Around the World in Seven Charts on Global Markets

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague Kristian Kerr. It is Monday, June 16th, 2025. And Kristian, I hope you had a wonderful Father's Day weekend. I think you watched a little bit of golf. Hopefully you had a nice time with family.

Kristian Kerr (00:23):

Yes, that is a nice part of the tradition of Father's Day that it falls on the final day of the US Open. So I have a built-in excuse as to why I can't be bothered and watch my golf. So it was very good Father's Day.

Jeffrey Buchbinder (00:38):

Wonderful. Well, you had the rest of the weekend to be with family even if you weren't necessarily around at the end of that golf tournament. So yeah, hopefully all the dads out there listening and watching on a good weekend as well. It is good to be with you. Here's our agenda for today. As we always do, we'll start with a market recap, and it was really interesting, needless to say, with a lot going on, pushing in a lot of different directions. We'll go with around the world in seven charts. If we were more creative, we probably would've done around the world in eight charts as a playoff of the 80, but we're, we're just going to do seven. You're welcome for not doing 80. That would take a little longer than 30 minutes. Agenda item three, inflation update the Fed's in a tricky spot.

Jeffrey Buchbinder (01:26):

We'll say, Kristian, your thoughts on what we might get from the Fed this week in addition to any potential developments on the Middle East conflict and got some key data as well, including retail sales that we will preview. So, let's start with the recap. So, I mean, Kristian, we got started off on a real nice positive note. We got a, you know, the framework of an agreement with China, and we got a good, CPI had some nice gains heading into Friday, and then it all fell apart.

Kristian Kerr (02:02):

Yeah, I mean, geopolitics has a tendency to sneak up on you. You know, I don't think, you know, this has been in the news of late, but kind of the attention's been mostly on kind of the Russia, Ukraine situation. So, you know, I, but I think it is quite interesting just the you know, here we are, day four, this, and market's shrugging it off for the most part, you know, which I, I know we'll get into in a little bit. But you know, that's my biggest takeaway is, you know, if you had told me this time last week that, you know, we're going to see basically attempts to take out the nuclear production facilities of Iran, and, you know, markets are basically going to be fine after that, I, you know, I would've I would've not believed it. So you know, markets continue to surprise is my biggest takeaway. Yeah,

Jeffrey Buchbinder (02:49):

We will get into this more, but certainly the market is used to Israel and Iran firing missiles back and forth at each other, although not at this scale. So you know, this thing is fluid need, needless to say the latest headlines here, right before we jumped on, or that Iran's willing to talk, the market's rallying on that. But last week it was all about energy. Of course. Oil prices spiked on Friday on the news of the initial Israeli airstrikes on Iran, brent crude up over seven. We'll have a chart on that here in a little bit. So it was really that combined with defensives that ended up working last week, and you had a little bit of a flight to safety on the dollar after Friday, but not much the dollar really. I mean, it was down last week, right? Or at least through today as we've kind of unwound the safe haven trade from, from Friday on the market's kind of optimistic bent during Monday's trade trading session. So you know, that's certainly something we're going to focus on in our charts, Kristian, but we've also got strong bond market last week, CPI, part of that. Anything else going on in the bond market you want to highlight?

Kristian Kerr (04:08):

Yeah, for me, it was just the I can't remember in my, you know, I don't know, 25 years of doing this where you get at geopolitical event like we did on Friday, and bonds sold off, right? You know, pretty, more towards the, the belly towards the long end, which was just quite surprising. Which, you know, I think is part of the, the bigger, you know, push pull dynamic that we're seeing between debt concerns and the way bonds are supposed to act. And that's kind of within a, you know, a higher inflation world that kind of, you know, maybe makes sense. But, you know, that was, that was probably the most interesting thing for me last week, you know, the reaction we had on CPI, you know, I think that was quite normal, but just you know, getting, getting the event we did where stocks are selling off and you're also kind of getting you know, yields moving up was something that I don't remember seeing, so I thought that was quite interesting.

Jeffrey Buchbinder (04:59):

Yeah, the market is clearly looking through the uptick in, in oil prices and not factoring in sustained inflation. That's, that's showing up in the bond market. That is, of course very positive. So here's your recipe 500 chart. We are over 6,000 now as we're recording this. We're a little bit below it when we price this chart at Friday's close. This is likely to get to an all-time high fairly soon. I think today's action certainly increases the chances of that we've got, you know, market that's not really that overbought and the breadth is pretty good. How do you think the technical setup looks, Kristian?

Kristian Kerr (05:44):

Yeah, and we've been talking about it, you know, just given all the levels that we've broken through. You know, it seems a question of when, not if will challenge all-time highs. I mean, I do think just given the time of year it is, we have quarter end coming up, so rebalances are pretty big. There's a propensity to try to front run those in the markets. So I think that's you know, that's maybe a factor here. And then I think, you know, you've got the big kind of buffered programs that, that sell large amounts of options, and they're kind of around these levels that tends to be a dampening factor on the market. So, you know, I think we get there, but I'm just not sure how fast we get there, because we have, we have all these kind of, the dynamics that, that tend to come into play into quarter end.

Kristian Kerr (06:31):

So I think that might, that might make things kind of a bit of a slog here in the, in the near term. But then again, we come into early July, right? First half of July is kind of the most positive time of the year for the market from a seasonal perspective. So, you know, I think once we get past quarter, and that's probably the, the idealized time for us to maybe make a run at it once we get past all this this quarter end stuff. So that's kind of my, my uber near term thinking in, in terms of direction.

Jeffrey Buchbinder (07:02):

Yeah, that, that all makes sense. We have struggled a little bit, I guess, since you know, the initial run at, at 6,144, which is the all-time high feels like momentum is starting to wane a little bit. So wouldn't be surprised if we get a little bit of a breather here. Before long, we've been talking a lot about how much optimism is priced in. That's more of a fundamental take than a technical take, but there is a lot of optimism priced in for sure. So, let's now transition to charts and I mean, these are really varied. We're going to cover a lot of ground here as the around the world label implies. Starting with, with this, this is a list that we've compiled with some help from our friends at a number of different firms, CFRA Strategas to see how stocks have historically responded to geopolitical shocks.

Jeffrey Buchbinder (08:00):

And so this is actually quite reassuring for folks who may be nervous out there. If you look at all of these, this is one day return, when the shock happens, then the total drawdown after the shock, and then how long it takes to recover or to bottom and recover. And finally, how long or how well, the stocks do after the geo geopolitical shock. And you see here, I mean, there's, there's a few key messages here. I mean, one is these drawdowns are pretty limited for the most. Part two, they end up playing out pretty quickly, right? So we're talking about typical four to 5% drawdown, maybe a few weeks, maybe a little longer than that. But typically, these, these episodes don't last very long. And if you look at returns, you know, three, six and 12 months out, they're actually pretty normal, roughly aligned with what markets do on average. So, you know, the message to me here is that selling these geopolitical shocks typically is a bad idea. You're more likely to do well if you buy the dip or just ride it out. What do you think, Kristian?

Kristian Kerr (09:16):

Yeah, to an extent. I mean, I do get a little nervous about just how complacent people have become towards geo geopolitics because I do think every event's a little bit different. I think, you know, if you were to narrow this down more to, all right, what are the geopolitical events that had lasting impact? Like the Pearl Harbor attack you could even go back further to when, you know, Hitler invaded Poland, right? Like, that had knock on effects that this is going to be a different situation. I think that's the, that's the big distinguishing characteristics. So, you know, I think this is definitely you know, a positive that most of the time these things tend to not be, you know, hugely significant events. But when they are, that's, that's when you're going to have kind of a, you know, a more lasting impact on the market.

Kristian Kerr (10:03):

I think for this particular case, you know, we've talked about this, you know, with the Middle East, we've seen a lot of these before the last few years. I think that's why we're kind of partly seeing the reaction we are now. But I, I think that's, until we start seeing what's going on start to really impact the supply of oil, that's kind of the, where everything hinges on. When you start seeing things that are going to, that are going to, you know, create less supply, that's when the markets will wake up. And so far, you know, everything's, yes, there's a lot of kind of tit for TA going back and forth, you know, yes, they've gone after, you know, some production facilities, things like that. But we're not really seeing kind of the, the major things that would have to happen to where, you know, the market's going to say, okay, there's a major potential supply shock here coming from this.

Kristian Kerr (10:51):

You know, and again, not to be callous to what's going on, but just viewing it from a pure market impact market. You know, what's going to, what's going to move markets on this? And that's, that's what they need to see for this to be, to be more important. But listen, historically, whenever, whenever you get oil shocks that the markets, you know, by its name, it's a shock and you start seeing kind of oil going, going up fast and furious you know, that that's going to, that's going to have a lot of pricing impact on things like equity. So I think, you know, that $80 level and crude is really, really important. You know, I think on the open, we got to around 78 and WTI this morning and kind of sold off pretty hard from there as kind of the idea was, you know, this isn't as bad as people namely you know, initially thought.

Kristian Kerr (11:38):

So I think that's kind of a big level of, think about near term, we start seeing, seeing oil go through 80, that that starts having kind of those shock implications. And we just aren't there yet. But again, this is day four of this so, you know, you know, I think we have to kind of be open-minded as to where this can go. But so far, you know, I I would say it's, it's it's, it's shaken out to not, you know, not be as bad as you think it could have been, you know, a week ago if you told me this was happening. Mm-Hmm <affirmative>.

Jeffrey Buchbinder (12:04):

Yeah, certainly reports that Iran is willing to talk, are helping reduce the chances of mail, major oil disruptions. So that's certainly positive. And then, you know, the economy's in pretty good shape here in the U.S. is slowing short, do we have an inflation problem? Sure. But we'll talk more about that in a bit. But economy's doing fine. And so $80 oil is not going to bring this economy to its knees. And if you look at some of these geopolitical shocks that did cause market disruptions you know, 1990 is one 1973, another 1981 another, these are, these are really challenging economic periods. And so yes, the higher oil prices were connected to the economic weakness, but the point is you had the economic weakness, and that's when the market does not do do as well managing through these, these shocks. So pretty, pretty reassuring story here. We would say, even if the market does decide it's more worried about this, we think that the draw down will be contained. So we talked a little bit about oil there, Kristian, I guess the market's not worried that we're going to have a closed Strait of Hormuz moves to worry about.

Kristian Kerr (13:20):

Yeah, I mean, well, I mean, I think there's, you know, if we're going to see this thing kind of become more significant for the markets, you know, I think there's basically a few things. T straight war moves is the big one. You know, I think that would really only happen if, if, you know, Iran, the Iranian regime kind of feels that, you know, they're, they're about to get, you know, it becomes existential essentially where they think they're about to get taken out. And then, you know, what do they have to lose type of thing. Because, you know, I think they are dependent on, on the revenues that they get from places like China. So, you know, not necessarily want to close that right now. So I think that's the big one, but that's kind of the, you know, the option that, that that probably only do when, when things are looking really dire.

Kristian Kerr (14:03):

But I think other things like, you know, say they attack, you know, Qatar, Bahrain, Saudi Arabia, like some of the facilities there attack a U.S. installation or personnel you know, that could, that could kick things off. And then of course. And I think on the Israeli side, you know, so far they've avoided attacking the island which hails about 90% of Iranian oil exports. But I think we were to see that that might be again, kind of from this, this lens of what affects supply that would obviously be you know, a major potential influence on that. So I think those are kind of the four things that I'm thinking about in terms of what could, what could change the, the dynamic right now. And, and so far we've avoided that stuff. So I think as long as we do you know, markets will probably for the most likely look, you know, keep looking past this and or, or erring more on the positive side.

Jeffrey Buchbinder (14:54):

Yeah, we're not military strategists clearly, but you know, part of the reason the market is, is up is you know, it's, it's essentially a peace dividend, right? Seems to me like the market is pricing in less geopolitical risk in not just the oil market today, because oil's down, but in the global equity markets as well. So anything can happen there. We're not going to make predictions on whether the regime stays or goes, but certainly the market is taking an optimistic take on this. So let's switch gears to positioning. Kristian. I know something you and I have talked about on this podcast and, and elsewhere, I've been surprised that institutions have been a little bit behind still.

Kristian Kerr (15:41):

Yeah. So yeah, put together a few charts kind of with that, that being kind of the the common characteristic. Just what are we getting, what are we learning from positioning? So yeah, this is a chart that shows the volume weighted average investors positioning in U.S. equities. So really reflects positioning in the market across all types of investors, including, you know, mutual funds, hedge funds systematic, what I'd call rules-based investors, and then also retail, right? So self-directed investors. So kind of your full gambit of investor types here. And I think this explains a lot of the story that we've been seeing in the market, particularly in, you know, post early April. And you know, the, all the chaos post, the tariff announcement is that, you know, there was a major de-risking event, and you can see on this chart, you know, we got down, this shows you standard deviations, but we got basically the lowest levels across, you know, investor positioning that we've seen in, you know, since 2020 essentially.

Kristian Kerr (16:42):

And as we've come back there you know, there's been this kind of belief or, or kind of lack of belief in, in this being a, a rally that you want to buy into, you know, across investor types, you know, I would say outside of retail. So more on the institutional side, there's just been thinking that, well, you know, this is going to roll back over pretty soon so I'm not going to fully, I'm not going to fully engage and fully re risk, and it's created this dynamic, whereas the market kind of continues to grind up, you know, it becomes very painful because, you know, if you're underweight your benchmarks and the market keeps going up you know, eventually a lot of investors and the institutional side are starting to get stopped in feeling forced to feel forced to come in, forced to come in at bad levels, and the kind of this grind continues.

Kristian Kerr (17:28):

So I think that explains a lot of, kind of what we've been seeing the last month particular is, is just kind of this lack of belief, but kind of forced the buy into this. And, you know, we're starting to get back closer levels around neutral. I think once you get to, to neutral, then that starts to be levels where, okay, we might, then we might finally be ready to see a you know, a more decent correction in the market. But that's kind of more than anything for me, has been what's driving this market is just the the, you know, how under sufficient investors have been on the institutional side and, and kind of that, that pain trade has really been driving it. You know, when you break down the, the particular styles or types of investor, you know, hedge funds have really re risked quite a bit, right?

Kristian Kerr (18:11):

You know, I would actually say that they're pretty much back to normal. It's really been kind of those rules based types. You know, they tend to be driven more by volatility, and volatility has come off quite a bit and they have not really re risked yet. So, you know, as volatility, if it stays low, they're going to be forced to come back in. But a lot of that depends on kind of the look back period. So short-term volatility is now, is now a lot lower, but you got to remember that a lot of the, a lot of what they're looking at can go back three months or more. So that's encompassing what happened in April. So as that starts to roll off, they might be forced to come back into this market. So it creates this kind of this, this bid potentially in the market as those systematic types are kind of the real last cohort that, that is going to be need that needs to be forced to buy into this market. And we'll see if that, if that happens. But that could be maybe that catalyst that we need to see us kind of go towards all-time highs here.

Jeffrey Buchbinder (19:07):

Yeah. So the other categories of investors are back to neutral already. So retail <crosstalk>.

Kristian Kerr (19:15):

Yeah. Yeah, when you break it down, I mean, retail is has, you know, they've been mark, but they've been, they've been buying this whole way down and the move back up, right? So they've been very active. I would say that they're, you know, above their normal positioning levels you know, mutual funds, I guess, you know, the long only types, they're still a bit below as well, but they tend to be very slow moving. So from a, in terms of a near term tactical catalyst, I'd say it's more we more based on the systematics. But like I said, you know, I, I think in the near term, a lot of it, you know, it's kind of what I call the tail wags the dog. But you've got all these, you know, derivatives out there. There's a lot of leverage nowadays. A lot of option trading with zero dt, and all this type of stuff. So I think that that kind of creates an odd dynamic in the market right now where you know, it's going to, it's going to kind of keep things hemmed in for a little bit. And then, and then perhaps once we get past quarter end then that, you know, some of these big positions start to roll off with the expiry, and then that could, that could set us up for you know, probably, probably a move higher if, if things go the way you, you think they would around option expiration.

Jeffrey Buchbinder (20:23):

Mm-Hmm <affirmative>. Yep. Quarter end almost here. And we've been in the buyback window, so you're getting some support from

Kristian Kerr (20:29):

Oh, yeah.

Jeffrey Buchbinder (20:31):

So interesting stuff. So let's go to positioning. So I guess this chart looks at whether the you know, the buyers essentially that have been moving in, have been buying more cyclicals or defensives and looks like they've been going defensive.

Kristian Kerr (20:50):

Yeah. It goes back to that, that kind of point I was making where, you know, a lot of this grind up has been, there's this lack of disbelief, right? You know, the most hated rally ever type of thinking. And, and I think this shows, this shows this very well, right? Where investors have been forced to buy in, whether or not they're saying, okay, I'm going to buy in and I'm going to, I'm not going to buy the stuff that's moved. I'm going to buy, you know, either, either I just trust this, I'm going to buy something more defensive. Or if I'm forced to buy in you know, I'm going to buy, you know, thing, the things that aren't really moving. And I think that's what's causing a little bit more of this, of this pain trade as well, is the fact that it has been so focused on kind of the areas or the pockets of the market that, that haven't been going up.

Kristian Kerr (21:30):

So imagine you've, you've been forced into the market and, and you know, on top of that, what you chose to get into is kind of underperforming. So it kind of perpetuates this dynamic that we're seeing. I think, you know, so until you kind of get these to more normalized levels, I think it's going to be difficult for us to see kind of a meaningful sell off baring some sort of, you know, major you know, headline or what have you. Just because, you know, the way the positioning is right now people don't have what they need to have on versus benchmark. And that's kind of, you know, perpetuating this, this kind of grind higher that we're seeing.

Jeffrey Buchbinder (22:05):

This is interesting because the cyclical sectors have been performing so much better, and the growth sectors for that matter, not just since April 8th, the market low, but also since, you know, just a month ago, right? Yeah. And that's the period where these, the defensive buying is, has ticked higher. So are those just going up? I mean, is is it, is it a volume situation? Like, how, how do you explain that these defensives are underperforming as positioning is ramping up in that area?

Kristian Kerr (22:33):

Yeah, well, I mean, this is on a z-score basis, right? So it's not like, it's not flows per se. So it's kind of getting back towards, you know, like how you are relative to benchmark. And I think those are a lot smaller. So, you know, it doesn't necessarily translate into, okay, everyone's piled in this, it should, you know, we should see big moves. So I think that that partly explains it, but I think, you know, my takeaway really is just the fact that it, it really highlights just how skeptical institutional investors are of this move. Doesn't mean they might not be, right, right. You know, I mean, these things can take time to play out. And there's, and I can remember vividly in like, you know, the mid two thousands, right? There was, there was skepticism in up being, right.

Kristian Kerr (23:17):

It took a while to play out. So, you know, there, I would not be surprised to see, you know, some sort of turn down, let's say, you know, we start seeing economic data start to, you know, say from the, the tariff episode in April, it's a bit delayed. We start seeing kind of actual, you know, real hard data effects of that say later in the summer you get in that you get in that typical kind of late summer window where you kind of get spooky things happen in the market. You know, I could see them being right. So this isn't necessarily that, that they're wrong, but I think it, it explains a lot of just the, the skepticism that's been driving this grind up in the market, right? Like, no one really wants to buy into this, and they're kind of being forced into it. And the fact that, you know, when they are coming into it, they're, they're focusing more on defensive because they think there is another leg down kind of explains a lot of what we're seeing right now in this market where it's the pain trade essentially. And I think this chart highlights it well,

Jeffrey Buchbinder (24:09):

Yeah. More evidence that maybe this market's due to run out of steam a little bit here over the next couple percent, but we'll have to wait and see how how stocks respond to a new high, which we think we'll get soon. All right. So let's turn to the Fed. I mean, this is a little bit of a preview of the week ahead because we have a fed meeting this week, but this is you, well, why don't you walk through why you put all the different terms on here and how people are supposed to interpret this. But LPL research still sees one, maybe two fed rate cuts this year.

Kristian Kerr (24:42):

Yeah. So the connecting theme of the charts I put together was really, it's about positioning, right? And another, you know, so this looks at open interest and, and open interest really refers to the, the total number of, you know, outstanding features and option contracts that are, that are currently active, not settled or closed. So different, different from volume. Because It shows kind of active engagement or active interest in, in particular instruments. And it can provide, you know, insight into liquidity activity levels and just general interest in particular contract. And, and I've found, you know, over the years, that kind of sudden changes in open interest can be an important leading indicator. And, and really last week, what I was trying to highlight from this is after the better than expected CPI data we had some really, really big jumps in, in open interest in, in a lot of parts of the interest rate market, right?

Kristian Kerr (25:34):

You know, you look at you know, the five in 10 years, this is the day before CPI and the day after so big jump there. You had, you had big jump in kind of the in SFR from now until end of the year fed funds for August, you had a big jump. So, you know, clearly not surprising, right? You know, you had much softer inflation data and, and we kind of have this, this interest, but we were leading into that event, right? The markets were getting very, very comfortable, perhaps a little bit complacent about, you know, starting to see this idea, well, maybe we don't get any cuts this year, right? Like, the fed's going to be cautious for a lot longer, and we get that data and all of a sudden markets are being forced the price in the potential for, you know, at least one, probably two cuts by the end of the year, right?

Kristian Kerr (26:20):

That's kind of what we're seeing here. So, you know, what does that mean going into this weed with the FOMC? I think, you know, I don't expect much from them, but I think the risk is that they, they might, they might skew at least a little bit in terms of their commentary towards being a little more dovish. You know, because they, you know, they historically want to you know, feed into market expectations. So markets starting to expect this you know, I think there's a good chance they, they might, they might lean a little bit more dovish in their commentary. I don't think that necessarily means that we get anything in July. But I think, you know, they start opening the door perhaps with with, with, with kind of some of what they say this week. So I think that's kind of where the risk lies, just given from, you know, a fairly dramatic jump in, in open interest, which, you know, like I said, tends to be a fairly decent gauge in positioning and, and tells you kind of where you know, where the market is leading near term.

Kristian Kerr (27:16):

Yeah.

Jeffrey Buchbinder (27:18):

And for those who don't know, SOR is just the new L-I-B-O-R. So, you know, short term it's overnight, right? Kristian, really short term lending rate between banks

Kristian Kerr (27:28):

And these contracts. The silver contracts used to be the Euro dollars prior to about, what, a year and a half ago when they changed those. So that was the big year dollar contract with one of the most liquid right? Mm-Hmm <affirmative>. Interest rate contracts in the in the world.

Jeffrey Buchbinder (27:45):

Very good. Yeah. So ramping up bets potentially here on short-term rates and the Fed. All right. Good stuff. Let's go to the dollar here. Been getting a lot of attention because of how weak it's been. Yeah. The chart you're shown here is, is the yen speculation on, I guess long yen? What do, what's the takeaway here?

Kristian Kerr (28:11):

Yeah, well, so this chart, you know, again, tying into that positioning theme. So this, this chart comes from the CFTC weekly Commitment of Traders report, which basically provides a a breakdown of net positions of different types of traders in the market on a weekly basis. So every Friday and the two primary categories, there are commercials and non-commercial. So commercials, think banks, corporates, people that have a, a commercial interest in the commodity future, what have you. And then you have non-commercial, which tend to be really just speculators. So people that, you know, are betting whether this thing is going up or down. So this is looking at those, at those in, at those investor types. And you can see here, you know, this goes back to what, like, you know, the late nineties you know, speculators are very interested in the yen going higher, right?

Kristian Kerr (28:58):

So they are long yen short dollars here. Now, to be fair, these charts kind of are a little bit distorted because as a contract gets more interest over time, so it's not really necessarily comparing apples to apples. So, you know, now versus mid two, the mid two thousand, you know, yes, we're quite a bit higher, but there's also a lot more interest. So that can, that can skew a little bit. But I think the point is there that there is you know, we're at extremes here in terms of, in terms of kind of bearishness on the dollar, and I picked the yen, but if you go look at a lot of other currencies, it's not too far off from here. There's a lot of bear sentiment on the dollar, and I think, you know, Adam would agree, right?

Kristian Kerr (29:37):

We're at a level in the dollar index, you know, we were in this big two-year range in the DXY, we broke below it. Then, then, then after we broke under, you know, classic breakdown and then no follow through, rallied back towards kind of the bottom end of that range, failed there again. And now we're turning back lower. So this is kind of interesting spot because you could say maybe it's double bottom in the dollar index, or we about to break down. So I'm a little nervous if you're a dollar bear that with sentiment so extreme and so already bearish, you know, it's kind of, well, who's left to sell this thing? So we're kind of at an inflection point, you know, I feel we've been saying that for a while, but, you know, we've been kind of letting the, the price action play out.

Kristian Kerr (30:18):

But, you know, I do wonder if, if we can have the follow through necessary for dollar weakness with with basically the, you know, the whole market already kind of as bared up as you can be. So it's going to be something to watch here, I think over the next the next couple weeks, particularly in the, in the, in the quarter end as you, as the FX market does tend to get a lot of flow impact from quarter end too. So whether we can see kind of a definitive breakdown or not you know, I think looking for kind of a weekly, a weekly to maybe two weekly close under kind of these range under these recent lows to really signal a more important breakdown. Obviously that'll have implications for asset allocations. You know, we've talked a lot about you know, international equities tend to do a lot better when you've got a very clear defined down trend in the dollar. You know, because you have money kind of rotating away looking for places that that's not the us. So I think it's going to have a lot of impact here. What, what, what happens over kind of the next few weeks in terms of, in terms of how this plays out, whether we end up seeing a, a squeeze again or whether we see kind of you know, a further breakdown in the in, in the, in the greenback here.

Jeffrey Buchbinder (31:29):

Yeah, the major events of the day are all influencing currencies, right? You're talking about Middle East, talking about trade negotiations all over the world, you know, American exceptionalism, deglobalization de-dollarization, all of rates fed all this stuff. I mean, the dollar is really moving on all of this. It's kind of you know, right in the middle of it. So, well,

Kristian Kerr (31:54):

The reason why all the, all the great macro traders, you know, the Soros, the Tudor Jones Druckenmiller is why they are primarily FX because it does, it's in the, it's in the vortex of it all, right? Like mm-hmm <affirmative>. If money's going to flow here or there, there's some theme it's going to, the FX is going to have some, some angle within that. I think that's why it's such a big part of that that world.

Jeffrey Buchbinder (32:16):

Yeah, absolutely. So your seventh chart is kind of along that theme, right? In terms of currencies this is a pretty surprising headline. I bet to a lot of folks. Gold has overtaken the Euro to become the second largest holding of central bank reserves.

Kristian Kerr (32:36):

It was surprising to me. Yes, yes. So again, you know, in that positioning theme, you know, I, this is basically a chart of federal bank positioning, right? And, last week, you know, the ECB came out with some numbers saying that, yeah, that, that gold has been doing so well over the last kind of two years that it's overtaken. That's what we're taking the euro as this, the second, you know, biggest holding for central banks. You know, and a lot of that buying's been, you know, India, China Turkey, even Poland, they've been buying a lot of gold lately. So, you know, I mean, a couple of things here, you know, if we look at it from positioning lens, you know, gold is not cheap anymore, right? If you look gold versus other commodities, it's very expensive.

Kristian Kerr (33:20):

And that's kind of how a lot of gold traders look at stuff as ratios versus other commodities. I think we're, you know, near multi-decade highs versus copper, things like that. So, you know, it begs the question with gold now being, you know, number two you know, are we can start seeing central banks start to diversify into other things, right? You know, we had a huge move in platinum last week. Silver's been on a run, you know, are we going to start seeing central banks kind of move into those areas as well? Because, you know, I'm just not sure they can continue at the pace that they're trying to get into gold. But at, you know, at the same time, you know, buying platinum or silver is not the same as buying gold either, right? So, you know, maybe, maybe it just means that we, that we see this continue, but but I, but I think it does start to beg the question whether we are going to see some, you know, maybe some other metals join the party.

Kristian Kerr (34:11):

But, but definitely interesting dynamic that I would not have expected to happen so soon. But also just shows the, in general, lack of alternatives into what banks have right now, right? You know, we've, we've talked a lot about this, I think of late, and we'll talk about it in the mid-year outlook, but, you know, the world change really a lot after the Russian invasion of Ukraine to where you just had a lot of federal banks and a lot of parts of the world say, you know, we can't afford to have, you know, our assets confiscated, so what can we put our money into? That kind of falls outside the jurisdiction of the west, the United States, right? So that's, I think, been a big driver of, of gold over the last few years. And I think the other kind of thing I would point out is that we haven't really seen Western buying of gold, right?

Kristian Kerr (34:58):

Like it's been predominantly in kind of an eastern hemisphere, let's say. So what happens when, you know, if you start seeing kind of these depths of dynamics start to take hold more, what have you and the west starts getting involved in gold or, or other, other kind of commodities similar to gold. You know, what, what does that mean, right? Because there's a lot more money in the west. So, you know, does that just spur this even more? But definitely a very interesting chart to me, and, and it signals kind of a lot what's going on, a lot what a lot of what can, can go on from where we are now. And it just you know, highlights just how big of a move this has really been over the last you know, call it three years in the in the gold market.

Jeffrey Buchbinder (35:41):

Yeah. The central bank buying is really sort of prolonged the reset of overbought conditions, I would say, in some of these gold, you know, including silver, probably now platinum, right? So, I mean, that is just, it's such a big dollar amount or currency amount that it can really overwhelm <laugh> these charts. And so LPL research has liked precious metal for quite some time. And frankly, as a hedge against what's going on in the Middle East, and as a play on this dynamic, you know, you'll have ups and downs, but probably higher at the end of the year than it is now. I think that's fair.

Kristian Kerr (36:23):

Yeah. Tough to bet against, at least.

Jeffrey Buchbinder (36:25):

Yeah. Well, the momentum is strong and that begets momentum, so we'll keep watching that. But yeah, precious metals we think makes sense as a small piece of an asset allocation. So, alright, we went around the world in seven charts. So let's preview the weekly market commentary, though many of you have probably already seen it as you're listening to this lpl.com research tab. It's an inflation update. This first chart, this is from Dr. Jeffrey Roach and it shows the relationship between the ISM services price index, which is a survey and the CPI. So do you expect prices to go up or down? And how is that compared to actual inflation? And you see here a very tight relationship. It's not a big surprise, but what's interesting here is this little hook higher, this is tariff driven expectations for inflation have risen. If you look at a lot of other surveys, not just the ISM, but you know, for example, the NFIB, the National Federation of Independent Business or Federal Reserve Surveys, you're going to see the same thing.

Jeffrey Buchbinder (37:32):

So an ex, there is an expectation that inflation's going to tick up. It's largely tariff driven. Some other factors probably mixed in there, a little stimulus spending, but generally speaking, inflation probably ticking higher in the near term, which makes absolutely fed's job tough. This chart shows the relationship of PE ratios for the s and p to inflation as inflation drops, which of course it's not doing right now, but it's relatively contained as inflation drops, PEs tend to rise. Valuations are off this chart. So we're at about a 22 PE now. Average is a little under 20 for p for inflation environments under 2%. So we've said it over and over again, we probably said it every week for the last several months.

Jeffrey Buchbinder (38:22):

Stocks are pricing in a lot of optimism. They weren't on April 8th <laugh>, but otherwise, pretty much all year stocks have been pricing in a lot of optimism markets saying that inflation's come down. So we really, inflation's really important for the Fed. It's really important for stock valuations. It's of course important for consumer spending, which really drives the economy. So in fact, I think the title of the Weekly was, you know, you you can't overstate how important inflation is. Something along those lines. It really is critically important. So Kristian, your comments on, on the inflation outlook and, and how important it's

Kristian Kerr (39:02):

Yeah, I mean, I think we've been, we've been seeing it, right? You know, I, inflation has just massive implications on asset allocation. You know, let's talk about the bond market, right? You know, over the last mm-hmm <affirmative>. You know, basically since the 2020s, bonds have not worked as well as they did prior to the 2020s as terms of a natural hedge in portfolios. And I think a lot of that's because we are in a higher inflation regime, right? Bonds mm-hmm <affirmative>. You know, basically they're, their fixed income returns get eroded in a, in a higher inflation regime. And that's, and that basically takes away that natural hedge aspect, and that's been the case throughout time. So I think it, it does have a lot of implications. I think in the near term, you know, if we do, if we do see kind of a little bit of an uptick inflation, you know, that that's going to make things tough for the Fed, right?

Kristian Kerr (39:49):

You know, they've, they've been cautious so, you know, they have a dual mandate, so kind of, it, it, it puts them in a very difficult spot in terms of, you know, I think they want to cut rates, but it's going to be it's a lot harder to do that if you start seeing signs of uptick inflation, right? So it, it feels like something's got to give at some point. But I think, you know, unless we see something kind of get a little bit more out of hand and where they have to start signaling potential rate hikes, which I think is not on the table here you know, they're, they're probably just going to be slower to cut rates. But I still think kind of, you know, as long as this is well contained and we think it will be you know, they, it just slows them down but doesn't actually alter their course.

Jeffrey Buchbinder (40:34):

Yeah, it'll be interesting to hear from the Fed this week. I mean, that's, again, other than following the events of the Middle East, I think the fed's probably the, going to get the most attention from market participants. Although there are other things, certainly on the calendar, it'll be interesting if they give you any clues as to how they're going to view inflation from the Middle East versus inflation from tariffs, and whether those things cause them to maybe lower their expectations for economic growth. Because If those things are negative growth drivers, there'll be, they'll be more likely to cut sooner. If they view them as inflation problems and they wait for the inflation clouds to clear, then you could be late in the year before you see a, a cut. So I'm, I'm totally with it there in a really tight spot. And even though they're not going to cut rates this week they do have you know, updated dot plot, updated economic productions, it'll be very interesting to see what clues we get about how they might respond to inflation from these various sources. We also get some senate text for the reconciliation bill this week. We're probably going to get a trade deal. The G7 meetings in in Canada are going on right now. The, I guess, odds on favorite for a deal first might be Vietnam at this point, which is interesting. They're talking about maybe cutting that 40 plus percent rate down to 20 or somewhere in the low twenties. There's talk about Europe maybe settling at 10. What do you think, Kristian, what are we going to get on trade this week?

Jeffrey Buchbinder (42:19):

And how market potentially react?

Kristian Kerr (42:20):

Yeah, I mean, to your point there's a lot of optimism baked in. I think there's a lot of optimism that something gets announced in Canada, right? And if we don't see that then that's potential negative. You know, I'm not sure Vietnam matters too much. I think they're going to want the market's going to want to see something with Japan Europe, one of the bigger trading partners. I think that's really what's, what's important for the market. So seeing at least, you know, progress towards something that's, that's actual real progress, not just saying it is, is going to be really important because listen, they're sitting down together and you know, it's starting to get to the point we're starting to get near, near important deadlines here next month to where I think, I think the market's going to want to see kind of more bonafide evidence that, that something is, is going to happen in a positive light, given all the optimism in the market. So I think that's going to be important. Not sure who it is, but as long as it's one of the bigger, one of the bigger trading partners, I think is going to be be important that we see something, something progress on in that over the next few days.

Jeffrey Buchbinder (43:27):

Yeah, and certainly last week's agreed upon framework with China is, is helpful. It's, it's nowhere near a trade agreement in a broad sense, but it was at least progress and the market's been able to take the, the worst case scenarios off the table with regard to tariffs. And frankly, that's been enough to really get back all we've lost and then some <laugh> as a result of you know, Liberation Day and the tariffs and all of that from April 2nd. So market's in a pretty good place, but a lot of optimism priced in right now for sure. So we'll keep watching the Middle East closely and certainly watching oil. But you know, good news at this point that if the reports are accurate, that Iran's willing to talk and we might see a deescalation, certainly we'd all, I think love to see that. So thank you Kristian for joining this week. Thanks everybody for listening in another LPL Market Signals really great conversation this week. We will see you next time. Everybody. Take care and hope all the dads out there had a wonderful Father's Day weekend.