Pentagon statement
Archives of “January 2020” month
rssIs this it? Are the US and Iran at war?
These reports of attacks aren’t fake
The fog of war has descended over twitter and the news media. There is all kinds of fake news out there but there is enough real news from CNN, Fox, the BBC, Reuters and others to convince me that this is actually happening.
Most concerning is some talk that Iran’s Revolutionary Guard has taken responsibility. At best you could argue this was some disconnected militias trying to create chaos. But from the US side I’m not even sure it matters. Trump almost has to respond now, especially if there are casualties.
If it is war (and it certainly looks like it), it’s tough to understate the consequences for global markets. For gold and oil this is a screaming buy and it’s bad news for stock markets. In FX, the trade is to buy the Swiss franc and Japanese yen.
WTI is up to $64.50 and gold is up $14 to $1588.
This was the best chart from Jeff Gundlach’s presentation
It’s impossible to hedge
The big risk in the FX market is that there are massive flows of unhedged foreign bond buying in the US.
The problem is that Japanese and European investors can’t get positive yield. A traditional option is to buy foreign bonds and hedge in a classic carry trade. The problem he highlights here is that you can’t do that now because the hedge pushes the return into negative territory.
So instead the theory is that they’re buying Treasuries unhedged. That is a wildly risky trade because you’re getting 1.8% a year for 10 years but the currency could drop 18%. What could happen is that if/when the US dollars falls, it starts a rush to the exits and you get a very quick, very painful drop and overshoot.
That should be a key risk that everyone is watching, especially with a President who wants a weaker currency.
USD/JPY: Intra-day range In 2019 narrowest since 1976; Where next? – MUFG
Can the low volatility continue?
MUFG Research discusses USD/JPY outlook and targets the pair at 107, 106, 105, 104 in Q1, Q2, Q3, and Q4 respectively.
“The intra-day high-to-low trading range for USD/JPY in 2019 was 7.6% – that’s the narrowest trading range since 1976 according to Bloomberg data. Taking the last three years the trading range has been just 13.5% underlining the remarkable stability of USD/JPY. 3mth ATM implied volatility fell to 4.99% in December, a record low underlining the conditions conducive to carry. These conditions helped keep the yen weak but failed to trigger any notable sell-off of the yen,” MUFG notes.
“In our view that is a reflection of underlying positives for the yen that will contribute to yen strength this year, even if financial market conditions remain relatively benign…We see limited upside for USD/JPY from current levels. The factors above will act to limit yen weakness. We do not assume any major risk-off event this year but the assassination of Qassem Soleimani in Baghdad on 3rd January is a clear near-term upside risk for the yen that has emerged as 2020 commences,” MUFG adds.
Stock indices end lower. All S&P sectors close lower on the day
Late day selling hurts major indices
Some late day selling has pushed the major indices into the red. All the S&P sectors are closing lower on the day.
The final numbers are showing:
- S&P index -9.13 points or -0.28% to 3237.15. The high reached 3244.91.The low extended to 3232.43
- NASDAQ index fell -2.883 points or -0.03% to 9068.58. The high reached 9091.93. The low extended to 9042.55
- Dow fell -119.97 points or -0.42% to 28583.43. The high reached 28685.50. The low extended to 28565.28.
Thought For A Day
European equity close: German markets lead the way
Closing changes for the main European equity bourses:
- German DAX +0.8%
- UK FTSE -0.1%
- Italy MIB +0.7%
- Spain IBEX -0.1%
- French CAC +0.1%
Spanish parliament voted in a new government today, adding some stability but the stock market wasn’t impressed.
US’ Pompeo to deliver remarks to the media at 1500 GMT
US secretary of state, Mike Pompeo, will brief the media later today
No further details on what it may be about. Here is the press release by the US Department of State. Just take note as it could relate to tensions in the Middle East.
10% corrections in S&P 500
It has been more than a year since the S&P 500 went down 10%. In the nearly 17 years since March 2003, there have been 19 declines of 10% or more. There have been 82 declines of 5% or more.
Drawdown Qty Trading days Days since last
5% 82 4234 64
10% 19 4234 298
20% 5 4234 259
25% 2 4234 2731
33% 1 4234 2831
More details on Iran’s reported retaliation ‘scenarios’ against the US
Iran says that the “revenge operation” will not just be one single operation
Iran’s Supreme National Security Council secretary, Ali Shamkhani, says that “a total of 19 bases, including 11 head bases, the closest to the eastern and western borders of Iran, and along with 8 US bases in the north and south of Iran, are on high alert”.
Adding that “we are aware of their military personnel and equipment and we are tracking their smallest developments”.
This is basically an outright threat towards the US and it will be interesting to see how Trump responds to this – whether verbally or actual military action.
I’ve said it before, the first rule of military response is to never talk about it. The fact that Iran is so brazen about the issue certainly raises some eyebrows about what they plan to do.