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The Dollar: Too Much of a Good Things or Bear-Trap Profit-Taking Ahead of the Weekend?

It was a dramatic week in the capital markets. Equities and commodities got hit hard while the dollar soared, especially against the major currencies typically seen as levered to world growth and whose central banks are perceived to be ahead of the Federa

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It was a dramatic week in the capital markets. Equities and commodities got hit hard while the dollar soared, especially against the major currencies typically seen as levered to world growth and whose central banks are perceived to be ahead of the Federal Reserve.  These include the dollar-bloc currencies and the Norwegian krone.  The RBNZ held off its rate hike amid a virus-induced lockdown. Nevertheless, Governor Orr made it clear a rate hike was still necessary, most likely for the next meeting on October 5.  On the other hand, Norway's central bank confirmed it was on track to hike next month.  Nevertheless, the Norwegian krone, Australian and New Zealand dollars fell over 2.5%-32% last week, the biggest decline so far this year.  

The greenback gained against nearly all the emerging market currencies.  The Brazilian real and South African rand were the weakest, depreciating by about 2.5% and 3.7%, respectively.  The JP Morgan Emerging Market Currency Index fell every day last week for a cumulative loss of nearly 1.2%, the largest in two months.  It was the sixth decline in the past eight weeks.  

There seemed to be two overriding drivers. First, the Fed confirmed what many participants have long thought.  Tapering will likely begin later this year, barring a fresh significant shock.  Although some observers may disagree that this has been the dominant view, the fact of the matter is that the short-end of the curve hardly changed in response to those FOMC minutes.  The implied yield of the June and December Fed funds futures were barely changed last week.  The latter has a hike fully discounted and the former, nearly so.  

The second driver is the spread of the pathogen.  Some observers mock New Zealand, which instituted a nationwide lockdown on discovering a single case, though several other cases have been reported.  However, the "just live with it" mantra works if many people have been vaccinated. Unfortunately, this is not the case in New Zealand and many other countries outside of North America and Western Europe.  That said, Japan is coming on strong and could surpass the US inoculations proportionately by the end of next month. However, the vaccine hesitancy in the US has eased in the face of the surge, which in a handful of states has seen ICU capacity nearly exhausted.  

Dollar Index:  The Dollar Index reached its best level since early November last week, a little below 93.75.  The high was set ahead of the weekend before it succumbed to a bout of profit-taking that snapped the winning streak at four and put in a possible bearish shooting star candlestick.  Still, the roughly1.0% gain was the best weeks of the year.  The high from around the US election last year was set near 94.30, and the (38.2%) retracement objective of the slide from the pandemic peak in March 2020 (~103.00) is found closer to 94.50.  Technically, it looks stretched, flirting with the upper Bollinger Band (~93.65).  However, while the momentum indicators are elevated, they have not begun turning lower.  That said, a break of 93.10-93.20 area would be the first sign that the bulls may be tiring.  

Euro:  The euro fell below $1.1700 for the first time in nine months last week.  The week's high was set on Monday just above $1.18, and it held above $1.17 until the middle of the week, and despite intraday penetration, it still closed back above that threshold.  Nevertheless, it barely traded above it the following day, and ahead of the weekend, a new marginal low was made slightly below $1.1665. It finished the week slightly below $1.17.  In the 12-weeks since the end of May, the euro has risen four times, and during this run, the euro has depreciated by around 5.5 cents (~4.5%).  The MACD and Slow Stochastics are not flashing any strong signal that the euro has gone too far too quickly, but the lower Bollinger Band is nearby ($1.1650).  Below there, the next important technical area is $1.1600. Initial resistance extends toward $1.1720. 

Japanese Yen:  The dollar held the JPY109-level at the start of last week.  It has not closed below there in three months.  The recovery stalled around JPY110.25 on August 19 before consolidating ahead of the weekend.  With only a few exceptions, the greenback has been in a JPY109-JPY111.00 trading range since the end of May.  The momentum indicators are not particularly helpful presently.  The lower Bollinger Band is found near JPY109, while the upper one is slightly below JPY110.70.  If the US 10-year yield is key, it is important to note that it is at the lower end of its range, around 1.20% (though it has spiked lower, it has not closed below 1.17% since February).  Provided it holds, the bias would be for a stronger dollar.  

British Pound:  Sterling fell by about 1.75% last week, its largest decline in two months against the dollar, and it was the third weekly decline.  It continued to trade heavily against the euro after rising to its best level since February 2020 on August 10. The MACD and Slow Stochastic are still moving lower, and the close was the lowest in six months even though cable held above last month's low (~$1.3570). Nearby support is extended to around $1.3550, and a convincing break could spur a move toward $1.3400.  A caveat comes from the Bollinger Band (~$1.3665), sterling closed below for the last two sessions.  It probably takes a move above $1.3700 to boost the probability that a low is in place.  

Canadian Dollar:  The US dollar spiked to almost CAD1.2950 ahead of the weekend, a new high for the year.  A lethal cocktail of a Fed preparing to taper, a virus mutation again deterring a return to "normal" and raising questions over demand, and a sharp drop in commodities, including a 7.6% drop in WTI and nervous equity investors weighed on the Loonie.  It looks overdone.  At its peak before the weekend, the greenback was more than three standard deviations above the 20-day moving average (~CAD1.2875).  Despite the paring of its earlier gains, it finished the week with two consecutive closes above the Bollinger Band (~CAD1.2775), set at two standard deviations above the 20-day moving average  The momentum indicators are still trending higher.  Previous resistance around CAD1.28 may now offer support.  Still, ahead of the weekend,  a bearish shooting star candlestick had been formed.  

Australian Dollar:  The Aussie was the weakest of the major currencies, losing nearly 3.2% last week, dropping to its lowest level since last November.  It stabilized ahead of the weekend after falling to almost $0.7100.  The $0.7000-$0.7050 offer the next technical targets.  It, too, looks terribly oversold by some measures.  It closed below its lower Bollinger Band for the past four consecutive sessions.   Both the MACD and Slow Stochastic are overextended, though neither is poised to turn higher in the near term.  Much technical damage has been done.  Initial resistance is seen in the $0.7160-$0.7180 area.  The New Zealand dollar also fell to its lowest level since last November ($0.6800) and closed for the fourth session below its lower Bollinger Band (~$0.6850). A break of $0.6800 could signal a move toward $0.6700.  The Aussie has approached key support against the Kiwi near NZD1.0400. 

Mexican Peso:  The dollar rose against the peso every day last week, and the biggest push came before the weekend.   The 1% gain pre-weekend advance accounted for a sizeable part of the week's 2.4% gain.  The combination of poor risk appetites, Fed tapering, and broad weakness in emerging markets weighed on the peso.  The MSCI Emerging Market Index fell 7% in July and is off by almost 4% here in August.  The JP Emerging Market Currency Index fell by about 1.25% last week.  The greenback briefly traded above MXN20.45 and closed above the 200-day moving average (MXN20.1150) for the first time in a couple of months.  The June high, which is the next important technical area, was set near MXN20.75.  Initial support may be encountered near MXN20.25.

Chinese Yuan:  The greenback's strength proved too much for the redback, closing above CNY6.50 for the first time in a month. For the most part, since mid-June, the dollar has been in a CNY6.45-CNY6.50 range.  Yet, while the yuan is soft against the dollar, it is near five-year highs against its trade-weighted basket (CFETS).   The PBOC's reference rate for the dollar has been set mostly in line with expectations.  Given that the PBOC may cut reserve requirements again while the Fed moves toward tapering, under-performance of Chinese stocks, and the ongoing campaign to rein in Chinese businesses, one would have expected the yuan to weaken.  Still, the bout of profit-taking seen in North America before the weekend saw the dollar slip against the offshore yuan back below CNY6.50 in late dealings.  


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Spread & Containment

“I Can’t Even Save”: Americans Are Getting Absolutely Crushed Under Enormous Debt Load

"I Can’t Even Save": Americans Are Getting Absolutely Crushed Under Enormous Debt Load

While Joe Biden insists that Americans are doing great…

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"I Can't Even Save": Americans Are Getting Absolutely Crushed Under Enormous Debt Load

While Joe Biden insists that Americans are doing great - suggesting in his State of the Union Address last week that "our economy is the envy of the world," Americans are being absolutely crushed by inflation (which the Biden admin blames on 'shrinkflation' and 'corporate greed'), and of course - crippling debt.

The signs are obvious. Last week we noted that banks' charge-offs are accelerating, and are now above pre-pandemic levels.

...and leading this increase are credit card loans - with delinquencies that haven't been this high since Q3 2011.

On top of that, while credit cards and nonfarm, nonresidential commercial real estate loans drove the quarterly increase in the noncurrent rate, residential mortgages drove the quarterly increase in the share of loans 30-89 days past due.

And while Biden and crew can spin all they want, an average of polls from RealClear Politics shows that just 40% of people approve of Biden's handling of the economy.

Crushed

On Friday, Bloomberg dug deeper into the effects of Biden's "envious" economy on Americans - specifically, how massive debt loads (credit cards and auto loans especially) are absolutely crushing people.

Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade. For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for US households as mortgage interest payments.

According to the report, this presents a difficult reality for millions of consumers who drive the US economy - "The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans."

The Fed, meanwhile, doesn't appear poised to cut rates until later this year.

According to a February paper from IMF and Harvard, the recent high cost of borrowing - something which isn't reflected in inflation figures, is at the heart of lackluster consumer sentiment despite inflation having moderated and a job market which has recovered (thanks to job gains almost entirely enjoyed by immigrants).

In short, the debt burden has made life under President Biden a constant struggle throughout America.

"I’m making the most money I've ever made, and I’m still living paycheck to paycheck," 40-year-old Denver resident Nikki Cimino told Bloomberg. Cimino is carrying a monthly mortgage of $1,650, and has $4,000 in credit card debt following a 2020 divorce.

Nikki CiminoPhotographer: Rachel Woolf/Bloomberg

"There's this wild disconnect between what people are experiencing and what economists are experiencing."

What's more, according to Wells Fargo, families have taken on debt at a comparatively fast rate - no doubt to sustain the same lifestyle as low rates and pandemic-era stimmies provided. In fact, it only took four years for households to set a record new debt level after paying down borrowings in 2021 when interest rates were near zero. 

Meanwhile, that increased debt load is exacerbated by credit card interest rates that have climbed to a record 22%, according to the Fed.

[P]art of the reason some Americans were able to take on a substantial load of non-mortgage debt is because they’d locked in home loans at ultra-low rates, leaving room on their balance sheets for other types of borrowing. The effective rate of interest on US mortgage debt was just 3.8% at the end of last year.

Yet the loans and interest payments can be a significant strain that shapes families’ spending choices. -Bloomberg

And of course, the highest-interest debt (credit cards) is hurting lower-income households the most, as tends to be the case.

The lowest earners also understandably had the biggest increase in credit card delinquencies.

"Many consumers are levered to the hilt — maxed out on debt and barely keeping their heads above water," Allan Schweitzer, a portfolio manager at credit-focused investment firm Beach Point Capital Management told Bloomberg. "They can dog paddle, if you will, but any uptick in unemployment or worsening of the economy could drive a pretty significant spike in defaults."

"We had more money when Trump was president," said Denise Nierzwicki, 69. She and her 72-year-old husband Paul have around $20,000 in debt spread across multiple cards - all of which have interest rates above 20%.

Denise and Paul Nierzwicki blame Biden for what they see as a gloomy economy and plan to vote for the Republican candidate in November.
Photographer: Jon Cherry/Bloomberg

During the pandemic, Denise lost her job and a business deal for a bar they owned in their hometown of Lexington, Kentucky. While they applied for Social Security to ease the pain, Denise is now working 50 hours a week at a restaurant. Despite this, they're barely scraping enough money together to service their debt.

The couple blames Biden for what they see as a gloomy economy and plans to vote for the Republican candidate in November. Denise routinely voted for Democrats up until about 2010, when she grew dissatisfied with Barack Obama’s economic stances, she said. Now, she supports Donald Trump because he lowered taxes and because of his policies on immigration. -Bloomberg

Meanwhile there's student loans - which are not able to be discharged in bankruptcy.

"I can't even save, I don't have a savings account," said 29-year-old in Columbus, Ohio resident Brittany Walling - who has around $80,000 in federal student loans, $20,000 in private debt from her undergraduate and graduate degrees, and $6,000 in credit card debt she accumulated over a six-month stretch in 2022 while she was unemployed.

"I just know that a lot of people are struggling, and things need to change," she told the outlet.

The only silver lining of note, according to Bloomberg, is that broad wage gains resulting in large paychecks has made it easier for people to throw money at credit card bills.

Yet, according to Wells Fargo economist Shannon Grein, "As rates rose in 2023, we avoided a slowdown due to spending that was very much tied to easy access to credit ... Now, credit has become harder to come by and more expensive."

According to Grein, the change has posed "a significant headwind to consumption."

Then there's the election

"Maybe the Fed is done hiking, but as long as rates stay on hold, you still have a passive tightening effect flowing down to the consumer and being exerted on the economy," she continued. "Those household dynamics are going to be a factor in the election this year."

Meanwhile, swing-state voters in a February Bloomberg/Morning Consult poll said they trust Trump more than Biden on interest rates and personal debt.

Reverberations

These 'headwinds' have M3 Partners' Moshin Meghji concerned.

"Any tightening there immediately hits the top line of companies," he said, noting that for heavily indebted companies that took on debt during years of easy borrowing, "there's no easy fix."

Tyler Durden Fri, 03/15/2024 - 18:00

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International

Copper Soars, Iron Ore Tumbles As Goldman Says “Copper’s Time Is Now”

Copper Soars, Iron Ore Tumbles As Goldman Says "Copper’s Time Is Now"

After languishing for the past two years in a tight range despite recurring…

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Copper Soars, Iron Ore Tumbles As Goldman Says "Copper's Time Is Now"

After languishing for the past two years in a tight range despite recurring speculation about declining global supply, copper has finally broken out, surging to the highest price in the past year, just shy of $9,000 a ton as supply cuts hit the market; At the same time the price of the world's "other" most important mined commodity has diverged, as iron ore has tumbled amid growing demand headwinds out of China's comatose housing sector where not even ghost cities are being built any more.

Copper surged almost 5% this week, ending a months-long spell of inertia, as investors focused on risks to supply at various global mines and smelters. As Bloomberg adds, traders also warmed to the idea that the worst of a global downturn is in the past, particularly for metals like copper that are increasingly used in electric vehicles and renewables.

Yet the commodity crash of recent years is hardly over, as signs of the headwinds in traditional industrial sectors are still all too obvious in the iron ore market, where futures fell below $100 a ton for the first time in seven months on Friday as investors bet that China’s years-long property crisis will run through 2024, keeping a lid on demand.

Indeed, while the mood surrounding copper has turned almost euphoric, sentiment on iron ore has soured since the conclusion of the latest National People’s Congress in Beijing, where the CCP set a 5% goal for economic growth, but offered few new measures that would boost infrastructure or other construction-intensive sectors.

As a result, the main steelmaking ingredient has shed more than 30% since early January as hopes of a meaningful revival in construction activity faded. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports. The latest drop will embolden those who believe that the effects of President Xi Jinping’s property crackdown still have significant room to run, and that last year’s rally in iron ore may have been a false dawn.

Meanwhile, as Bloomberg notes, on Friday there were fresh signs that weakness in China’s industrial economy is hitting the copper market too, with stockpiles tracked by the Shanghai Futures Exchange surging to the highest level since the early days of the pandemic. The hope is that headwinds in traditional industrial areas will be offset by an ongoing surge in usage in electric vehicles and renewables.

And while industrial conditions in Europe and the US also look soft, there’s growing optimism about copper usage in India, where rising investment has helped fuel blowout growth rates of more than 8% — making it the fastest-growing major economy.

In any case, with the demand side of the equation still questionable, the main catalyst behind copper’s powerful rally is an unexpected tightening in global mine supplies, driven mainly by last year’s closure of a giant mine in Panama (discussed here), but there are also growing worries about output in Zambia, which is facing an El Niño-induced power crisis.

On Wednesday, copper prices jumped on huge volumes after smelters in China held a crisis meeting on how to cope with a sharp drop in processing fees following disruptions to supplies of mined ore. The group stopped short of coordinated production cuts, but pledged to re-arrange maintenance work, reduce runs and delay the startup of new projects. In the coming weeks investors will be watching Shanghai exchange inventories closely to gauge both the strength of demand and the extent of any capacity curtailments.

“The increase in SHFE stockpiles has been bigger than we’d anticipated, but we expect to see them coming down over the next few weeks,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said by phone. “If the pace of the inventory builds doesn’t start to slow, investors will start to question whether smelters are actually cutting and whether the impact of weak construction activity is starting to weigh more heavily on the market.”

* * *

Few have been as happy with the recent surge in copper prices as Goldman's commodity team, where copper has long been a preferred trade (even if it may have cost the former team head Jeff Currie his job due to his unbridled enthusiasm for copper in the past two years which saw many hedge fund clients suffer major losses).

As Goldman's Nicholas Snowdon writes in a note titled "Copper's time is now" (available to pro subscribers in the usual place)...

... there has been a "turn in the industrial cycle." Specifically according to the Goldman analyst, after a prolonged downturn, "incremental evidence now points to a bottoming out in the industrial cycle, with the global manufacturing PMI in expansion for the first time since September 2022." As a result, Goldman now expects copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25.’

Here are the details:

Previous inflexions in global manufacturing cycles have been associated with subsequent sustained industrial metals upside, with copper and aluminium rising on average 25% and 9% over the next 12 months. Whilst seasonal surpluses have so far limited a tightening alignment at a micro level, we expect deficit inflexions to play out from quarter end, particularly for metals with severe supply binds. Supplemented by the influence of anticipated Fed easing ahead in a non-recessionary growth setting, another historically positive performance factor for metals, this should support further upside ahead with copper the headline act in this regard.

Goldman then turns to what it calls China's "green policy put":

Much of the recent focus on the “Two Sessions” event centred on the lack of significant broad stimulus, and in particular the limited property support. In our view it would be wrong – just as in 2022 and 2023 – to assume that this will result in weak onshore metals demand. Beijing’s emphasis on rapid growth in the metals intensive green economy, as an offset to property declines, continues to act as a policy put for green metals demand. After last year’s strong trends, evidence year-to-date is again supportive with aluminium and copper apparent demand rising 17% and 12% y/y respectively. Moreover, the potential for a ‘cash for clunkers’ initiative could provide meaningful right tail risk to that healthy demand base case. Yet there are also clear metal losers in this divergent policy setting, with ongoing pressure on property related steel demand generating recent sharp iron ore downside.

Meanwhile, Snowdon believes that the driver behind Goldman's long-running bullish view on copper - a global supply shock - continues:

Copper’s supply shock progresses. The metal with most significant upside potential is copper, in our view. The supply shock which began with aggressive concentrate destocking and then sharp mine supply downgrades last year, has now advanced to an increasing bind on metal production, as reflected in this week's China smelter supply rationing signal. With continued positive momentum in China's copper demand, a healthy refined import trend should generate a substantial ex-China refined deficit this year. With LME stocks having halved from Q4 peak, China’s imminent seasonal demand inflection should accelerate a path into extreme tightness by H2. Structural supply underinvestment, best reflected in peak mine supply we expect next year, implies that demand destruction will need to be the persistent solver on scarcity, an effect requiring substantially higher pricing than current, in our view. In this context, we maintain our view that the copper price will surge into next year (GSe 2025 $15,000/t average), expecting copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25’

Another reason why Goldman is doubling down on its bullish copper outlook: gold.

The sharp rally in gold price since the beginning of March has ended the period of consolidation that had been present since late December. Whilst the initial catalyst for the break higher came from a (gold) supportive turn in US data and real rates, the move has been significantly amplified by short term systematic buying, which suggests less sticky upside. In this context, we expect gold to consolidate for now, with our economists near term view on rates and the dollar suggesting limited near-term catalysts for further upside momentum. Yet, a substantive retracement lower will also likely be limited by resilience in physical buying channels. Nonetheless, in the midterm we continue to hold a constructive view on gold underpinned by persistent strength in EM demand as well as eventual Fed easing, which should crucially reactivate the largely for now dormant ETF buying channel. In this context, we increase our average gold price forecast for 2024 from $2,090/toz to $2,180/toz, targeting a move to $2,300/toz by year-end.

Much more in the full Goldman note available to pro subs.

Tyler Durden Fri, 03/15/2024 - 14:25

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Government

Moderna turns the spotlight on long Covid with new initiatives

Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital…

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Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital campaign debuted Friday along with a co-sponsored event in Detroit offering free CT scans, which will also be used in ongoing long Covid research.

In a new video, a young woman describes her three-year battle with long Covid, which includes losing her job, coping with multiple debilitating symptoms and dealing with the negative effects on her family. She ends by saying, “The only way to prevent long Covid is to not get Covid” along with an on-screen message about where to find Covid-19 vaccines through the vaccines.gov website.

Kate Cronin

“Last season we saw people would get a flu shot, but they didn’t always get a Covid shot,” said Moderna’s Chief Brand Officer Kate Cronin. “People should get their flu shot, but they should also get their Covid shot. There’s no risk of long flu, but there is the risk of long-term effects of Covid.”

It’s Moderna’s “first effort to really sound the alarm,” she said, and the debut coincides with the second annual Long Covid Awareness Day.

An estimated 17.6 million Americans are living with long Covid, according to the latest CDC data. About four million of them are out of work because of the condition, resulting in an estimated $170 billion in lost wages.

While HHS anted up $45 million in grants last year to expand long Covid support initiatives along with public health campaigns, the condition is still often ignored and underfunded.

“It’s not just about the initial infection of Covid, but also if you get it multiple times, your risks goes up significantly,” Cronin said. “It’s important that people understand that.”

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