Europe Has More Leverage Than Commonly Portrayed
The DXY dollar index is heading for its worst week since last June, while gold is enjoying its best week since March 2020.
Key Takeaways
Europe’s Economic Leverage: As for the most recent TACO on this Greenland and NATO file, it was probably less Mark Carney’s speech than the sudden realization that Europe actually imports $300 billion of services from the U.S. annually and exports just $200 billion. This is leverage that the Europeans have, which receives very little press when the tariff discussion turns to trade surpluses and tariffs on the goods sector. Not to mention that Europe “owns” some $17 trillion of U.S. financial assets, and that includes $10.6 trillion of equities (more than triple the $3.1 trillion in Treasury security holdings).
Governments Are Shifting Borrowing Towards Short-Term Debt: Bond markets are quiet, which is a good thing these days — helped in no small part by the decision among European governments to follow the U.S. lead of the past few years by curbing their sales of longer-term debt and shifting more towards shorter-term debt funding. As an aside, we are discussing internally whether to open a position in the juicy 30-year Treasury bond, which is detested even with a juicy 2.6%-2.7% real yield and a very positive carry.
The Dollar Slumps as Gold Rallies: The DXY dollar index remains soft and is back-testing support at the 98 level — heading for its worst weekly performance since last June — as the yen pops +0.7% to ¥157.4 on heightened FX intervention threats. Meanwhile, gold is fast approaching $5,000 per ounce and is enjoying its best week since the peak of the pandemic anxiety in March 2020. Bullion looks overbought, but the factors that brought it to the level it sits at today are not going away anytime soon.
