Trading Desk

Looking ominous.

KOSPI

HSI bounced alongside HTI1!, which initiated a rebound from key support. The Golden Week figures released on October 9 showed domestic tourism spending up 4.3% and trips up 6.3% year on year on a comparable daily basis. Spending per trip therefore remained weaker even as travel increased.

VIX technical structure is in line with our expectation of vol pickup near the election.

The front end is getting relief from the pace of tightening. On October 8, Waller said hikes do not need to come at consecutive meetings. That is in line with what I told you in the last Tactical Positioning: I doubt he'll hike at the October FOMC meeting, as he'll play the little puppet Trump wants him to be. US02Y has pulled back from the 5% resistance, as we expected.

US10Y and US30Y continue to print new YTD highs after hitting major resistance. The divergence between short- and long-end yields is particularly noteworthy, as it suggests the market is realizing the war could last longer than it had expected.

Trump delivered the TACO needed to tame oil prices, as we can see from the price of CL1!, which at one point was $20 a barrel below its high. But this TACO has not translated into lower long-end yields. This is perhaps what Trump least wants to see. As the midterm election gets closer and closer, I expect Trump to pull stronger and stronger TACOs in an effort to tame yields. But unlike in 26Q2, I doubt such attempts could deliver a material trend change in yields.

USDJPY

DXYWe called the bottom in DXY around 98.8, and the dollar index has since formed a base and rallied to break above the key resistance at 101.725. The macro picture continues to support dollar strengthening, except for a possible short-term pullback as yields hit critical resistance, though I doubt it will be significant.

HG1!

As mentioned last week, traffic through the Strait of Hormuz has shown signs of improvement, and those signs have continued this week. Yet the recovery has done little to ease pressure in the physical market.

As I have repeatedly argued, Iran's interest lies in controlling oil prices. The goal is higher for longer. That will push U.S. inflation higher and entrench a spiral that becomes harder to break the longer Washington waits. Higher rates will make financing and refinancing increasingly expensive for the U.S. Treasury and the AI sector, weakening the economy and forcing Washington to accept Iran's terms for peace. We made this judgment in the first week of the war. Since then, despite the daily barrage of fake-news headlines, nothing has changed that trajectory.

The barrels are returning, but moving them has become vastly more expensive. VLCC freight from the Middle East to China has surged to around $35 a barrel, versus roughly $3 at the start of the year. The increase alone is several times the toll Iran proposed in peace negotiations: 5%-7% of cargo value, equivalent to roughly 5-7 a barrel at $100 oil.

Some European refiners are already struggling to pass higher crude acquisition costs through to product prices. If they cut runs, crude demand falls while finished-fuel supply tightens further. Recovering crude flows therefore do not resolve the diesel problem. Diesel feeds directly into producer prices and transmits the energy shock through freight, farming and distribution costs into consumer prices. That keeps pressure on CPI and PCE even when crude futures retreat.

CL1! is much weaker than BZ1!, as Trump launched another round of SPR releases last week to curb out-of-control oil prices ahead of the midterms.

XAGUSD

XAUUSDheld the key 4.11K support over the past two weeks and staged a sharp rebound on Friday. China's September reserve figures, released on October 7, showed an addition of 740K ounces. Central-bank buying is continuing. But central-bank buying remains overshadowed by the negative backdrop from the Iran war. As I have warned repeatedly over the past few months, persistently high oil prices keep inflation pressure alive and yields rising, weighing on gold even with geopolitical safe-haven demand.

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Michael Burry is quite obviously in his first stage of grief, denial. Just as I predicted two weeks ago. Before 2000 and 2008, this stage lasted 6–9 months, during which the market went against his bets and investors started losing faith in him. The market sided with us by having the SPX print a fresh new ATH today. As the market delivers my prophecy and participants grow increasingly complacent, trail your stops. Like I said, sadly, it's like God gives with one hand and takes with the other. He's among the best value investors, but at the same time, he's terrible at timing the inevitable. But the inevitable will come. 
Tick Tock...

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