The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.
Bull/Bear Market
The Bull/Bear indicator remains at 60%, with two of five leading indicators signaling risk-off:
Weekly continued claims increased to 1.974 million on June 14, warning that the labor market is deteriorating. Unemployment was at 4.2% in May, but will likely rise in the next few months.
Stock Pricing
Stock pricing increased to 96.96, compared to a low of 95.04 ten weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.
We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Robert Shiller’s CAPE compares the S&P 500 index against a ten-year average of inflation-adjusted earnings. CAPE increased to 37.29, approaching its December 2021 high of 38.31, which was only previously surpassed during the Dotcom bubble of 1999-2000.
The previous high was 32.56, before the stock market crash of October 1929, shown on Shiller’s long-term chart below.
Conclusion
We are in the early stages of a bear market, with the bull-bear indicator at 60%. Extreme stock pricing increases the risk of a significant drawdown.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
The S&P 500 and Nasdaq reached new highs, but the Dow has not yet confirmed the breakout
Liquidity is strong, and long-term Treasury yields are softening
But the Conference Board Leading Economic Index warns of a recession
The dollar keeps falling, and demand for gold remains strong, flagging high levels of uncertainty
The S&P 500 broke resistance at 6100 to reach a new high. Expect retracement to test the new support level, but respect will likely signal a fresh advance.
The Nasdaq 100 ETF (QQQ) has also reached a new high.
However, the Dow Jones Industrial Average lags and has not yet confirmed the new breakout.
The broad Dow Jones US Index (DJUS) still lags the DJ World-x-US Index (W2DOW).
Financial Markets
The Chicago Fed National Financial Conditions Index declined to -0.51 on June 20, signaling improving financial conditions.
10-year Treasury yields declined to 4.25%, providing further support for stocks.
Economy
The Conference Board’s leading economic index (LEI) declined to 99.0% in May. Six-month growth in the LEI (blue) fell to an annualized -5.4%, below the -4.1% that triggers a recession signal (marked in red).
The black line on the above chart indicates negative growth in more than 50% of the LEI components over the past six months, which confirms the recession signal.
Manufacturers’ new orders, excluding defense and aircraft, are one of the few LEI components that did not decline over the past 6 months. However, they show a steep long-term downtrend when adjusted for inflation (PPI for capital goods).
New orders for consumer goods, adjusted by CPI, are also declining.
Dollar & Gold
The dollar continues to weaken, with the US Dollar Index breaking support at 98 to confirm our target of 90.
Gold is consolidating between $3,200 and $3,400 per ounce. Declining Trend Index peaks warn of secondary selling pressure, and another test of support at $3,200 is likely. Respect of support would signal another test of resistance at $3,500.
Silver is consolidating in a narrow pennant at $36 per ounce. A retracement to test the new support level at $34 remains likely, but follow-through above $37 would signal another advance.
Conclusion
A breakout of the Dow Jones Industrial Average above 45K would signal another advance for stocks, but the Conference Board Leading Economic Index warns of a recession. Manufacturers’ new orders for non-defense capital goods and consumer goods both display long-term weakness.
10-year Treasury yields softened to 4.25%, and financial conditions are easing, supporting stock prices. However, a declining dollar and strong gold price continue to warn of uncertainty. We don’t see this as a buy opportunity for investors; extreme stock valuation levels continue to warn of elevated risk of a significant drawdown.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Stocks rallied on news of a ceasefire between Iran and Israel
But celebrations may be premature
The dollar weakened, which is likely to boost demand for gold
The S&P 500 rallied to test resistance at 6100. Breakout would signal a fresh advance, but declining Trend Index peaks warn of selling pressure.
Uncertainty remains high.
The White House was quick to claim victory after the US airstrike on Iranian nuclear enrichment facilities. But claims that the subsequent ceasefire is the start of a new era of peace in the Middle East will likely prove premature.
A ceasefire is not a peace settlement. It’s a pause in hostilities that allows both parties to rearm and re-strategize.
A precision strike is nothing more than a big hole in the desert, the effectiveness of which can only be determined by subsequent Iranian actions.
The damage assessment reported by CNN is premature, but it does raise some interesting questions.
The assessment, which has not been previously reported, was produced by the Defense Intelligence Agency, the Pentagon’s intelligence arm. It is based on a battle damage assessment conducted by US Central Command in the aftermath of the US strikes, one of the sources said.
The analysis of the damage to the sites and the impact of the strikes on Iran’s nuclear ambitions is ongoing, and could change as more intelligence becomes available.
….Two of the people familiar with the assessment said Iran’s stockpile of enriched uranium was not destroyed. One of the people said the centrifuges are largely “intact.” Another source said that the intelligence assessed enriched uranium was moved out of the sites prior to the US strikes. (CNN)
If the stockpile of enriched uranium were moved or otherwise not destroyed, how would this affect Israel’s security?
The only way to finish this is with boots on the ground. Neither Israel nor President Trump is likely to commit to that.
In the Treasury market, 10-year yields declined to 4.3%, easing the pressure on stocks.
However, the dollar continues to weaken, with the US Dollar Index testing support at 98. A breach would confirm our target of 90.
The chart below shows how Brent crude and the dollar moved contra-cyclically, with the dollar weakening when crude oil prices rose, and vice versa.
However, that changed shortly before Russia’s full-scale invasion of Ukraine in 2022, the dollar strengthened despite a spike in energy prices, diverging from past behavior as investors sought safety. The divergence continues, with the dollar weakening while crude oil prices are falling. The dollar’s role is under threat.
Investors globally appear to be gradually reducing their exposure to dollar-denominated assets, driving the greenback down to its lowest level against a basket of major currencies in three and a half years….
According to Bank of America’s FX strategy team, European “real money” investors – institutions like pension funds and insurance companies – are the main drivers of the dollar’s selloff in the second quarter, slashing their dollar positioning to the lowest since 2022 in a matter of weeks.
But the story might not be so straightforward…. research shows that most of the dollar’s average daily declines in the last few months have come in Asian trading hours, suggesting Asian holders of U.S. bonds may also be increasing their dollar hedges. (Reuters)
Demand for gold remains strong as the dollar weakens, with the metal finding support at $3,300 per ounce. Respect of this level would signal another test of resistance at $3,400.
Conclusion
Stocks have rallied, but uncertainty in the Middle East remains high.
Long-term Treasury yields have softened, but the dollar continues to weaken, reflecting uncertainty over the US role in the global monetary system.
Private investors have replaced central banks as major investors in US Treasuries. They are far more price sensitive, and both European and Asian investors are increasingly hedging their dollar positions, expecting dollar weakness.
A weakening dollar is expected to boost demand for gold.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.
Bull/Bear Market
Our Bull/Bear Market indicator remains at 60%, with two of five leading indicators signaling risk-off:
The unemployment rate remains at a low 4.2% in May, but weekly continued claims climbed to 1.945 million on June 7, warning that the labor market is deteriorating.
However, monetary conditions are easing. The Chicago Fed National Financial Conditions Index declined to -0.52 on June 13, signaling improved financial conditions.
Stock Pricing
Stock pricing eased slightly to 96.30, compared to a low of 95.04 nine weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.
We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Conclusion
We are in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, indicating risk of a significant drawdown.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Iran proposes a ceasefire, sending stocks higher while gold dips
The attacks continue, with uncertainty high
But short-term volatility is unlikely to affect long-term secular trends
The Israel-Iran conflict entered its fifth day on Tuesday, with an Israel Defence Force spokesman claiming the IDF had achieved air dominance over Tehran. Uncontested air sorties continue to attack military targets as well as the state broadcaster.
So far, attacks by the IDF have largely avoided oil infrastructure. Still, Israeli drone attacks set off a large fire at the Shahran oil depot in northern Tehran, and another at the offshore South Pars gasfield, the source of two-thirds of Iranian gas production. Meanwhile, Iran struck an oil refinery in Haifa. A spillover into strikes on oil facilities would mark a significant escalation, threatening to draw in other states reliant on oil supplies through the Strait of Hormuz.
Iran’s biggest uranium enrichment plant at Natanz has been badly damaged, but the enrichment site at Fordow, built under a mountain, is largely untouched. The IDF’s capability to eliminate the second site is questionable.
The Iranian proposal for a ceasefire, in return for flexibility in nuclear negotiations, allayed market fears. However, President Trump spooked markets when he cut short his visit to the G7 and called for the US national security council to assemble on his return.
One commentator observed: “You don’t convene the NSC to announce a peace proposal.”
Stock market futures dropped in after-hours trading, while gold found support.
Before the close on Monday, the S&P 500 recovered above 6000, but short daily candles warn of hesitancy.
The Dow Jones Industrial Average displays similar uncertainty. Reversal below 41.5K would warn of another correction.
Financial Markets
The Fed continued its QT program in May, shrinking assets on its balance sheet by $36 billion.
However, on the liability side, the Treasury General Account declined by $129 billion, significantly boosting overall market liquidity in May.
Commercial bank reserves climbed to $3.407 trillion on June 11, reflecting the surge in liquidity.
Treasury Markets
10-year Treasury yields are headed for another test of 4.5% as the probability of another Fed rate cut fades. Markets are not expecting a rate cut at Wednesday’s FOMC announcement.
The fiscal deficit for the year to May climbed to $1.365 trillion, up from $1.202 trillion in the corresponding eight months of the previous year. The projected deficit for the financial year is $1.88 trillion.
Dollar & Gold
The US Dollar Index continues to test support at 98. The recent Trend Index peak below zero warns of strong selling pressure, and follow-through below yesterday’s low would confirm our target of 90.
Gold retreated below support at $3,400 per ounce as traders took profits. A breach of $3,300 would warn of another test of $3,150, but respect is as likely to signal another test of $3,500.
Silver held firm above $36 per ounce, suggesting a continuation of its recent uptrend.
Conclusion
The Israel-Iran conflict is unlikely to escalate unless Iran attempts to close the Strait of Hormuz, threatening global oil supplies. We expect short-term volatility but little effect on the long-term secular trends in global financial markets.
The status of US Treasuries as the global reserve asset is fading. Rising fiscal deficits and debt levels have triggered a secular bear market in bonds and the dollar. Central banks are increasingly replacing fiat currency reserves with gold as the primary global reserve asset. We expect the trend to continue until gold reaches 60% to 70% of total reserves, the norm during the Bretton Woods era of gold convertibility during the 1950s and 60s.
The dollar is in a strong downtrend due to capital outflows from US financial markets. However, long-term Treasury yields remain range-bound. Speculation on further Fed rate cuts is offsetting pressure from capital outflows. Financial markets are pricing in two rate cuts by the end of the year, but the Fed is likely to stand firm for as long as employment numbers remain strong.
Stocks face headwinds from three sources: lower revenue growth from a slowing economy, narrower margins due to import tariffs, and higher interest rates. Widening fiscal deficits, precarious public debt levels, and higher inflation all increase the interest premium demanded for long-term investments.
The Fed can always suppress long-term interest rates to support the US Treasury. However, this would raise inflation, weaken the dollar, and accelerate the growing demand for gold.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.
Bull/Bear Market
Our Bull/Bear Market indicator is at 60%, with two of five leading indicators signaling risk-off:
The University of Michigan index of current economic conditions improved to 67.6 in June, but remains deep in recession territory (below 100).
Stock Pricing
Stock pricing eased slightly to 96.33, compared to a low of 95.04 eight weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.
We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Stock market capitalization declined to 2.60 times GDP in the first quarter of 2025. Warren Buffett’s favorite long-term valuation measure reflects an extreme reading compared to his fair value rule-of-thumb of 1.0 and a fifty-year average of 1.16.
Conclusion
We are in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing remains extreme, indicating risk of a significant drawdown.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
The dollar is weakening due to capital outflows from the US
Long-term Treasury yields are declining in anticipation of Fed rate cuts
However, capital outflows are expected to lift long-term rates and slow economic growth in the years ahead
The weaker dollar is expected to depress stock prices and boost demand for gold
The US Dollar Index broke support at 98, signaling another decline with a target of 90. Trend Index peaks below zero warn of strong selling pressure.
A low CPI print boosted support for Treasuries, with the 10-year yield declining to 4.36%.
However, the long-term chart below warns of a bond bear market. After more than three decades of capital inflows into US financial markets, international capital flows have reversed in anticipation of President Trump’s trade policies. Narrowing the trade deficit will likely slow the inflow of capital into the US, raising long-term interest rates and slowing economic growth.
The sharp increase in federal debt, from 55% of GDP in 2008 to 114% today, limits policy options. Reducing the fiscal deficit from its current 6.5% to a more sustainable 3.0% would likely cause a similar contraction in economic growth, tipping the economy into recession.
The Fed is also limited in its monetary policy options because of inflationary pressures from Trump’s trade policy, if it were to cut rates, and the adverse effect on the fiscal budget if it allowed long-term interest rates to rise.
The weakening dollar will likely accelerate the capital outflow from US financial markets, increasing the upward pressure on long-term interest rates and downward pressure on stocks. It is also expected to boost demand for gold as an alternative.
Gold climbed to above $3,400 per ounce, signaling another test of resistance at $3,500. A breakout above $3,500 would strengthen our target of $4,000 by the end of the year.
According to the IMF, the percentage of gold in international reserves increased by a record 4.0% in 2024, with a similar decline in US Dollar holdings. However, official gold purchases are only half the picture.
Jan Nieuwenhuijs conducted extensive research, along with the World Gold Council, on unofficial gold purchases by China and Saudi Arabia. He estimates that this back-door gold accumulation amounts to 3,500 tonnes since 2010, in addition to the 5,500 tonnes of official purchases.
The S&P 500 is headed for a test of its previous high at 6100, but a weakening dollar disguises its true performance. When measured against gold, the index has declined more than 20% in real terms over the past 12 months.
Conclusion
The weakening dollar warns of capital outflows from US financial markets. A narrowing of the trade deficit is expected to reverse the three-decade-long bull market in bonds, lifting long-term interest rates and reducing growth.
The move is bearish for stocks in the long term, with expected higher interest rates and lower earnings growth. However, contracting growth will likely reduce interest rates next year as the Fed loosens monetary policy to stimulate growth. Both long and short-term scenarios are bearish for stocks.
Gold will likely be boosted by a weakening dollar and increased central bank buying as US dollar reserves are replaced with bullion. A breakout above resistance at $3,500 per ounce would strengthen our target of $4,000 by the end of the year, but the long-term outlook remains bullish.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.
Bull/Bear Market
Our Bull/Bear Market indicator remains at 60%, with two of five leading indicators signaling risk-off:
Employment in cyclical sectors—manufacturing, construction, and transport and warehousing—remains strong at 27.8 million, with no sign of the typical contraction that precedes a recession.
However, the 12-month average of heavy-weight trucks declined to 39.0K units in May, just a smidgen from a 38.7K bear signal.
Stock Pricing
Stock pricing increased to 96.70, compared to 95.04 seven weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.
We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Conclusion
We remain in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, indicating risk of a significant drawdown.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
A stronger-than-expected BLS labor report buoyed stocks
The stronger jobs figures reduce the chance of further Fed rate cuts
Speculators are covering positions in long-term bonds, causing yields to rise
Higher long-term yields are, in turn, bearish for stocks
The S&P 500 was buoyed by a stronger-than-expected labor report, with little sign of the economy slowing from President Trump’s flip-flop on tariffs. A breakout above strong resistance between 6000 and 6100 would signal a fresh advance, but we advise caution as it could be a bull trap.
Financial Markets
Financial market liquidity has improved, with the Chicago Fed National Financial Conditions Index declining to a revised -0.476 on May 30.
A sharp fall in the Treasury General Account (TGA) at the Fed injected more than $200 billion into financial markets in recent weeks, but that is not sustainable for long.
A declining spread on Moody’s Baa corporate bonds shows the beneficial effect on credit markets.
Treasury Markets
Speculators anticipating a series of Fed rate cuts are covering positions in long-term Treasuries, lifting the yield to 4.5%. Follow-through above 4.5% would offer a short-term target of 4.8%, prompting further action by Treasury Secretary Bessent to keep a lid on long-term rates. However, he can only do so much without the Fed’s help.
Economy
Employment in cyclical sectors—manufacturing, construction, and transport and warehousing—remains strong at 27.8 million, with no sign of the typical contraction that precedes a recession.
Unit sales of heavy-weight trucks are declining gradually rather than the steep fall that typically precedes a recession.
However, declining real manufacturers’ new orders for capital goods (excluding defense and aircraft) for April, adjusted by the producer price index (for capital goods), warn of a sharp fall in new capital investment.
Labor Market
Jobs grew by a better-than-expected 139 thousand in May. However, the figure is seasonally adjusted and likely subject to revision.
Continued claims increased to 1.9 million by May 24, but the unemployment rate remained 4.2% in May, well below our 5.0% warning level.
Growth in aggregate hours worked slowed to an annualized rate of 1.0%, warning of a similar decline in GDP growth in the second quarter.
Temporary jobs have contracted to 2.5 million, reinforcing the bearish sign from declining growth in hours worked.
The gap between job openings and unemployment has narrowed, indicating that the labor market is now in balance.
However, average hourly earnings continue to grow at close to 4.0%, signaling underlying inflationary pressures in the economy.
Dollar & Gold
The US Dollar Index continues to test long-term support at 100. Follow-through below 98 would offer a target of 90, warning of capital outflows and a strong bear signal for the bond market.
Gold is patiently testing resistance at $3,400 per ounce, waiting for a bear signal from the Dollar Index. A breakout would strengthen our target of $4,000 by the end of the year.
Silver made a sharp breakout above resistance at $34 per ounce. We expect retracement to test the new support level. Respect will likely confirm the breakout, but, having been burned before, we remain wary of a bull trap.
Conclusion
The rise in stocks is likely short-lived as rising long-term interest rates will likely spoil the party. The Fed is unlikely to heed President Trump’s call for a 100 basis-point cut:
“Go for a full point, Rocket Fuel,” Trump said in a post on Truth Social, adding that the Fed could increase rates again if inflation reignited. (Reuters)
The labor market remains in balance, and signs that the economy is slowing more likely reflect the impact of poor trade policy rather than too-high interest rates.
All eyes should be on the dollar. A Dollar Index fall below 98 would warn of capital outflows—a bear signal for bonds and stocks and a bull signal for gold.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
President Trump announces steel and aluminum tariffs will increase from 25% to 50%
Input costs for US manufacturers are expected to soar
Spending is expected to slow after the introduction of tariffs in April
The economic outlook is clouded with uncertainty, and the risk of a recession is rising
President Trump accused China of “totally violating its agreement” with the United States last week. (Reuters)
The Geneva agreement concluded between Treasury Secretary Bessent and his Chinese counterpart called for a 90-day pause in increased tariffs and for China to lift restrictions on exports of critical materials such as rare earths needed for semiconductor, electronics, and defense applications.
According to a US trade representative, the Chinese are moving slowly on granting export licenses for critical materials. The automobile industry is already warning that shortages of rare earth magnets could halt production in a matter of weeks.
The Chinese slow-walking of export licenses appears to be retaliation for the US last week imposing license requirements, and revoking some licenses, for exports of design software and chemicals for semiconductors, butane and ethane, machine tools, and aviation equipment.
In another blow to the auto industry, President Trump announced that he will increase tariffs on steel and aluminum imports from 25% to 50%. Steelmakers are expected to benefit from higher domestic prices, boosting output, but automobile manufacturing, heavy engineering, and construction industries will likely bear the costs.
Steel exports from Canada and Mexico will be most affected, but South Korea, Germany, and Brazil are also expected to suffer. The EU has threatened retaliatory measures if the issue cannot be resolved.
Aluminum imports are likely to continue despite the increased tariffs. Bauxite and electricity are the two primary input costs of smelters, and domestic US smelters will struggle to match the low-cost hydroelectric power of global competitors.
Financial Markets
The S&P 500 is testing the band of resistance at 6000, but short weekly candles indicate hesitancy.
Strong liquidity supports financial markets, with the Chicago Fed National Financial Conditions Index falling to -0.606, signaling easy monetary conditions.
10-year Treasury yields are testing support between 4.4% and 4.5%, but the weak dollar warns of capital outflows that are expected to send long-term yields higher.
JPMorgan CEO Jamie Dimon says, “You are going to see a crack in the bond market. It is going to happen…. I’m telling you it’s going to happen….”
Economy
Former Fed economist Dr Lacy Hunt warns that the US economy is slowing, with a higher than 50% probability of recession. He warns that the economy is far weaker than generally understood, and what markets are not considering is that spending brought forward to front-run tariffs is likely to cause a sharp drop in spending in the next few months.
A recession would also cause the fiscal deficit to increase sharply, by at least another 2.0% of GDP, adding further stress on the bond market.
The ISM manufacturing PMI declined to 48.5% in May, indicating a long-term contraction.
Manufacturing inventories surged in March as manufacturers brought forward purchases to get ahead of April’s tariff increases.
Imports also surged in the first quarter, followed by a steep plunge in May.
Exports are contracting at a similar rate.
Prices is the only sub-index that has surged, warning of steeply rising input costs.
Crude Oil
OPEC+ decided to increase production targets by 411.000 barrels per day in July, which is equal to the increases in May and June.
However, in a sign of shrinking global trade, China’s seaborne imports declined by more than a million barrels per day in May. Kpler estimates imports at 9.43 mbpd compared to 10.46 mbpd in April and 10.45 mbpd in March. (Reuters)
Brent crude is likely to re-test support at $60 per barrel, and breach would offer a target of $50.
Dollar & Gold
Capital outflows are weakening the dollar. The US Dollar Index has broken support at 100, and follow-through below 98 would confirm another decline with a target of 90.
Gold rallied to test the band of resistance at $3,400 per ounce. A breakout above $3,500 would strengthen our target of $4,000 by the end of 2025.
Conclusion
Due to high levels of uncertainty, consumers and corporations are expected to defer capital expenditures in the months ahead. The drop in spending is likely to be accelerated by the build-up in inventories and the bringing forward of expenditures to get ahead of tariff increases in April.
Contracting imports and exports in the manufacturing sector warn that the economy will slow. Falling crude oil imports in China paint a similar outlook, suggesting a global recession.
A recession would increase the deficit and further stress the bond market, which is already concerned about spiraling debt levels.
A falling dollar and rising gold price warn of capital outflows from US financial markets. JPMorgan CEO Jamie Dimon tells us to prepare for a coming crack in the bond market. That would mean higher long-term yields and sharply lower stock prices, likely boosting demand for gold even higher.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
