Sive Morten
Special Consultant to the FPA
- Messages
- 22,093
Fundamentals
Almost the whole week markets were flat. It was a really challenge to find trading setup on EUR and Gold markets this week. But, nevertheless, the major event was Monday markets collapse, especially in Japan. Situation on EU and US markets was not as dramatic and on Tue it has become clear that it fits retracement scenario - fast, strong, but still, this is not a miserable plunge but controlled sell-off. And the rest of the week just confirmed this. Now financial sphere has become a victim ofGame of Thrones US political games. Fundamentally, the US economy is ready for collapse, liquidity is drying out and safety margin is almost exhaust, but global banker who has the real power in the country right now could endure the agony by liquidity injections to let Democrats to win elections. What ideas do they have in their heads - who knows... But currently all investors stand in uncomfortable situation when analysis and public data or major events don't help too much. In fact, bankers will decide what will happen - they could close liquidity and crush the markets if D. Trump, say, will get unchallengeable advantage, or, conversely provide some liquidity to postpone difficult times on after elections period. Personally, I do not believe that BoJ has independence in its decisions. I'm sure for 99% that it was agreed with the Fed and US Treasury. Japan and US has alike situation with debt and budget. I do not exclude the scenario suggesting that it was a kind of test, what will happen if tight the rate in current conditions on example of Japan. Of course, some monetary tasks also were on table and were resolved. But this situation clearly shows what will happen if the Fed keep the rate at high level or even will decide to raise it when next wave of inflation comes.
Market overview
A surge in the yen to a seven-month high led a broad dollar fall, as a slew of economic data last week raised the prospect of a U.S. economic downturn and bigger interest rate cuts from the Federal Reserve. Weaker-than-expected U.S. jobs data, along with disappointing earnings reports from large technology firms and heightened concerns over the Chinese economy, have sparked a global sell-off in stocks, oil and high-yielding currencies in the past week as investors sought the safety of cash. The selling continued on Monday, with U.S. Treasury yields falling further, stock indexes in the red, bitcoin dumped and the dollar losing ground.
The Japanese yen's surge comes as traders aggressively unwound carry trades. On Monday, Fed fund futures reflected traders pricing a near 100% chance of a 50 basis point cut at the central bank's September meeting, according to CME FedWatch. The market's aversion to risk was also seen in tighter spreads on U.S. interest rate swaps, futures on the Secured Overnight Financing Rate (SOFR) and the Federal funds rate along with surging U.S. junk bond spreads.
Institute for Supply Management (ISM) said on Monday that services sector activity rebounded from a four-year low in July with rising orders and employment, easing recession fears. Its non-manufacturing purchasing managers (PMI) index rose to 51.4 from 48.8 in June, ahead of economist expectations for 51.0. A PMI reading above 50 indicates growth in services, which accounts for more than two-thirds of the U.S. economy.
The U.S. dollar will claw back some of its recent losses over the coming three months on expectations financial markets have again gone too far in pricing in too many Federal Reserve interest rate cuts this year, a Reuters poll of foreign exchange strategists found. FX strategists in the monthly Reuters poll, conducted from Aug. 1-6 through recent market turmoil, predicted the euro , currently about $1.10, would fall about 1.4% to $1.08 by end-October, before rising to current levels in six months and then to $1.11 in a year.
The dollar rose on Thursday after new U.S. labor market data showed that unemployment benefits fell more than expected last week, easing fears of an imminent recession. Initial jobless claims fell to a seasonally adjusted 233,000 for the week ended Aug. 3, the Labor Department said on Thursday, suggesting fears that the labor market is unraveling were overblown. But it doesn't obstacle continues claims to stay on the high.
A summary of opinions voiced at the BOJ's July policy meeting showed on Thursday that some board members cited a need to keep raising interest rates, with one saying they should eventually be increased to at least around 1%. The contrasting opinions from the summary and Uchida on whether the BOJ will continue to raise rates, or pause as a result of market volatility, underscores the delicate task facing the central bank and will likely keep investors skittish.
Some analysts believe this unwinding in the carry trade may have further to run, and is possibly only halfway there, which could add to volatility. Even if the U.S. Federal Reserve does deliver a steep rate cut, as most traders are expecting in September, and the BOJ another increase, there would still be an incentive to use the yen to fund other trades. Investor focus will now be on the U.S. consumer price inflation report for July due next week, as well as comments by Fed Chair Jerome Powell at the central bank's Jackson Hole Economic Policy Symposium on Aug. 22-24.
Investor morale in the euro zone fell for a second consecutive month in August, a survey showed on Monday, dropping to its lowest level since January. The Sentix index for the euro zone fell to -13.9 points for August from -7.3 in July. Analysts polled by Reuters had expected it to drop to -8.0 this month. The index on expectations also saw a sharp drop, falling to -8.8 points from 1.5 in July, a figure that Sentix said was "likely to worry forecasters" as the already weak economic situation is set to deteriorate further over the next 6 months.
The survey said that investors were concerned about the fragile geopolitical situation, especially in the Middle East, upcoming German state elections and uncertainty over the U.S. presidential election later this year. Investor morale nosedived in Germany, Europe's largest economy, falling to -31.1 in August from -19.0 the previous month. The index on the current situation in Germany plummeted to -42.8 in August from -32.3 in July. The poll of 1,150 investors was conducted between Aug 1-3, Sentix said.
U.S. bank stocks slumped started Monday as fears of a recession sent investors fleeing from a sector closely tied to the health of the economy and toward safe-haven assets. Lenders typically feel the squeeze as recessions heighten concerns over credit losses due to higher unemployment. Loan demand - a key factor in profitability - also takes a beating.
The New York Federal Reserve said it accepted $316.246 billion submitted to its overnight reverse repo facility on Monday, the lowest since May 2021. Analysts said investors may have pulled their money from the reverse repo market and placed cash in the overnight repo market, where banks and financial firms such as hedge funds borrow short-term cash using Treasuries or other debt securities as collateral.
Investors are now bracing for Wednesday's U.S. consumer price data for a read on how inflation is faring in the world’s largest economy amid recent signs that growth is wobbling. Economists polled by Reuters expect both headline and core consumer prices rose 0.2% in July from a month earlier.
While Japan reports preliminary second-quarter growth figures on Thursday. So should Thursday's data point to a brighter outlook, Japanese policymakers can finally breathe a sigh of relief. A downside miss and they'd have to find more reasons to justify July's hike.
MESS AROUND YEN
Let's start from short intro to explain from where in general current situation comes. In fact, recent collapse of Japan stock market and fast close of carry trades on JPY is not a problem of just recent day. The energy for this was accumulated for considerable period of time, and now we see actually, the 1st break of the system. n fact, the American dollar has turned into a cannibal, which does not disdain the currencies of vassals and "allies" in order to maintain the liquidity of its own markets. A sharp rise in Fed rates causes the dollar to rise and sucks capital out of other markets.
Global financial markets are being held up by faith in the dollar and confidence in the Fed's monetary policy. The mass craze, if you will, is the idea that the authorities will be able to return to a more normal credit environment on a stable basis in the near future. The 2008 and 2020 crises were flooded with money printing and the era of ultra-low dollar rates led to a dramatic increase in global debt. Global liabilities ($300 trillion) are mostly denominated in US dollars. When you are forced to abandon credit because global growth is slowing and access to dollar financing is becoming very expensive, assets depreciate against the rising denominator ($).
The US economy accounts for ~25% of global GDP, but its status as the world's reserve currency (imperial privilege) ensures up to 85% of global trade settlements in dollars. The rise of the dollar puts enormous pressure on global trade and stimulates currency wars, since a stronger reserve currency leads to a sharp rise in the cost of imported resources and to the devaluation of national currencies (like JPY).
Billions of US Treasuries are being sold by countries that have been accumulating dollar reserves for years (Japan again). Now they must sell dollar assets to support their national currencies. If foreign central banks start selling US Treasuries, dollar rates rise, causing the dollar to strengthen again. This is why the next global recession is now starting to manifest itself through currency and debt markets, rather than through the traditional macro indicators of unemployment and GDP, which is artificially overestimated by fake (low) inflation. The speed with which they are breaking down is breathtaking.
As we've said, the Monday shock was caused by the fact that the carry trade between the dollar and the yen partially unraveled. There were two factors - a tiny rate hike by the Bank of Japan (the difference between the Fed and the BOJ rates fell from 5.4% to 5.25%) and the strengthening of the yen, which turned into, so to speak, a cascade strengthening due to the closing of dollar positions and a return to the yen.
A rate cut of, say, 0.5% by the Fed would only make things worse because it would further reduce the rate differential to 4.75%, leading to continued carry trade closing and an even stronger yen strengthening, which would start the same cycle all over again.
The Fed cannot help but understand this, so if the rate is lowered, it will only be counting on this. But we return to the same question - whose side is the Bank of Japan playing on. I mean for the Fed or for itself. Based on what was said above, if the Fed has a goal to keep the rate without lowering for as long as possible, then the Bank of Japan is playing on the side of the Fed. True, the markets will not be torn to shreds yet, but the very "cooling" that the Fed needs, this gap already implies, if you look at history.
That's why The Bank of Japan voltes face... the deputy head of the Bank of Japan has given a signal that they will not rush to raise the rate.
The same we could say about BoJ. As the Fed, they cannot really increase it while the ceiling of their capabilities is limited to 0.5%, which, one way or another, will mean maintaining a negative real rate in the long term, regardless of the inflation dynamics, and therefore maintaining incentives to return to the carry trade over a longer horizon. In the meantime, it seems that those who overdid it with risks in these games have been “off-loaded”. And it seems that major concentration of positions were in AI and High tech US stocks.
In fact Japan has only one way via three options:
Whether these losses will become fuel for the process to become a cycle (losses generate sales, which generate losses, which ... in a circle) - the question is still rather open. And whether it will break someone big, which will trigger a crisis of mistrust in the financial system, a liquidity crisis - is also a question, since no one understands the allocation and concentration of risks in individual segments of the financial system to a sufficient extent. But this is in no way connected with the risks of a recession at the current moment, although it can trigger/accelerate it.
the market lives with very large leverage and can really break down anywhere from such flights, and after such a rise in volatility, some market participants will be forced to cut risks/leverage by reducing positions, which will create conditions and inertia for the process to continue.
JP Morgan was rush to state that carry trade unwind is finished for 75%. Although just recently they talked about just 50%. Besides, we barely believe that trillion positions could be unwound in just a single session. Also, as we've said in the beginning, it is naive to think that BoJ did it without consultation with the US, taking in consideration how fast they blow down their interventions by US dissatisfaction.
Speaking about technical levels, now it seems that 140 becomes the key one. Breaking it down opens road to 120 and probably will trigger another sell-off.
BACK TO THE FED
Meantime, what the Fed is preparing to us... So, in last three years nation debt has increased for 30%. And only lazy person has not said about it yet. Everybody knows this. But this information is less known but nevertheless very interesting. Public debt stands around $17+ Trln. It is obvious that it could move only in one direction - up.
The growing debt must be constantly fed by someone with a new influx of currency. In conditions when the Federal Reserve cannot turn on the printing press, this burden falls on the financial institutions of the United States itself and its satellite countries. The satellites cannot withstand it - the Japanese financial system was the first to go down the drain. Perhaps, stress is ahead for European financiers, but most likely it will not come to that. In the near future, the anti-crisis will turn on the Federal Reserve and flood all the problems with a new portion of freshly printed dollars.
When choosing between inflation and the collapse of the dollar pyramid, the choice is obvious. The only question is how quickly the Fed reacts. Actually we talked about it last time - until global bankers believe to hold the power, they will not let markets to fall. And - bingo! QE is coming. Janet Yellen's madness knows no bounds:
Indeed, this has been known since last spring. But no one thought that Yellen would close the insane US deficit with a large-scale issue of bills [about the role of the Treasury as a hedge fund for democrats]. But one came true - So by the time Yellen launches Treasury QE, the Fed will already be in the next easing cycle. This just confirms how serious the situation is. Crescat comments:
On the bond market situation hardly looks better. Don't be deceived recent "safe haven" rally, it is about different thing. But take a look at new debt issues. The other day there were two auctions of US Treasury bonds (10y and 30y issues) from Yellen - one worse than the other ( the news of the day is that ). Zero Hedge comments:
The tail of the second auction of 30-year bonds reached 3.1 bps, the highest since November [a measure of demand for the issue, indicating low demand]. Foreigners bought only 65% of the issue. Primary dealers had to buy 19% of the issue. This is worst results since Covid time. An alarm bell in terms of real market demand for the long end of the Finance Ministry's " toxic" debt.
Almost the whole week markets were flat. It was a really challenge to find trading setup on EUR and Gold markets this week. But, nevertheless, the major event was Monday markets collapse, especially in Japan. Situation on EU and US markets was not as dramatic and on Tue it has become clear that it fits retracement scenario - fast, strong, but still, this is not a miserable plunge but controlled sell-off. And the rest of the week just confirmed this. Now financial sphere has become a victim of
Market overview
A surge in the yen to a seven-month high led a broad dollar fall, as a slew of economic data last week raised the prospect of a U.S. economic downturn and bigger interest rate cuts from the Federal Reserve. Weaker-than-expected U.S. jobs data, along with disappointing earnings reports from large technology firms and heightened concerns over the Chinese economy, have sparked a global sell-off in stocks, oil and high-yielding currencies in the past week as investors sought the safety of cash. The selling continued on Monday, with U.S. Treasury yields falling further, stock indexes in the red, bitcoin dumped and the dollar losing ground.
The Japanese yen's surge comes as traders aggressively unwound carry trades. On Monday, Fed fund futures reflected traders pricing a near 100% chance of a 50 basis point cut at the central bank's September meeting, according to CME FedWatch. The market's aversion to risk was also seen in tighter spreads on U.S. interest rate swaps, futures on the Secured Overnight Financing Rate (SOFR) and the Federal funds rate along with surging U.S. junk bond spreads.
Institute for Supply Management (ISM) said on Monday that services sector activity rebounded from a four-year low in July with rising orders and employment, easing recession fears. Its non-manufacturing purchasing managers (PMI) index rose to 51.4 from 48.8 in June, ahead of economist expectations for 51.0. A PMI reading above 50 indicates growth in services, which accounts for more than two-thirds of the U.S. economy.
The U.S. dollar will claw back some of its recent losses over the coming three months on expectations financial markets have again gone too far in pricing in too many Federal Reserve interest rate cuts this year, a Reuters poll of foreign exchange strategists found. FX strategists in the monthly Reuters poll, conducted from Aug. 1-6 through recent market turmoil, predicted the euro , currently about $1.10, would fall about 1.4% to $1.08 by end-October, before rising to current levels in six months and then to $1.11 in a year.
The dollar rose on Thursday after new U.S. labor market data showed that unemployment benefits fell more than expected last week, easing fears of an imminent recession. Initial jobless claims fell to a seasonally adjusted 233,000 for the week ended Aug. 3, the Labor Department said on Thursday, suggesting fears that the labor market is unraveling were overblown. But it doesn't obstacle continues claims to stay on the high.
A summary of opinions voiced at the BOJ's July policy meeting showed on Thursday that some board members cited a need to keep raising interest rates, with one saying they should eventually be increased to at least around 1%. The contrasting opinions from the summary and Uchida on whether the BOJ will continue to raise rates, or pause as a result of market volatility, underscores the delicate task facing the central bank and will likely keep investors skittish.
Some analysts believe this unwinding in the carry trade may have further to run, and is possibly only halfway there, which could add to volatility. Even if the U.S. Federal Reserve does deliver a steep rate cut, as most traders are expecting in September, and the BOJ another increase, there would still be an incentive to use the yen to fund other trades. Investor focus will now be on the U.S. consumer price inflation report for July due next week, as well as comments by Fed Chair Jerome Powell at the central bank's Jackson Hole Economic Policy Symposium on Aug. 22-24.
Investor morale in the euro zone fell for a second consecutive month in August, a survey showed on Monday, dropping to its lowest level since January. The Sentix index for the euro zone fell to -13.9 points for August from -7.3 in July. Analysts polled by Reuters had expected it to drop to -8.0 this month. The index on expectations also saw a sharp drop, falling to -8.8 points from 1.5 in July, a figure that Sentix said was "likely to worry forecasters" as the already weak economic situation is set to deteriorate further over the next 6 months.
The survey said that investors were concerned about the fragile geopolitical situation, especially in the Middle East, upcoming German state elections and uncertainty over the U.S. presidential election later this year. Investor morale nosedived in Germany, Europe's largest economy, falling to -31.1 in August from -19.0 the previous month. The index on the current situation in Germany plummeted to -42.8 in August from -32.3 in July. The poll of 1,150 investors was conducted between Aug 1-3, Sentix said.
U.S. bank stocks slumped started Monday as fears of a recession sent investors fleeing from a sector closely tied to the health of the economy and toward safe-haven assets. Lenders typically feel the squeeze as recessions heighten concerns over credit losses due to higher unemployment. Loan demand - a key factor in profitability - also takes a beating.
The New York Federal Reserve said it accepted $316.246 billion submitted to its overnight reverse repo facility on Monday, the lowest since May 2021. Analysts said investors may have pulled their money from the reverse repo market and placed cash in the overnight repo market, where banks and financial firms such as hedge funds borrow short-term cash using Treasuries or other debt securities as collateral.
Investors are now bracing for Wednesday's U.S. consumer price data for a read on how inflation is faring in the world’s largest economy amid recent signs that growth is wobbling. Economists polled by Reuters expect both headline and core consumer prices rose 0.2% in July from a month earlier.
While Japan reports preliminary second-quarter growth figures on Thursday. So should Thursday's data point to a brighter outlook, Japanese policymakers can finally breathe a sigh of relief. A downside miss and they'd have to find more reasons to justify July's hike.
MESS AROUND YEN
Let's start from short intro to explain from where in general current situation comes. In fact, recent collapse of Japan stock market and fast close of carry trades on JPY is not a problem of just recent day. The energy for this was accumulated for considerable period of time, and now we see actually, the 1st break of the system. n fact, the American dollar has turned into a cannibal, which does not disdain the currencies of vassals and "allies" in order to maintain the liquidity of its own markets. A sharp rise in Fed rates causes the dollar to rise and sucks capital out of other markets.
Global financial markets are being held up by faith in the dollar and confidence in the Fed's monetary policy. The mass craze, if you will, is the idea that the authorities will be able to return to a more normal credit environment on a stable basis in the near future. The 2008 and 2020 crises were flooded with money printing and the era of ultra-low dollar rates led to a dramatic increase in global debt. Global liabilities ($300 trillion) are mostly denominated in US dollars. When you are forced to abandon credit because global growth is slowing and access to dollar financing is becoming very expensive, assets depreciate against the rising denominator ($).
The US economy accounts for ~25% of global GDP, but its status as the world's reserve currency (imperial privilege) ensures up to 85% of global trade settlements in dollars. The rise of the dollar puts enormous pressure on global trade and stimulates currency wars, since a stronger reserve currency leads to a sharp rise in the cost of imported resources and to the devaluation of national currencies (like JPY).
Billions of US Treasuries are being sold by countries that have been accumulating dollar reserves for years (Japan again). Now they must sell dollar assets to support their national currencies. If foreign central banks start selling US Treasuries, dollar rates rise, causing the dollar to strengthen again. This is why the next global recession is now starting to manifest itself through currency and debt markets, rather than through the traditional macro indicators of unemployment and GDP, which is artificially overestimated by fake (low) inflation. The speed with which they are breaking down is breathtaking.
As we've said, the Monday shock was caused by the fact that the carry trade between the dollar and the yen partially unraveled. There were two factors - a tiny rate hike by the Bank of Japan (the difference between the Fed and the BOJ rates fell from 5.4% to 5.25%) and the strengthening of the yen, which turned into, so to speak, a cascade strengthening due to the closing of dollar positions and a return to the yen.
A rate cut of, say, 0.5% by the Fed would only make things worse because it would further reduce the rate differential to 4.75%, leading to continued carry trade closing and an even stronger yen strengthening, which would start the same cycle all over again.
The Fed cannot help but understand this, so if the rate is lowered, it will only be counting on this. But we return to the same question - whose side is the Bank of Japan playing on. I mean for the Fed or for itself. Based on what was said above, if the Fed has a goal to keep the rate without lowering for as long as possible, then the Bank of Japan is playing on the side of the Fed. True, the markets will not be torn to shreds yet, but the very "cooling" that the Fed needs, this gap already implies, if you look at history.
That's why The Bank of Japan voltes face... the deputy head of the Bank of Japan has given a signal that they will not rush to raise the rate.
The same we could say about BoJ. As the Fed, they cannot really increase it while the ceiling of their capabilities is limited to 0.5%, which, one way or another, will mean maintaining a negative real rate in the long term, regardless of the inflation dynamics, and therefore maintaining incentives to return to the carry trade over a longer horizon. In the meantime, it seems that those who overdid it with risks in these games have been “off-loaded”. And it seems that major concentration of positions were in AI and High tech US stocks.
In fact Japan has only one way via three options:
- The Bank of Japan continues to print endless amounts of yen to maintain yield caps on bonds - this will inevitably lead to a currency crisis and uncontrolled inflation;
- Release yields to go at 225% debt to GDP means each 1% increase in interest rates would cost about 3.7 trillion yen in interest payments. New debt would of course continue to be bought by the BOJ (see option 1).
- Harakiri.
Whether these losses will become fuel for the process to become a cycle (losses generate sales, which generate losses, which ... in a circle) - the question is still rather open. And whether it will break someone big, which will trigger a crisis of mistrust in the financial system, a liquidity crisis - is also a question, since no one understands the allocation and concentration of risks in individual segments of the financial system to a sufficient extent. But this is in no way connected with the risks of a recession at the current moment, although it can trigger/accelerate it.
the market lives with very large leverage and can really break down anywhere from such flights, and after such a rise in volatility, some market participants will be forced to cut risks/leverage by reducing positions, which will create conditions and inertia for the process to continue.
JP Morgan was rush to state that carry trade unwind is finished for 75%. Although just recently they talked about just 50%. Besides, we barely believe that trillion positions could be unwound in just a single session. Also, as we've said in the beginning, it is naive to think that BoJ did it without consultation with the US, taking in consideration how fast they blow down their interventions by US dissatisfaction.
Speaking about technical levels, now it seems that 140 becomes the key one. Breaking it down opens road to 120 and probably will trigger another sell-off.
BACK TO THE FED
Meantime, what the Fed is preparing to us... So, in last three years nation debt has increased for 30%. And only lazy person has not said about it yet. Everybody knows this. But this information is less known but nevertheless very interesting. Public debt stands around $17+ Trln. It is obvious that it could move only in one direction - up.
The growing debt must be constantly fed by someone with a new influx of currency. In conditions when the Federal Reserve cannot turn on the printing press, this burden falls on the financial institutions of the United States itself and its satellite countries. The satellites cannot withstand it - the Japanese financial system was the first to go down the drain. Perhaps, stress is ahead for European financiers, but most likely it will not come to that. In the near future, the anti-crisis will turn on the Federal Reserve and flood all the problems with a new portion of freshly printed dollars.
When choosing between inflation and the collapse of the dollar pyramid, the choice is obvious. The only question is how quickly the Fed reacts. Actually we talked about it last time - until global bankers believe to hold the power, they will not let markets to fall. And - bingo! QE is coming. Janet Yellen's madness knows no bounds:
Indeed, this has been known since last spring. But no one thought that Yellen would close the insane US deficit with a large-scale issue of bills [about the role of the Treasury as a hedge fund for democrats]. But one came true - So by the time Yellen launches Treasury QE, the Fed will already be in the next easing cycle. This just confirms how serious the situation is. Crescat comments:
On the bond market situation hardly looks better. Don't be deceived recent "safe haven" rally, it is about different thing. But take a look at new debt issues. The other day there were two auctions of US Treasury bonds (10y and 30y issues) from Yellen - one worse than the other ( the news of the day is that ). Zero Hedge comments:
The tail of the second auction of 30-year bonds reached 3.1 bps, the highest since November [a measure of demand for the issue, indicating low demand]. Foreigners bought only 65% of the issue. Primary dealers had to buy 19% of the issue. This is worst results since Covid time. An alarm bell in terms of real market demand for the long end of the Finance Ministry's " toxic" debt.
