Threading the Needle
Threading the Needle
The dominoes are all lining up for the Goldilocks of all Goldilocks scenarios...
Events this week are all lining up for the Goldilocks of all Goldilocks scenarios.
The big fears facing markets are as follows:
Yen Carry Trade
Recession
Geopolitical Events
Each one of these fears looks to be receding in the rearview mirror at the moment.
Carry Trade, Carried Out
First, the Yen carry trade unwind seems to be behind us. Goldman Sachs claims that something like 90% of carry trade-related positioning has already been unwound.
The Yen has stabilized.
The Nikkei has rallied back to cover most of its violent losses.
As volatility subsides and markets return to normal, the Yen crisis seems behind us.
Recession Fears Receding
Last week’s jobs data, which I wrote about last week, has largely erased fears of recession. Initial Jobless Claims came in lower than expected and much lower than feared.
They certainly don’t look to be breaking out in any meaningful fashion.
ISM Services data was robust.
Now, this week, we have another slate of significant data that looks to be coming in better than expected, with PPI coming in colder than expected this morning.
It’s now quite unlikely that the CPI will come in hot tomorrow after seeing this month’s PPI, especially after last month’s dovish surprise.
Meanwhile, Retail Sales this week will likely be in line as well.
This data paints the picture of a stable economy, growing slowly with low inflation that is ready to be stimulated into the next expansion period.
Geopolitical Detente
I’ve been arguing all along that the expected Iran response to Israel’s assassinations would be a nothingburger. Well, it looks like it might be even more dovish than that.
It’s looking more and more like the “Iran response” might be to encourage a peace deal in Gaza.
One less war to worry about means one less reason to risk-off. That leads to lower VIX and more dovish VAR calculations for institutions. In short, it leads to higher prices.
Up Only
If we can thread the needle on all these events this week, and we are off to a good start, I think we will be boarding the elevator up to new heights.
Indeed, markets seem eager to enter price discovery mode once again.
Remember, we are in an emerging period of fiscal dominance. The question is no longer “Why should the price go up?” but only “Why should the price go down?” So much money is systematically pumped into the works of asset markets that things need to be bad for there to be a sustained downside break.
I think the ingredients are right for a violent and sustained rally.
Let’s watch.
Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here.