GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


 

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COMMODITY CURRENCIES IN CONTEXT: A FINANCIAL WARNING SIGN © Leo Haviland May 1, 2018

“All poker is a form of social Darwinism: the fit survive, the weak go broke.” A. Alvarez, “The Biggest Game in Town”

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OVERVIEW AND CONCLUSION

The Bank for International Settlements provides broad real effective exchange rates (“EER”) for numerous currencies around the globe. Within the BIS statistics are several nations who are important exporters of widely-traded commodities such as petroleum, base and precious metals, and agricultural products such as soybeans. Concentrating on and comparing the broad real effective exchange rates of eight freely-traded currencies widely labeled as “commodity currencies” offers insight into assorted interrelated financial marketplace relationships. The overall patterns of this array of assorted export-related commodity currencies often has intertwined in various ways with very significant trends in broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”) and the Bloomberg Commodity Index (“BCI”), the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general (as well as the S+P 500), and key interest rate benchmarks such as the 10 year US Treasury note.

In assessing and interpreting the role of and implications indicated by the commodity currency platoon in financial battlefields, marketplace guides should highlight several preliminary considerations. The various commodity currencies (“CC”) do not all move at precisely the same time or travel the same percentage distance in a given direction. Although they generally move roughly together within an overall major trend for the group, an individual member may venture in a different direction for quite some time. Although the path in recent months of the various CCs “together” generally has been sideways, their individual movements have not been identical.

Of course the various commodity currency countries are not all alike. So a given guru can tell somewhat different stories about each of them and their currency. Not all CC nations are equally important within the international trade arena. The various domains do not rely to the same extent on commodities within their export packages. And not all are reliant on a given commodity sector (such as petroleum) as part of their commodity output. Some CC nations produce notable amounts of manufactured goods. In addition, some countries probably are more vulnerable to currency and trade wars than others.

Moreover, the intertwined relationships between currencies (whether the CC EERs or others such as the broad real trade-weighted United States dollar), commodities “in general”, stock marketplaces (advanced nation signposts such as the S+P 500; the emerging marketplace field in general), and interest rates can and do change. Relationships between CC EERs and the broad real trade-weighted dollar (“TWD”) can shift. The TWD’s intertwining and relationship to interest rate, equity, and commodities in general is complex. In addition, although subjective perspectives identify apparent convergence and divergence (lead/lag) relationships between financial territories, these connections (links, associations) can alter, sometimes substantially. Marketplace history is not marketplace destiny, whether entirely or even partly.

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Commodities “in general” surpassed their first quarter 2017 peaks in first quarter 2018 (and April 2018), rapidly climbing from a notable mid-year 2017 trough. The majority of commodity currencies established an EER top in (or around) 1Q17. In contrast to commodities in general, the effective exchange rates of the various commodity currency club members either have not exceeded that top established in (around) 1Q17, or have not done so by much. In addition, the CC group’s EERs generally did not climb much, if at all, from around mid-year 2017. This CC EER pattern (some divergence from commodities in general) warns that a significant top in commodities  probably is near. In the past, highs for the commodity currency EERs linked to highs for commodities in general.

Relevant to this marketplace viewpoint regarding the commodity currency EERs and commodities “in general” is the upward trend in US Treasury note yields. Recall not only the major bottom in the UST 10 year note around 1.32 percent on 7/6/16, but especially underline for the CC (and global stock marketplaces) the yield climb from its 9/8/17 interim trough at just over two percent. The Federal Reserve Board has been raising the Federal Funds rate and gradually reducing the size of its bloated balance sheet. The UST 10 year note broke out in first quarter 2018 above critical resistance at 2.65pc; the UST 10 year  recently bordered 1/2/14’s 3.05pc barrier (3.03pc on 4/25/18; the two year UST note also has climbed, reaching 2.50pc on 4/25/18). Also supporting this outlook for commodities is the 1Q18 peak in the S+P 500 (1/26/18 at 2873) and the MSCI Emerging Stock Markets Index (from Morgan Stanley; “MXEF”; 1/29/18 at 1279).

Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. These include buying commodities as an “asset class”. What happens to commodities when key central banks begin to end their beloved yield repression schemes, or hint that they will do so?

Marketplace history indeed shows that sometimes there has been divergence between commodities “in general” and stock benchmarks such as the S+P 500 for a while. Recall the 2007-09 global economic disaster era. The S+P 500 peaked 10/11/07 at 1576 (MXEF summit 11/1/07 at 1345), prior to the broad GSCI’s pinnacle in July 2008 (7/3/08 at 894). Yet recall that the July 2008 GSCI peak occurred close in time to the noteworthy S+P 500 interim high on 5/19/08 at 1440, as well as the lower S+P 500 tops of 8/11/08 (1313) and 9/19/08 (1265). And note the timing linkage between the broad GSCI and S+P 500 in the past couple of years. Not only did they make major lows around the same time in first quarter 2016 (broad GSCI at 268 on 1/20/16; S+P 500 on 1/20/16 at 1812 and 2/11/16 at 1810). They both accelerated upward in their bull moves around the same time in mid-year 2017; the GSCI low was 351 on 6/21/17, with that in the S+P 500 6/29/17’s 2406 (8/21/17 at 2417). The broad GSCI slumped from its initial high at 466 on 1/25/18, which linked to the S+P 500’s high on 1/26/18; although the GSCI since has hopped over its 1Q18 interim top, it thus far has not done so by much (480 on 4/19/18).

Thus the failure of the EERs for the CC group as a whole to advance much over the past year and especially since mid-year 2017 (with no decisive overall new highs for the group in general in 1Q18) probably has implications for both commodity and equity trends.

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Commodity Currencies in Context- a Financial Warning Sign (5-1-18)

AS THE FINANCIAL WORLD TURNS: COMMODITY AND OTHER MARKETPLACE DOMAINS © Leo Haviland April 2, 2018

Chuck Berry sings in “’Round and ’Round”:
“Well, the joint started rockin’
Goin’ round and round,
Yeah, reelin’ and a rockin’,
What a crazy sound,
Well, they never stopped rockin’,
’Till the moon went down”.

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OVERVIEW AND CONCLUSION

Many marketplace high priests enthusiastically proclaim proverbs on price relationships. For some heralds, these adages are only guidelines; however, for others, they represent high (or very high) probabilities. Such aphorisms include the links between the United States dollar and commodities “in general”, or between the US dollar and the S+P 500 or other stock indices. For example, one widely popular chant: “weak dollar equals strong commodities”, “strong dollar equals weak commodities”. For some, the word “equals” in this formula implies “is connected to”, or “associated with”.

Observers differ, often substantially, in their choice between as well as the assessment of the supposedly relevant variables (data, evidence) and analytical time horizons. Perspectives on past, current, and future convergence and divergence (lead/lag) relationships between financial marketplaces (and factors influencing them) likewise can vary significantly.

In practice, viewpoints regarding the role of the dollar in determining commodity price levels, trends, and turning points nevertheless differ, and often a great deal. After all, other financial marketplace realms (such as interest rates and stocks), diverse economic and political theaters, and a wide range of other phenomena interrelate with both the dollar (and other currencies) and assorted members of the commodities world. So a variety of competing stories and predictions about the dollar, commodities (whether in general or in regard to individual sectors such as petroleum or base metals), and other marketplaces exist and change.

Moreover, historical review indicates that trends for commodities “in general” can intertwine in various fashions with currencies (such as the United States dollar), as well as with interest rate benchmarks (picture the US 10 year government note), and stock playgrounds (the S+P 500 and related indices of advanced nations; emerging marketplace signposts). Moreover, marketplace history, whether for a given arena or the relationship between two or more fields, is not marketplace destiny.

For further related marketplace analysis of stock, interest rate, currency, and commodity fields, see other essays such as: “Global Stock Marketplaces: Winter of Discontent” (3/5/18); “There Will Be Blood: Financial Battlefields” (2/9/18); “Busload of Faith: Financial Marketplaces” (1/15/18); “Marketplace Vehicles: Going Mobile” (12/13/17); “History on Stage: Marketplace Scenes” (8/9/17).

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In any case, let’s now focus on the historical relationship between the broad real trade-weighted US dollar (“TWD”) and commodities in general over the past several years. The table below underlines that players should be on the watch for a fairly close coincidence in timing of major or other important turning points in those two wide realms. However, in the current context, they also should monitor TWD moves in relation to the critical height around 96.0. The broad real trade-weighted US dollar (“TWD”) recently fell decisively beneath crucial support around 96.2 to 96.6. The broad real TWD high during the global financial disaster was March 2009’s 96.6.

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What does an investigation of the petroleum, base metals, and agricultural commodity groups since their first quarter 2016 major lows unveil? Many marketplace turns have occurred around the same time. All these commodity battlefields made important highs in first quarter 2018; so did the S+P 500 and other important advanced nation and emerging marketplace stock indices.

Yet not all commodity sectors (or members within a group) necessarily dance (make turns) together. In principle and practice, potential divergence can develop and persist within the commodity universe.

However, whereas petroleum arguably very recently threatened to exceed its 1Q18 barriers, base metals and agriculture apparently did not. Determined and sustained crude oil output restraint by OPEC and its non-OPEC allies such as Russia has helped to draw down OECD petroleum industry inventories. Fears of supply interruption (Middle East tension, including the Iran nuclear issue; Libya; Nigeria; Venezuela) exist. Numerous prophets assert the world economy will remain robust. The further weakening of the dollar since around mid-year 2017 has inspired some petroleum bulls.

The net noncommercial long position of petroleum players (see the CFTC Commitments of Traders) expanded massively since mid-2017, and this net noncommercial buying probably played an important role in rallying oil prices. It remains very large and is vulnerable to liquidation.

Prices for the oil group probably will not break above their first quarter 2018 highs by much if at all. Neither will broad commodity indices such as the broad S&P Goldman Sachs Commodity Index or the Bloomberg Commodity Index. The 1Q18 peaks in the S+P 500 and MXEF stock indices are two year diagonal bull time moves from their 1Q16 major troughs. The GSCI and BCI’s first quarter 2018 highs likewise are two year diagonal ascents from their major bottoms of 1Q16.

Yet suppose the petroleum complex does attain new highs relative to those of 1Q18. As petroleum is an important part of many widely-watched commodity signposts (especially the broad S&P Goldman Sachs Commodity Index), that may boost such broad indices to levels above first quarter resistance.

It is important whether or not the base metals crew (copper, aluminum, zinc, and others) also achieves new highs, for both base metals and oil link closely to international economic growth trends (and arguably more “immediately” than agriculture does).

Many major highs (lows) for commodities “in general” have roughly coincided with major peaks (bottoms) in the S+P 500. But not all have. The 2007-2009 global economic disaster era displayed an exception. The major high in the S+P 500 (10/11/07 at 1576) preceded the GSCI’s pinnacle (7/3/08 at 894). However, the S+P 500’s final top, 5/19/08’s 1440, bordered the July 2018 commodities summit.

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Regardless of whether or not key commodity indices achieve highs above their first quarter 2018 plateau, the first quarter 2018 resistance for the S+P 500 and other advanced and emerging marketplace equity benchmarks probably will remain in place. As “There Will Be Blood: Financial Battlefields” (2/9/18) stated: “The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top.”

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As the Financial World Turns- Commodity and Other Marketplace Domains (4-2-18)

GLOBAL STOCK MARKETPLACES: WINTER OF DISCONTENT © Leo Haviland March 5, 2018

“I’m goin’ down the road feelin’ bad
I don’t want to be treated this-a-way.” Bill Monroe, the Grateful Dead, and other musicians have performed versions of the traditional song, “Goin’ Down the Road Feelin’ Bad”

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OVERVIEW AND CONCLUSION

American stock indices “in general” inspire an assortment of stories regarding them, including reasons for their past, present, and future levels and trends. Many of these descriptions and analyses regarding broad benchmarks such as the S+P 500 and Dow Jones Industrial Average appear relatively unique to the United States. However, economic regions and financial marketplaces around the world have increasingly intertwined during the course of globalization in recent decades, and especially during the past several years.

Therefore the directional travels (bull and bear adventures) of America’s stock marketplace increasingly have tended to parallel those of other significant advanced countries and regions. In recent years, the trends of emerging marketplace stocks “in general” increasingly have interconnected with those of leading advanced nations. Consequently, narratives and explanations regarding a broad “national” stock marketplace indicator such as the S+P 500 often involve those of equity barometers elsewhere (as well as interest rate, currency, and commodity movements).

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History underscores that across the fields of these various stock marketplace signposts, the timing of key price turns and the duration and extent (percentage distance travelled) of very important trend moves are not always exactly the same or extremely close. But they often are.

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After establishing important bottoms together in first quarter 2016 (and during the preceding price decline), the key American stock indices and those of other important advanced nations and the “overall” emerging stock marketplace have traded closely together from the directional and marketplace timing perspective. Though the bull moves since first quarter 2016 in these assorted domains did not all cover the same distance, all were very substantial. Their rallies since around the time of the November 2016 United States Presidential election were impressive. Investors and other stock owners, Wall Street, and the financial media cheered the majestic ascent. Heated advice to “buy the dip” became widespread as the S+P 500 climbed and as price declines tended to become less substantial in percentage terms.

However, the glorious bull move in American and other related stock marketplace halted in first quarter 2018. A mournful “correction”, a decline of roughly ten percent, ensued. The disturbing decline in the S+P 500 and other significant global stock marketplace indices probably will continue. However, if the S+P 500 and other equity benchmarks manage to surpass their January 2018 highs, they probably will not do so by much.

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For further economic and political analysis, see “There Will Be Blood: Financial Battlefields” (2/9/18), “Busload of Faith: Financial Marketplaces” (1/15/18), “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Global Stock Marketplaces- Winter of Discontent (3-5-18)

THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).

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CONCLUSION

The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.

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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)