On Currency Watch Following Melt-up Q1
Doug Nolan
Another remarkable quarter.
Financial conditions loosened further, building on the Fed’s Q4 dovish pivot.
The spectacular risk asset melt-up was ongoing.
From October 26th lows to March highs, the Semiconductors rallied 65%, the KBW Bank Index 47%, the NYSE Arca Computer Technology Index 39%, the small cap Russell 2000 31%, the Nasdaq100 30%, and the S&P500 28%.
Bitcoin ended the quarter up 159% from October lows, trading at a record high on March 14th ($73,798).
For the quarter, the S&P500 returned (price and dividends) 10.55% – the “best first quarter since 2019.”
Super Micro Computer led the gainers, surging 255%.
Nvidia jumped 82%, Micron Technology 38%, and Meta Platforms 37%.
The Semiconductor Index (SOX) returned 17.76%, the Nasdaq Composite 9.32%, and the Nasdaq100 8.72%.
The NYSE Arca Oil Index returned 16.44%, the Nasdaq Insurance Index 15.39%, the NYSE Arca Computer Technology Index 15.01%, the Nasdaq Transports 11.61%, and the NYSE TMT Index 10.55%.
While 10-year Treasury yields jumped 32 bps during Q1 to 4.20%, corporate Credit notably outperformed.
Investment-grade spreads to Treasuries traded down to 88 bps late in the quarter, the narrowest risk premium since November 2021 – and within seven bps of the low back to 2005.
High yield spreads dropped to 2.92 percentage points, the narrowest since January 2022.
Corporate debt issuance was nothing short of phenomenal.
March 28 – Bloomberg (Caleb Mutua):
“The primary US investment-grade corporate bond market logged its busiest first quarter on record, super-charged by investors clamoring for high yields before the Federal Reserve starts cutting interest rates.
Blue-chip firms have capitalized on robust investor demand to borrow a record $529.5 billion this year through Wednesday, far outpacing the previous high of $479 billion in the first three months of 2020…
Sales hit a record in January and February and March issuance of $142.2 billion has exceeded expectations.”
Loose conditions fueled an M&A renaissance.
March 28 – Reuters (Anirban Sen and Anousha Sakoui):
“Mergers and acquisitions (M&A) bounced back in the first quarter after a downbeat 2023…
Total M&A volumes globally climbed 30% to about $755.1 billion, according to… Dealogic.
The number of transactions worth more than $10 billion jumped to 14, compared with five during the same period last year…
U.S. M&A volumes surged 59% to $431.8 billion.
European deals jumped 64%, while Asia Pacific volumes slumped 40%.”
March 28 – Financial Times (Ivan Levingston):
“Blockbuster deals more than doubled in the first quarter of this year, signalling a nascent recovery in the mergers and acquisitions market following a lengthy drought.
The number of takeovers worth at least $10bn jumped in the first three months of 2024 compared with the same period last year, driven by large US deals in the energy, tech and financial sectors…
Eleven such transactions, with a total value of $215bn, were struck during the quarter, up from five takeovers worth a combined $100bn in the first three months of 2023.”
The allure of bubbling securities markets – and the premise of “U.S. exceptionalism” - underpinned the U.S. currency.
The Dollar Index gained 3.1%.
The Japanese yen declined 6.8%, the Swiss franc 6.7%, the Norwegian krone 6.0%, the Swedish krona 5.5%, and the New Zealand dollar 5.4%.
In the face of dollar strength, commodities more than held their own.
Crude jumped 16%, with WTI ending the quarter ($83.17) within striking distance of two-year highs.
Unleaded Gasoline futures surged 29%, while Natural Gas sank 30%.
Outside of energy, the precious metals were the stellar performer in the commodities arena.
Gold surged $167, or 8.1%, to an all-time high $2,230.
Silver jumped 4.9% to $24.96.
WSJ: “What’s Next for Gold?
Look to China for Clues.”
Bloomberg:
“China Splurges on Gold for a 16th Month as Price Hits Record,” and “Gold Beans All the Rage With China’s Gen Z as Deflation Bites.”
Bitcoin surged 64% during the quarter, with Ethereum gaining 53% and Binance Coin 95%.
Having started trading on January 11th, the iShares Bitcoin ETF rose 52%.
Outstanding Commercial Paper expanded $80 billion, or 25% annualized, to $1.350 TN – the high back to 2009.
Meanwhile, the historic inflation in money market assets was ongoing.
Money Market Fund assets jumped another $154 billion, or 10% annualized, during the quarter to $6.041 TN.
Money Fund Assets ballooned almost $1.5 TN over the past 18 months.
Q4 ended with the market expecting at least six 2024 rate cuts (158bps), with expectations approaching seven (168bps) cuts at January 12th rate lows.
But loose conditions extended the economic boom, with ongoing robust demand and tight labor markets helping solidify sticky inflation.
Both January and February CPI reports posted upside inflation surprises.
At quarter’s end, fading market rate expectations (67bps) had more closely aligned with the “dot plot’s” three cuts.
It’s worth noting that the Fed’s balance sheet contracted $228 billion during the quarter to $7.485 TN – back to the level from three years ago, but still about 80% larger than pre-pandemic levels.
With leveraged speculation in its heyday, we can assume the Fed’s liquidity withdrawal is a mere drop in the global liquidity bucket.
A European debt market report from Reuters last week estimated that “hedge funds have been buying between 20% to more than 50% of auctions in some instances.”
It’s a global phenomenon.
Leveraged speculation is surely behind liquidity abundance in debt auctions across the globe.
I’ll assume “basis trade” leverage continues to inflate, with “carry trade” leverage key to booming corporate debt markets from the U.S. to Europe, Asia, and EM.
In all the euphoria, it’s easy for markets to overlook fledgling late-quarter currency market instability.
I don’t expect the BOJ’s timid little mini-baby step rate increase - with assurances of ongoing highly accommodative monetary policy and government bond support - to suffice.
March 27 – Bloomberg (Masaki Kondo, Erica Yokoyama and Yumi Teso):
“Japan had its toughest warning yet for traders on its willingness to intervene in currency markets after the yen slid to its weakest level in about 34 years against the dollar.
The nation’s currency dipped to 151.97 versus the greenback early on Wednesday in Tokyo — beyond the level at which policymakers stepped in during October 2022 — before comments from government officials on their readiness to act boosted the yen to its strongest level of the day.
‘We are watching market moves with a high sense of urgency,’ Finance Minister Shunichi Suzuki said.
‘We will take bold measures against excessive moves without ruling out any options.’”
March 29 – CNBC (Erica Yokoyama and Emi Urabe):
“Japan’s top currency official said recent yen weakness is odd and out of line with current economic fundamentals, reaffirming his commitment to act if needed to prevent excessive swings in the exchange rate.
‘I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,’ said Masato Kanda, vice finance minister for international affairs…
‘Many people think the yen is now moving in the opposite direction of where it should be going.’”
Japan’s delusional officials will be tested.
The world has changed.
It’s now an elevated inflation, policy rates, and market yields environment.
It is the Japanese policy rate that is today out of line with fundamentals – not yen weakness.
Deluded Beijing officials make their Japanese adversaries appear rational.
The plan remains to grow the Chinese economy at an unfailing 5%, zealously push the development of Xi’s “new quality productive forces,” secure the renminbi as a dominant global currency, and cement China’s superpower economic and military status.
I’ll assume colossal overinvestment in apartments will be followed by massive overcapacity in batteries, EVs, solar panels, semiconductors, artificial intelligence, quantum computing, big data, surveillance, etc.
Such lofty ambitions ensure another year of Credit growth surpassing $5 TN.
Meanwhile, with the ongoing eruption of one of history’s most spectacular speculative Bubbles, lava is creeping ever closer to China’s bloated banking system.
It’s all unfolding as one hell of a challenge, especially for the great Chinese meritocracy of one.
March 27 – Reuters (Joe Cash):
“China’s President Xi Jinping met American business leaders at the Great Hall of the People in Beijing on Wednesday, as the government tries to woo back foreign investors and international firms seeking reassurance about the impact of new regulations.
Beijing wants to boost growth of the world's second largest economy after foreign direct investment shrank 8% in 2023…”
I daydream of touring the Forbidden City as a member of the U.S. business delegation.
Over a lovely dinner of dumplings, Peking roasted duck and room-temperature Tsingtao, just soaking up the propaganda, I politely raise my hand: “Mr. Xi, we would be interested in hearing more about your devoted ‘no limits’ partnership with ‘dear friend’ Vladimir Putin.”
Xi Jinping is hell bent on achieving his objectives.
It has been an incredible consolidation of power, with Xi arguably the most powerful individual alive on this planet.
Yet there are financial realities.
There are economic realities.
There are glaring shortfalls in understanding and experience with all things Bubble-related.
Xi’s astonishing powerplay does not circumvent late-cycle Credit, speculative and economic dynamics.
Perhaps more pressing, Team Xi cannot indefinitely control global currency markets.
Unprecedented non-productive Credit growth, a bursting real estate Bubble, acute financial fragilities, epic financial and economic maladjustment, and waning (domestic and international) confidence are incompatible with a stable currency.
If Q1 was the quarter of market melt-ups, Q2 has potential to mark the onset of currency market instability.
The Fed has certainly done its part.
With predictable results, signaling rate cuts with inflation elevated and markets melting up has underpinned higher for longer and heightened the allure of U.S. assets.
This has supported ongoing wide interest-rate differentials versus Japan and China (in particular) and bolstered the dollar.
The currency instability demon may have been unleashed last week.
March 25 – Bloomberg:
“China’s central bank reinforced its support for the under-pressure yuan by strengthening its daily reference rate for the managed currency by the most since January.
The People’s Bank of China shifted its fixing by 0.1% with traders still on tenterhooks after the yuan sank to its weakest since November on Friday.
The currency rose as much as 0.2% in offshore trading…
The PBOC faces the difficult task of keeping its currency stable while trying to both maintain supportive monetary policy for a sputtering economy and keep a lid on capital outflows.”
Market will test the BOJ, and we can assume Japanese officials will come out guns-a-blazing.
I expect this series of interventions will begin to reveal the inflation that has taken place in the amount of intervention now required to move markets (foreshadowing the inevitable return of global QE).
And I would not be surprised if nascent currency turmoil has the market setting its sights on the vulnerable renminbi.
We’ve already seen over the past week or so how currency pegs can quickly turn problematic.
History in this regard is not comforting.
By this time, the big Chinese banks must be loaded with currency derivative exposures.
It’s worth noting that China’s sovereign CDS and major bank CDS were up again this week – having now risen to highs since last November.
Understandably, market currency nervousness is quickly transmitted to Chinese CDS.
The market wants to cling to the belief that Beijing has everything well under control.
But when currency confidence starts to wane, a sliver of doubt creeps in that as goes the currency, so goes control over Credit, the banking system and economy.
March 28 – Bloomberg (David Finnerty):
“Yen watchers are pointing to 152 per dollar as the next key level for the beleaguered currency.
Options positions threaten to accelerate losses for the yen, should it weaken beyond that mark.
On the flip side, such a move may also be the trigger for Japanese authorities to intervene to support the currency, strategists say.
Hedge funds are estimated to have billions of dollars in derivatives that are currently profitable and continue to rise in value the nearer the yen gets to 152 — but evaporate if that barrier is crossed.
A selloff in the yen would then be at risk of accelerating as such traders race to cover short dollar-yen positions linked to the original options.”
For posterity, former Fed Governor (and often named future Fed Chair candidate) Kevin Warsh was interviewed Monday by CNBC’s Becky Quick:
“Process matters.
Institutions matter.
I’m a little less impressed about the strength of the U.S. economy today.
The Treasury Department, the Federal Reserve – for the best of intentions, I’m sure – are goosing this economy…
Massive government deficits at times of prosperity.
A Fed promising to cut rates even as asset prices are melting up - looser policy.
The rest of the world, especially our allies and adversaries, look at us, and maybe they’re impressed by GDP growth.
Maybe they’re impressed by the stock market.
But I wouldn’t say they’re overly impressed by the U.S. economic engine.
The engine seems like it’s being stimulated even at a time of full employment.”
“The first thing I’d suggest is that the 19 people around the table spend more time thinking about – and describing – what are the factors that can affect inflation.
I’ll say I’m a little puzzled by what their framework really is.
We were led to believe last year that inflation was really services inflation and wage inflation.
The new index they trotted out showed that services ex-housing is growing above 4%, so we haven’t heard about that for a while.
Listen, I am sympathetic to their challenge in trying to navigate this economy as the world is on fire.
But I think pre-committing, as they do in these series of dots – each person saying how many times they’d cut three, six, nine months from now – I think it’s deeply counterproductive.
Now, for financial markets, it productive.
Asset prices are melting up.
But they’re taking big risks with inflation.
So, if you’re living off your W2 income, they’re asking for inflation to move back higher.
And I think some of the data suggests it is.
But, of course, if you have a large balance sheet this is all a ‘great parting’.
But ultimately what happens to hard working Americans matters more.”
0 comments:
Publicar un comentario