As we previously noted, while speculatrs had been reducing their shorts in Treasury futures, they had added to Eurodollar shorts – pushing their bets on Fed rate hikes to record highs. However, as Bloomberg notes, signals are starting to emerge that traders who built up that heavy short, or hawkish, eurodollar base since the start of 2016 could be starting to throw in the towel on a March Fed rate hike.
CME confirmed that Wednesday saw record volume in fed fund futures of 658.7k contracts, beating the previous record of 613k on Nov. 9, the day after the U.S. presidential election. Over the course of Wednesday’s session, a total of 283k Apr fed funds futures contracts traded, largest single-day volume seen in the contract. Open interest in the contract rose by 109k, suggesting some short covering before the minutes and potential new longs after the minutes.
Following this morning’s soaring inflationary and retail sales data, and following Yellen’s hawkish tone yesterday, March rate-hike odds have soared from below 25% to over 40%. The Dollar Index is extending its recent winning streak on this move – now up 11 days in a row, the longest streak since May 2012.
Rate hike odds are ripping higher as The Fed gets its way of pricing in a March rate hike…
And The Dollar Index continues to rise…
This is the longest USD win streak since May 2012.
July 1975 – 11 days in a row
Sept 1975 – 11 days in a row
May 2012 – 14 days in a row
Feb 2017 – 11 days in a row
And notably, if extends to 12 days tomorrow, will be the second longest winning streak in dollar history.
Federal Reserve Chair Janet Yellen’s semiannual testimony takes the spotlight next week as investors watch for clues on US monetary policy and her take on the current political climate.
Here’s what to watch in the coming days.
Ms Yellen will deliver her “Humphrey Hawkins” testimony before the Senate Banking Committee on Tuesday, followed by an appearance before the House Financial Services Committee on Wednesday.
The Fed has signalled three interest rate rises this year. Sticking to its mantra that all meetings are ‘live’, investors will watch for closely watch “how forceful she is in promoting the notion that March is still on the table,” said Tom Porcelli of RBC Capital Markets.
Indeed, federal fund futures currently imply a 13.3 per cent chance of a rate rise next month, according to CME data.
“Given the uncertainty of timing on the fiscal agenda and the relatively modest uptick in inflation thus far this year, we think it will be difficult for the committee to get enough members on board for a hike in March (not to mention that the French election in late April/early May looms large as a potential catalyst for global volatility),” Mr Porcelli said. “But Yellen could certainly move the “perception” needle on this.”
In the Q&A session, Ms Yellen will likely be grilled on Fed independence, the central bank’s economic outlook and its view on Mr Trump’s planned proposals.
Today Trump talked about a tax plan that will be “incentive-based policy, much more so than we have right now.”
Details are beginning to leak out and the most important one is that former Goldman Sachs CEO Gary Cohn is writing the plan. He stepped down from the investment bank to join Trump’s team.
The thinking is that Cohn will be kind to the financial industry.
Cohn said cutting corporate and individual taxes were the two main goals and he told Fox Business that he was focusing on tax cuts for low earnings.
“We’re not spending a lot of time with the high earners,” Cohn said during that interview.
You can be sure that the loophole that allowed another Goldman CEO (Henry Paulson) to avoid $200 million in taxes when he joined the Treasury will also be left in by Cohn, who will have chased in nearly $300m in his Goldman departure to join Trump’s team.
A big question is how likely it is to be implemented. Trump said that Senate and House leaders were being consulted but they may see that as a slight. Paul Ryan and Mitch McConnell have floated their own plans in the past and they won’t want to be dictated something by Trump.
After the details are released, look for initial enthusiasm but it could be tempered quickly if it doesn’t have the support of Congress.
Less than a week after Donald Trump won the presidency, the head of the world’s biggest hedge fund, Ray Dalio, unexpectedly declared that he was a firm believer in Trump’s policies in a lengthy LinkedIn article in which he praised the coming age of Trump: “there is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth)…. there’s a good chance that the economy/market will shift from what we have gotten used to and what we will experience over the next many years will be very different from that.”
It now appears that Trump’s honeymoon with some of the biggest asset managers is now officially over, because in his latest Daily Observations note, scooped by BBG, Dalio and co-CIO Bob Prince write that he’s becoming “more concerned that the damaging effects of President Donald Trump’s populist policies may overwhelm the benefits of his pro-business agenda.”
“We are now in a period of time when how this balance tilts will be more important to the economy, markets, and our well-beings than normally dominant drivers such as central bank policies,” Dalio wrote. The duo added that the current investment environment is marked by “exceptional uncertainty” and recommended avoiding concentrated bets, and holding easy-to-sell assets.
And, as Bloomberg puts it, Dalio is “turning sour” on the new leader following his ban on visitors from seven mostly Muslim countries and his proposed border tax on Mexican goods. Earlier this month at the World Economic Forum in Davos, Dalio said it remains to be seen whether Trump is aggressive and thoughtful, or aggressive and reckless. So far the executives said they haven’t seen much thoughtfulness in Trump’s policy moves.
Voicing a tone of caution that has increasingly gripped markets as they shift away from the euphoria phase and revert back to reality, the Bridgewater authors write that “while there is a lot of potential to improve fiscal policies and make beneficial structural reforms (to enhance the business friendly environment, reduce regulatory inefficiencies, etc.), there is also significant risk that his populist policies could hurt the world economy (and worse),” Dalio and Prince said.
The price of copper moved towards $6,000 a tonne on Tuesday as traders bet that workers at the giant Escondida mine in Chile would reject a pay deal and go on strike.
Copper for three month delivery on the London Metal Exchange advanced $138 to $5,989 a tonne amid claims from union representatives that miners were voting against the offer made by Escondida’s owner BHP Billiton.
Escondida is the world’s biggest copper mine and a prolonged stoppage could have a significant impact on the market, according to analysts.
The last time workers went on strike in 2011 it sent shockwaves through the industry. During a two-week stoppage 40,000 tonnes of copper supply was lost. A similar level of disruption is forecast this time if miners down tools.
“At [current] anticipated production, we estimate that 3,400 tones of output would be lost for each day of stoppage,” said Nicholas Snowdon analyst at Standard Chartered, noting the longest strike at Escondida was in 2006 and lasted 25 days.
However, industrial action is a not a foregone conclusion. BHP has 48 hours to request government mediation if it looks likely workers will reject its offer.
That would lead to further a five days of talks with the possibility of an extension. Read More
Switzerland’s Gold Exports To China Surge To 158 Tonnes In December
Switzerland’s gold bullion exports to China saw a huge jump in December, climbing to 158 tons versus a much lower 30.6 tons in November – a jump of 416%.
According to Eddie van der Walt as reported on the Bloomberg terminal this morning, total Swiss gold exports surged to 287.6 tons in December (valued at CHF 10.8b) according to data on the website of the Swiss Federal Customs Administration.
Switzerland’s gold exports had already been very robust in November coming in at 191.4 tons. This means that total Swiss gold exports rose by over 50% from November to December due to global and particularly Chinese demand. Another indication of this global gold demand is that Swiss gold imports increased to 323.6 tons vs 220.5 tons – likely due to refinery demand and investors opting to store gold in Switzerland.
There was increased demand from China ahead of the Chinese New Year and due to concerns about the continuing devaluation of the yuan. This accounts for much of the rise but uncertainty regarding the election of President Trump may also have contributed to the strong rise in Swiss gold exports.
Gold exports to China in December “were the highest since at least January 2014” according to Bloomberg. Most of the exports to China are in the form of investment grade gold bars in the one kilogramme gold bar format which is used by Chinese investors, institutions, exchange traded funds (ETF) and indeed the Shanghai Gold Exchange.
Gold “exports to India dropped to 20.6 tons vs 63.2 tons in November and shipments to Hong Kong fell to 38 tons vs 45.8 tons.”
Gold bullion imports from the U.K. jumped to 148 tons vs 48.4 tons meaning that Swiss gold imports from the U.K. “were the highest since December 2015.” The London gold market continues to see outflows as gold continues to move from the London gold market to strong hands in China via the Swiss refineries. There are also flows to retail and high net worth investors including companies and family offices choosing to store gold in Switzerland and other safer jurisdictions.
Having taken on the Keystone pipeline and America’s struggling manufacturing sector in a flurry of executive actions on Tuesday, moments ago Reuters reported, citing several congressional aides and immigration experts briefed on the matter, that on Wednesday Donald Trump will sign several executive orders restricting immigration. The president is expected to sign the orders at the Washington headquarters of the Department of Homeland Security, whose responsibilities include immigration and border security.
Trump’s orders are said to involve restricting access to the United States for refugees and some visa holders from seven mostly Muslim nations including Iraq, Iran, Libya, Somalia, Sudan, Syria and Yemen.
Additionally, Trump’s restrictions on refugees are likely to include a multi-month ban on admissions from all countries until the State Department and the Department of Homeland Security can increase the intensity of the vetting process.
During his presidential campaign, Trump initially proposed a temporary ban on Muslims entering the United States to protect Americans from jihadist attacks. Many Trump supporters decried Democratic President Barack Obama’s decision to increase the number of Syrian refugees admitted to the United States over fears that those fleeing the country’s civil war would carry out attacks. However, since then both Trump and his nominee for attorney general, Jeff Sessions, have said they would focus the restrictions on countries whose emigres could pose a threat rather than placing a ban on people who follow a specific religion.
As Reuters adds, to block entry from the designated countries, Trump is likely to instruct the U.S. State Department to stop issuing visas to people from those nations, according to sources familiar with the visa process. He could also instruct U.S. Customs and Border Protection to stop any current visa holders from those countries from entering the United States. White House spokesman Sean Spicer said on Tuesday that the State and Homeland Security departments would work on the vetting process once Trump’s nominee to head the State Department, Rex Tillerson, is installed.