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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JAPANESE YEN: CURRENCY ADVENTURES (2007-09 REVISITED) © Leo Haviland January 14, 2016

In Akira Kurosawa’s famous film “Yojimbo”, a farmer remarks: “Everybody’s after easy money.”

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CONCLUSION

In recent months, much marketplace and media attention regarding foreign exchange arenas has focused on the travels of the United States dollar, the Chinese renminbi, the Euro FX, and an assortment of emerging marketplace currencies. The Japanese Yen has captured relatively little of the limelight. But it should.

Marketplace history of course need not repeat itself, either completely or even partly, but players should not overlook or dismiss parallels. The Japanese Yen’s rally in the past few months reflects current (and points to further) worldwide economic weakness. Recall the Yen’s rally during the worldwide economic crisis of 2007-09.

During the acceleration of the global economic disaster of 2007-09, both the Japanese Yen and the United States dollar made major bull moves on a broad real trade-weighted (effective exchange rate) basis. The Yen tumbled dramatically from its 2011/2012 summits. But that bear move probably ceased in mid-2015. The modest rally in the Yen since June 2015 has coincided with the continued advance of the dollar’s broad real trade-weighted major bull move. Moreover, as during the 2007-09 crisis span, the Yen’s effective exchange rate climb has accompanied a rally in its cross rate against the dollar.

Not only is the current Yen bull trend a bearish sign for world economic growth. It also is a bearish indicator for the Nikkei, S+P 500, and other key stock benchmarks. As massive Yen depreciation alongside quantitative and qualitative easing (QQE) helped to propel the Nikkei (and thereby other stock marketplaces such as the S+P 500 higher), growing Yen strength (all else equal) tends to push the Nikkei and other stock realms lower. The Yen march upward since June 2015 coincides with slides in equities, a drop in the US Treasury 10 year note yield, and renewed sharp falls in commodities “in general” (and petroleum in particular).

BOTTOM LINES

On 1/14/16, the S+P 500 touched a low at 1879, very close to its 8/24/15 low at 1867. It then rallied, closing around 1922. The Nikkei’s 1/14/16 low at 16944 hovers right above its 9/29/15 trough. What about the Shanghai Composite? Its low on 1/14/16 at 2868 neighbors its 8/26/15 depth at 2851.

Previous essays have discussed the Federal Reserve Board’s effort to slow, halt, or reverse marketplace declines in the S+P 500. For example, see “Playing Percentages: Stock Marketplace Games” (7/13/15). In the current environment, stock slumps of around ten and 20 percent from an important plateau (such as the May 2015 one) are important guideline levels for the Fed. The Fed’s preferred method to stop downward moves of around ten percent is talk (wordplay) rather than action. Falls of around 20 percent (or more) increase the odds of action (perhaps even renewed quantitative easing).

Thus today’s speech from James Bullard, the President of the St. Louis Fed, is rhetoric aiming to support US (and perhaps other) stocks (“Oil Prices, Inflation and U.S. Monetary Policy”).

Such charming wordplay from the Fed (and its central banking allies) can induce rallies in the S+P 500. However, it probably will not stop the S+P 500 from resuming its bear move and breaking beneath its August 2015 bottom. The Nikkei will fall under its 9/29/15 low, and the Shanghai Composite will venture beneath its late August 2015 bottom. The broad real TWD will remain strong for at least the near term; the Japan EER will continue its modest rally, as will the Yen’s advance against the US dollar.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16) and earlier essays.

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Japanese Yen- Currency Adventures (2007-09 Revisited) (1-14-16)

THE CURTAIN RISES: 2016 MARKETPLACE THEATERS © Leo Haviland January 4, 2016

Shakespeare proclaims in “As You Like It” (Act II, Scene VII):

“All the world’s a stage,

And all the men and women merely players”.

THE 2016 WORLDWIDE ECONOMIC STAGE

As the 2016 international economic (and political) drama commences, the worldwide economy not only is sluggish, but also feebler than most forecasters assert. International real GDP, as well as that in the United States, has a notable chance of slowing down further than many expect (the International Monetary Fund predicts real global output will increase 3.6 percent in calendar 2016; “World Economic Outlook”, Chapter 1, Table 1.1).

The ability of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, China’s central bank, and their friends to engineer their versions of desirable outcomes via highly accommodative policies has diminished. Beloved schemes such as quantitative easing (money printing) and yield repression and related rhetoric are becoming less influential. Ongoing significant political divisions and conflicts (America’s troubling carnival represents only one example) likely will make it challenging for political leaders to significantly promote substantial (adequate) growth.

The failure of longer term US government yields such as the UST 10 year note to rise substantially despite the Fed’s recent modest boost in the Federal Funds rate represents a noteworthy warning sign regarding American and global financial prospects. Note also very low sovereign yields in much of the Eurozone (picture Germany); Japanese government rates remain near the ground floor. However, yields of less creditworthy debt instruments, whether sovereign or corporate, probably will continue to climb in 2016, another ominous indication.

For the near term at least, the broad real trade-weighted US dollar probably will remain strong. Emerging marketplace equities and commodities “in general” likely will persist in bear trends. What does the rally of the dollar above its late August/September 2015 heights signal? What does the collapse of benchmark commodity indices such as the broad GSCI beneath their late August 2015 lows portend? These warn not only of worldwide economic weakness, but also of further declines in the S+P 500. Note that emerging marketplace stocks hover fairly closely to their 2015 depths. The S+P 500 probably will remain in a sideways to bearish trend.

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The Curtain Rises- 2016 Marketplace Theaters (1-4-16)

TWO-STEPPING: US GOVERNMENT SECURITIES © Leo Haviland December 1, 2015

In the film noir “Double Indemnity” (Billy Wilder, director), Walter Neff describes the murder tale as “Kind of a crazy story with a crazy twist to it.”

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OVERVIEW AND CONCLUSION

Over the last seven years, through the last stage of the bloody worldwide economic crisis and the ensuing often fitful recovery, through dramatic and sometimes violent swings in assorted financial playgrounds, America’s heroic Federal Reserve ferociously has pinned the Federal Funds rate to the ground.

Many marketplace clairvoyants believe this widely-beloved guardian relatively soon will cautiously begin prodding the Funds rate higher. The next Fed gatherings are 12/15-16/15, 1/26-27/16, and 3/15-16/16. Maybe the courageous Fed will lift the rate up 25 basis points in its December 2015 meeting! In any case, as the widely-watched United States government two year note resides near the Fed Funds rate from the yield curve perspective, the two year US Treasury level and trend in part reflect marketplace opinions regarding Fed policy shifts and inflation.

In any case, the recent elevations in the two year US Treasury note a few basis points over .90 percent probably will not be broken by much in the near future. There indeed are some signs that United States inflation has edged toward the Fed’s two percent target. The Fed also proclaims its desire to normalize its highly accommodative policy. Yet the Fed embraces a gradual approach and does not want to make any missteps. Also, the international economy (look at the Eurozone and China) has slowed. So the Fed probably will patiently assess the consequences of its rate move for the United States (and global) economy and marketplaces (such as the S+P 500 and the US dollar).

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Yield levels and relationships obviously can fluctuate for all sorts of reasons. However, the falling rate trend for the US 10 year government note since early 2014 contrasts with the rising one for the UST two year note. The drop in 10 year UST yields, as it is occurring in the face of some US inflation and rising two year rates and artful Fed pillow talk about normalizing policy, arguably reflects economic weakness (mediocre GDP growth) in the US or elsewhere. In today’s interconnected world, feebleness elsewhere influences the American scene.

Note a related warning signal of actual or impending US economic weakness consistent with the fall in 10 year UST yields. Since the advent of money printing in the US in late 2008/early 2009, narrowing of the 10 year less two year spread roughly has coincided with the ending of that quantitative easing. This spread tightening (becoming less positive) in turn has reflected slower economic growth (or worries regarding potential weakness or recession). The agile Fed announced the actual first round of “tapering” (gradual ending of its latest QE venture) on 12/13/13, after several reductions in the QE program, tapering finished at end October 2014. The Treasury spread currently is close to its July 2012 depth.

Is a hunt for yield, fearful flight to quality, or need to own high-grade collateral more focused on the long end of the US government yield curve than the short end? Perhaps, but not necessarily. As the ECB extends its money printing program, is a shortage of long dated Eurozone government debt not only pushing yields there lower, but also thereby reducing yields for the UST long term instruments such as the 10 year? Perhaps. But economic weakness remains the most convincing reason for the sustained decline in UST 10 year yields since early 2014.

Consistent with the fall in the US 10 year yield and the narrowing of the 10 year versus two year yield spread, additional flags indicating weakness for the worldwide economy beckon. Although the S+P 500 remains high, emerging marketplace stocks in general and commodities continue to join hands in long-running substantial bear trends. The durable bull trend in the broad real trade-weighted dollar generally has danced in tune with the bear ones in emerging marketplace stocks and commodities.

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Two-Stepping- US Government Securities (12-1-15)

DANGEROUS TIMES IN US NATURAL GAS © Leo Haviland November 2, 2015

The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45. For prices to sustain voyages over 3.00, it probably will require a significantly colder than normal winter or noteworthy cuts in natural gas production. A containment risk (supplies too high relative to available storage), although currently not probable, nevertheless lurks for the end of calendar 2016 build season, especially if 2015-16’s winter is warmer than usual. If significant containment problems develop, and perhaps even if the potential for significant containment difficulties significantly increases, the 1.65 to 1.90 floor could be broken.

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The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 low, tumbling to 1.948 on 10/27/15 (near NYMEX contract expiration; many key troughs have occurred around contract expiration). The late October 2015 depth borders the last prior major bottom, 1.902 on 4/19/12. Historical analysis indicates the bear trend from February 2014 to October 2015 travelled sufficiently far in price and duration terms to look for a trend shift from bearish to neutral or bullish. In addition, the most recent Commitments of Traders reports for key natural gas contracts reveal a massive net noncommercial short position. Many significant marketplace trend changes in natural gas roughly coincide with very elevated net long or short noncommercial positions. Current and (assuming normal weather) anticipated upcoming natural gas days coverage through winter 2015-16 and the 2016 build season appear fairly close to historical averages, particularly in the context of NYMEX natural gas prices well under 3.00.

However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented. Moreover, the days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

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Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. Trend changes in NYMEX natural gas need not coincide with one in the petroleum complex or in commodities in general.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements have intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent have paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 high at 2135. See “Commodities: Captivating Audiences” (10/12/15) and other recent essays.

Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 12/4/15. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). Thus even if petroleum manages to rally further from its recent lows, it likely will remain relatively weak. The broad real trade-weighted United States dollar edged slightly lower (about one percent) to 97.0 in October 2015 from its September 2015 bull move high at 98.0 (Federal Reserve, H.10; monthly average), but it probably will remain relatively strong for the near term. Weak oil and a strong dollar, all else equal, are bearish factors for American natural gas prices.

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Dangerous Times in US Natural Gas (November 2, 2015)