Raw Transcript
What a day it has been in these financial markets. Uh we get aggressive swings across major assets and of course crude oil. Uh we're going to try to figure out what all of it means here on macro money. This is Ilius Spac, head of global macro here at Tasty Live. And what we're going to try and do here is of course uh first and foremost delve into the price action. try to uh figure out what all of this ultimately amounted to being. uh and then see if we can't uh take a look at what the uh landscape then portends because of course this is not the first time that uh we've talked about crude oil this week and all the volatility that seems to be showing up there in but uh it probably won't be the last either. So the main question that we have to ask ourselves here and uh this much should not be surprising is what is this really? Is this a situation where we have temporary geopolitical risk on the table? Or is this a situation where there is something more lasting, something more substantive, and perhaps something more thematic that is taking shape? After all, we've seen time and time again situations where the flare up in geopolitical risk came and it went didn't amount to much and at least last year it was an opportunity to fade. But perhaps that is not where we are now. So let's begin with a look at the price action. There is the breakdown. We can see stocks are down 0.58% for the S&P. NASDAQ uh taking a full uh 1.1% almost hit. Bonds are up. So you get a flavor for a uh kind of risk uh off environment here. tellingly uh the situation seems to be uh that in fact this was about as close to risk aversion classic uh as you might expect. Um bonds in this environment looking like they are uh once again taking that role of safe haven. Uh, and um that's not the correct quote for the yen here. Let's fix that. There we go. So, we have a yen that's up and a dollar that's down. that because of course that certainly changes the landscape and brings us back into this uh kind of um situation where uh we see again kind of risk aversion classic. We have a yen that's higher showing uh the unwinding of carry. We have bonds as we say that are higher and yields that are in crude oil interestingly down 1.41% 41% but that's only after it was up as much as 2% on the day. Bitcoin also interestingly breaking uh ranks with uh everything that's going on here up 3.3% finally clearing out that range that where it's been oscillating since early December. More on that later. I've made uh some changes to the portfolio there. Uh we'll take a look at those toward the end of the show. So uh stick around for that update. Um but the main clearly narrative here having to do with what's going on in Iran and with oil. But that's not all of it. Uh because we of course also had a bit of economic data on the calendar. Uh, and there was a bit of that um, story about the Fed and what it might do. So, before we jump onto the oil side of things, let's take care of a little business here uh, and take a look at what that looked like. So, this was the day economic data. it came out a bit hotter than anticipated. We can see here this is back data for um for October and November for CPI is already caught up to um the December numbers but uh PPI alas is still disrupted by the uh government shutdown but the latest numbers here we can see here's core PPI for November it is up to 3% uh certainly much higher higher than expected. The prior number we can see was revised up to 2.9%. The expectation was 2.7. So this is meaningfully hotter for core PPI than anticipated. Wholesale inflation seems to be uh building here. Uh same thing for the headline number again 3% hotter than the 2.7 uh% expected hotter uh than even the revised 2.8% be uh before. So we're looking at a situation that seems to be generally a little bit hotter uh on at least the wholesale inflation front. And as we looked at yesterday, the main story here, because of course this data is somewhat stale, is what is happening under the surface. And we can see here at the headline, it looks like things are relatively steady. So the month-on-month gains not that large, the year-on-year readings relatively uh anchored. But if we look under the surface, this is wholesalers margins first at the end of the US-based supply chain and then at the beginning. And what you see here is that since the advent of these tariffs, margins have been getting squeezed at the end of the supply chain and at the beginning. It's a little bit more um dramatic here for intermediate goods at the early part of the supply chain. Basically, as soon as something touches down state side from wherever it's coming from, these are the uh the importers at this stage of wholesaling. And you can see they're taking big hits on margins up to two percent here on some months that don't see a measured rebound the other way. Hits that then look like the biggest squeeze since 2013. And that's because they appear to be eating the tariffs and basically shielding demand downwind of themselves. because of course if that demand is destroyed because the price goes up too high then they're out of business. So they're trying to do the best they can to keep that demand protected as long as they can. And we can see here that as we start to get especially into the latter parts of 2025, wholesalers closer down the supply chain to where retail is, they're starting to take margin hits because now it's starting to show up for them and these numbers start to get large. We can see in particular in August of last year, this hit is especially sharp. And so the squeeze on inflation seems to be significant. And of course the prior day what we saw was relatively benign looking CPI which gave us numbers that for the most part looked okay anchoring at around 2.7%. But more importantly the larger trends in CPI seemed to be in line with what the Fed was looking for. That is to say, goods inflation was leveling out. Services inflation, the biggest component of the bunch. You can see that here. Services by far the biggest that seems to still be going down. There was a pop in housing uh inflation, but the trend here is unmistakable. So all of this looks well and good, but if there is the plateauing here because wholesalers are eating the tariffs and not passing it on. Well, then this is inherently a temporary thing. They can't eat it forever. Eventually, it'll be too big a burden for them to do that. And so what we eventually then might end up with is a kind of unccoring of inflation once they are forced to basically give up the ghost on holding it back. And what then becomes of course the issue is if inflation spikes the Fed is not in much of a position to cut rates which of course is the crux of this entire issue. We can see that the markets still want a pair of rate cuts this year. 53 basis points here is what they've baked in. Now, that is of course still a wide disparity from where the Fed thinks it is going to have rates. We can see that here. Still on the December summary of economic projections, we find the Fed only sees one cut for this year. And in fairness, the Fed and the markets are generally aligned for how many cuts we see in two years. That's about agreed at at two cuts, but the markets want all of them this year, and the Fed wants to space them out over this and 2027. Now, if there is inflation brewing under the surface in PPI, that's going to be a difficult thing for the Fed in finding its way over to where the markets are. And of course, we can see the S&P 500 hasn't really made new highs since October of last year. It's it's tried, but it hasn't held those levels and has stumbled every time it's tried to issue a close above October's highs. And that was of course when the Fed told markets that they're overextrapulating rate cut potential and should stop. And ever since then, stock markets haven't gone very far. So this then is where crude oil comes in because if there is pressure on wholesalers and a timer on how long they can eat these tariffs, this situation makes that worse. What we see here is a breakout for crude oil uh that appears to be even if you're no kind of technical analyst somewhat unmistakable because what you find here is clearly a series of lower highs and lower lows going all the way back to last year. That spike you see around June, July of last year, that's the firefight between Israel and Iran, which ultimately had the US join into a strike on Iran's nuclear facilities. But the down move extends even beyond that. That spike was just the latest in a move to the top of a range that's kept crude oil anchored below $80 a barrel going all the way back to September 2023. But even just this here from midl last year into now is a very clear decline. We can see the low there at uh just below 55 bucks a barrel is what was there uh on liberation day last year when everything panicked around the introduction of the tariffs at first. We found a bottom going into the beginning of this year and clearly now whatever down trend this is appears to have been violated. And it's easy to say that what's going on here is strictly having to do with the teetering in Iran and the possibility that the US might strike to push the whole thing over. But that seems to be the small story within a larger one because what you find is the Venezuela raid to extract Nicholas Maduro was in here somewhere. Crude oil did not budge on that news. It moved later. It also moved before, let's say, the past 48 hours really be uh became a story about whether the US would intervene in what's going on in Iran because the actual uprising in Iran is an organic one. The people have actually stood up and are threatening to overthrow their government. Now what that did in the wake of Venezuela as it started to heat up even before a conversation about US involvement got underway was started a conversation that is at its essence a much bigger and a much longer term discussion that of course is about what all of these dominoes falling at the same time seems seems to mean for not just Venezuela, not just Iran, but much more importantly what it means for China. Because there is of course clearly here the assumption that in basically taking over Venezuela's oil exporting what the US has done is said we control this now and that means not China but look at China's import mix here uh with the nice visual from uh visual capist here And you can see Iran high on the list. Then Russia, Saudi, South America, and South America of course includes Brazil, includes Gana, Venezuela's in there, but it's not the largest. But what you start to see here is, okay, so Iran's teetering, the US is boarding Russian shadow fleet tankers. That's probably the biggest uh disruption here. And at least one piece over here is missing. So what does that leave us? Well, it certainly makes for a meaningful hit taken together were it all to come apart at the same time if you were to consider China's energy mix. Now, of course, there is other sources. It's not like they're going to go without oil. They will get their oil elsewhere. But it does force a reshaping. For example, if Iran suddenly goes offline and Russia and its supply keep getting squeezed and Venezuela is now basically off market for exports to China, China's going to have to get more from Saudi. they're going to have to get more from other Gulf um countries which we see here Qatar, Bahrain and Oman. Uh so that they're going to have to maybe get more from the UAE and West Africa from Iraq. So there's a rejiggering of supply chains here and that of course makes things more expensive. Also you can't get all types of oil everywhere. Some grades are lighter, some grades are heavier. So, China's energy mix here isn't perfectly substitutable one producer to another. So, there's going to have to be some reshuffleling. And China is the world's second largest oil consumer. So, what that reshuffleling means is that there's probably a squeeze on supplies in these other places that was unexpected. And in reaction to that is how you end up with this. In fact, if we take a look at the spread between the global benchmark bread crude and the US benchmark WTI, we can see that the spread has jumped wildly. And that's telling you that US-based crude prices are of course cheap because the US is almost fully self reliant and is itself a producer and an a net exorter um of some oil. But the global price we can see clearly is showing signs of stress and a potential supply squeeze. Not because the US might wait into Iran, but because all of these things taken together appear to squeeze China's imports. And so what we end up with then is today we attempt to rally. We were up again as we were saying earlier as much as 2%. But we get a recoil back after US President Donald Trump comes out and says, "We heard that the killing is going to stop the killing of civilians ostensibly. we heard that um you know and that's good to see etc etc and sort of seem to give an indication that the US is maybe not in a hurry but at the same time US allies have told their uh civilians to leave Iran. the UK embassy closed briefly and we likewise have at least German airlines uh telling their um their planes to avoid Iranian airspace. Generally speaking, the US would not tell its allies to pull its people and redirect its flights if nothing was going. But maybe ultimately nothing does occur. Maybe this is a show of presence and a show of force that ultimately doesn't have to be um consummated. But whether the US gets involved or doesn't really change why crude oil seems to be breaking out here. And so tellingly the pullback we have as it seems to uh come from the president that we're not imminently going to get involved. The US is not imminently going to get involved here directly. Nevertheless, the breakout holds. We get a pullback and a retest of the bounds of the breakout, but ultimately with the push through 5860 59 here, the breakout seems to be intact. And the longer term story, the reshuffleling of China's supplies for all of this apparent reconfiguration of the market, that's going to take months at best. So that story is probably not going away. And of course, where this connects to what we just saw on US PPI is it takes about a month for oil prices to filter into US inflation. And if oil prices are going to spike here, then CPI is likely to follow. And of course, if that's the case, then those producers are that much more squeezed for margins, that much less able to eat the tariffs, that much more inclined to pass on costs down to consumers. Well, and then what interest rates exactly is the Fed supposed to cut? which of course then comes back together to a threat for risk sentiment. So I am still long gold. I am still long the dollar which takes all of this impressively in stride as if to say yes I intend to move higher. I flipped over my Bitcoin position because as I've said, we uh crossed the range boundary there on the top side. So I am now long a call vertical still short the NASDAQ and the SM uh the S&P through uh put verticals. I have doubled my oil exposure. So I'm long there looking for that move to continue with plenty of duration still in these positions. And I've added a little bit on the bonds side, a little bit long uh at the long end here via a call vertical in TLT. Looking for all of this risk aversion to give them perhaps a little bit of a lift and perhaps an expectation that rate cuts will have to be later and that they will show up at the long end of the curve rather than the front. And that is macro money for today. As ever, we are here Monday through Thursday right after overtime. That's a show that I co-host with Chris Veio, looking at the Wall Street Clos and where things might go there from. I am likewise writing for the news and insights portion of tasty.com and commenting at Iaspac on former Twitter and on Blue Sky. If you're watching this on YouTube, like and subscribe. Macro Money is back tomorrow. Happy trading.