Submitted by Jeffrey Snider – Alhambra Investment Partners
By most accounts the Asian “dollar” was quiet last night but now the “regular” eurodollar is in full form. That might suggest greater care with these terms as the yen appears to be in that latter mix despite geographically belonging to the former. For purposes of clarification, then, since Japanese banks were among the original sources of the eurodollar buildup (and the second most difficult of the 2007-08 bottlenecks) in my view they belong to the eurodollar whereas Chinese, Hong Kong and those of perhaps newer entrance form the Asian dollar. The fact that one, the seemingly ancient eurodollar, is alive today while the other is not might again suggest fracture though still quite attached.
At the moment, eurodollar futures seem to be most indicative of today’s higher tendency toward liquidation. As noted recently, the eurodollar curve has barely paused lately, especially after the FOMC failed to act for the nth time. The curve has been a shriveling, bearish hump for awhile, but that has seemingly amplified in the past week. The June 2018 eurodollar futures has traded today well above the highest price on August 24.
Among the major currency proxies for the “dollar” only the real (nothing new) and yen really stand out. Combined with the eurodollar curve’s trends shown here, and the fact that the Asian dollar is not readily apparent (SHIBOR fixed the same as yesterday, offshore CNH HIBOR was lower O/N and only slightly higher 1W and out), that might suggest more and deeper economic concern rather than raw financial adjustment (though one certainly follows the other). The fact that US stocks and the corporate bubble are aligned with the angry eurodollar seems to further that interpretation.
While HYG sets a new low in retail junk, we still have no idea about institutional pricing for leveraged loans. As has become a regular concern, the S&P/LSTA Leveraged Loan 100 failed to update again, still clocking September 18 for the last index values. Since the index was already last week down close to the August 26 low, pricing irregularity in that space is not likely to be “helpful.” In my own personal view, I can’t help but wonder if pricing difficulties have contributed to the systemic lack of enthusiasm for corporate junk (giving rise to further and greater uncertainty and perhaps fear; see gold below).
Other institutional prices through yesterday’s close seem to echo that reality, as the corporate bond bubble is being sold again. The BofAML CCC index yield has revisited the highs from the yuan episode, while the broker’s Master II high yield index rate is only about a dozen basis points below the August 24 liquidation level.
The combined eurodollar relationship in perhaps this renewed economic and fundamental reconfiguration (certainly a shift in perceptions) is, in my view, the primary agent in gold’s rise – especially since the FOMC meeting. Gold prices continue to defy the defilement of the retreating “dollar” supply (and collateral flow) and thus signal a great deal more apprehension more broadly. The fact that these spikes in gold prices align with eurodollar moves would seem to confirm those more fearful and penetrating connotations.
There is an almost natural tendency to assign golden behavior based on perceptions of QE or central bank expansionary pressure (assumed or otherwise). I don’t want to discount that too much but in my view and understanding, particularly under the conditions of the eurodollar that have prevailed since 2007, gold seems to act more on the “dollar” rather than anachronistic ideas about dollars. In other words, it is the tug between the safety bid of central banks being proved wholly wrong vs. the funding stress created by perceptions of that; that was the violence and volatility of gold in 2008, where gold plunged on three separate occasions only to be fearfully bid back up and then some time and again.
The break between gold and the “dollar” (certainly as represented by its formerly very close correlation to the real) is, for me, the main signal of that same shift in perception. To put it in Yellen’s context, “transitory” isn’t as widely and faithfully accepted as it once was just a few months ago. The problem of that view is right from the start, as it already admits that there is a problem but simply ignores any deeper implication by assuming temporary stature. Thus the end of transitory means not recognizing the problem, as it was already there and admitted, but rather going beyond and starting to contemplate those darker inferences. The shift now in the eurodollar, as briefly described here, seems to be in that direction – with and without the Asian dollar.