Inheritance sectors, such as banking and energy and resources, should theoretically outperform in this environment.

Korean earnings held steady this week as other regional currencies weakened against the powerful dollar and higher U.S. yields. My reasoning behind upcoming Asian FX weakness is well documented in past notes, so I won’t repeat myself again. I believe the gain has remained firm as the Bank of Korea is expected to raise policy rates by 0.25% tomorrow. I think, however, that it will play a catch-up and have a kiwi moment if the rise is less than or equal to 0.25% because like oil, gold and kiwi, the news is priced. Markets are covering their bets right now in case there is a surprise.

The buy / sell of the rumor, buy / sell of the fact (depending on the asset class), price action this week can be traced back to one occasion, the sudden jump in the US 30-year yield this week, and to a lesser extent. , the 10-year yield. For evidence, take a look at the rally in USD / JPY, the world’s leading yield differential. USD / JPY surpassed 115.00 this week, a 45-month high according to my calculations, although I ran out of toes and toes to count and the kitten sleeping next to me refused to provide her feet. I will just add that the Japanese Ministry of Finance does not intend to intervene in USD / JPY at these levels, so let’s put that to bed now. Call me back when we get to 135.00.

Until long-dated U.S. yields begin to reverse their recent gains, and the author has long believed that this is not a given, we should not expect an end to the U.S. dollar, nor should we be excited about stock markets for the rest of this. a month and maybe until Christmas. The FOMC Minutes tonight could bring comfort if they have a dovish tone; my bet is that they won’t and that the FOMC members are as divided as the U.S. Congress on the next performance. US GBP Q3 valuation tonight is old news, but Durable Goods and Personal Income and Expenditure should be good for some volatility. If anything, markets are more vulnerable to the data reflecting more inflationary pressures, especially if Personal Income exceeds 0.50% for October.

Germany’s IFO this afternoon may bolster Covid-19’s euro deterioration if it is weaker than expected. Currently, the affairs of Europe are being pushed by the focus of events in US markets and are unlikely to materially impact energy prices, for example, this week, without a halt from German and / or France, partial or otherwise. Tomorrow is Silence of the Day of the Pomegranates in the United States, and I expect most Americans to make a long weekend of it. Thus, in an act of famous last words, I expect markets in Asia to be particularly buoyant by the end of the week.



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