Category: Gold & Commodities

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Another S&P 500 advance likely

Stocks are poised for a breakout, signaling a fresh advance on the S&P 500. All eyes are focused on the September 17-18 FOMC meeting, with an expected rate cut of at least 25 basis points.

Stocks

The S&P 500 is testing resistance at its previous high of 5670, while Trend Index troughs above zero indicate buying pressure. Breakout would offer a target of 6000.

S&P 500

The equal-weighted index ($IQX) has already broken resistance. Retracement respected support at 7000, confirming our target of 7400.

S&P 500 Equal-Weighted Index

The Russell 2000 Small Caps ETF (IWM) lags, with the Trend Index struggling to recover above zero. A breakout above 225 would offer a target of 250.

Russell 2000 Small Cap ETF (IWM)

Financial Markets

Liquidity in financial markets is gradually tightening, which could act as a handbrake on any advances. A contracting Fed balance sheet, net of TGA and reverse repo (RRP) liabilities, shows the effect of regular monthly QT reductions.

Fed Assets net of TGA & Reverse Repo (RRP) Liabilities

Commercial bank reserves are shrinking as a result.

Commercial Bank Reserves at the Fed

Bitcoin struggles to hold above support at $60K, highlighting the effects of tightening liquidity.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are rallying to test resistance at 4.0%, but long-term buying pressure—signaled by Trend Index peaks below zero—is expected to keep yields low for the next quarter.

10-Year Treasury Yield

Bank of Japan

A wild card that could disrupt the system is BOJ monetary policy. The last rate hike, to 0.25%, caused the Dollar to fall sharply against the Yen and a sell-off in US financial markets as carry trade positions were unwound.

Japanese Yen

Further rate hikes are on the cards, with the next BOJ meeting scheduled in October. Jim Grant from Grant’s Interest Rate Observer:

CPI excluding fresh food in Japan’s capital grew at a 2.4% annual pace in August, data released yesterday show, topping the 2.2% consensus expectation and marking its fourth consecutive sequential increase. That data series typically serves as a leading indicator for broader price pressures in the world’s fourth-largest economy; nationwide CPI data is due on Sept. 19.

Pointing to transitory factors including expiring government subsidies for utility bills and rice shortages, Norinchukin Research Institute chief economist Takeshi Minami predicted to Reuters that “the underlying inflation trend will continue to moderate in coming months.”

However, percolating wage growth – with average pay rising 5.2% this year per data compiled by Japanese Trade Union Confederation, the highest in more than three decades – could bolster the Bank of Japan’s appetite for further tightening following the July 31 rate increase to 0.25% from a 0% to 0.1% range, as BoJ chief Kazuo Ueda suggested to parliament last week.

Considering the acute financial spasm which followed that rate adjustment and accompanying unwind of yen-funded carry trade positions, the prospect of a sequel would presumably be front of mind for Mr. Market. Investors remain confident that such an outcome is in fact far-fetched, with interest rate futures assigning only 9% odds of further tightening at the BoJ’s Oct. 18 meeting.

Some observers aren’t so sure. “My money is on another rate hike in October,” Moody’s senior economist Stefan Angrick told CNBC Friday, further predicting at least one further uptick early next year. Bloomberg economist Taro Kimura likewise anticipates an October shift to 0.5%, writing that Thursday’s data illustrate “a broad upswing in service prices,” and “increases the risk that the BoJ can’t afford to wait to pare stimulus.”

The destabilizing effect of further BOJ rate hikes should not be underestimated.

Inflation

US inflation, on the other hand, remains subdued. Core PCE inflation ticked to 2.6% for the 12 months to July, but the Trimmed Mean PCE rate declined to 2.7%.

PCE, Core PCE & Trimmed Mean PCE

Monthly core PCE and the headline rate for July are more encouraging, with both growing at an annualized rate below 2.0%.

PCE Inflation - Monthly

Dollar & Gold

The Dollar Index remains in a strong downtrend, with Trends Index peaks below zero, warning of long-term selling pressure. We expect the latest rally to encounter resistance at 102.50.

Dollar Index

Gold retraced to $2,500 per ounce, with a likely test of support at $2,475 as long-term Treasury yields rally and the Dollar strengthens. However, the precious metal is in a strong up-trend, and respect of support would confirm our target of $2,600.

Spot Gold

Silver is weaker than gold because of weak industrial demand from China’s solar industry. A breach of its current support level near $29 per ounce would warn of a decline to test long-term support at $26.50.

Spot Silver

Crude Oil

Brent crude continues to build a base between $76 and $82 per barrel. Low crude prices ease inflationary pressures in the global economy and improve the prospect of lower interest rates.

Brent Crude

Base Metals

Copper penetrated its descending trendline, suggesting that a base is forming. A correction that respects support at $8,600 per tonne would strengthen the signal.

Copper

Aluminum rallied strongly, indicating improving industrial demand. A breakout above $2,500 per tonne would be a bullish sign for copper.

Aluminum

Conclusion

Financial markets warn of gradual tightening, but low long-term interest rates, subdued inflation, and the prospect of a Fed rate cut at the FOMC meeting on September 17-18 are all bullish for stocks. We expect the S&P 500 to break through resistance at its previous high of 5670, confirming our target of 6000.

However, investors need to be aware of the risks ahead in 2025.

After the November elections, Treasury is expected to shift its quarterly funding towards longer-term coupons to take advantage of lower yields. The resulting increase in supply could drive up long-term yields while reducing liquidity in financial markets. On the other side of the Pacific, further rate rises by the Bank of Japan could spark a sell-off in US financial markets as more Yen-financed carry trades are unwound.

Either of the above actions could contract liquidity in financial markets, causing another stock sell-off.

We remain bullish on gold as long as long-term interest rates remain low, weakening the Dollar. Silver is likely to underperform due to weak industrial demand.

Acknowledgments

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Short, medium and long-term outlook

We conclude with a summary of our short-, medium-, and long-term outlook. But first, let’s examine today’s market activity.

Stocks

The S&P 500 is edging higher, gaining 0.3% yesterday, while the strengthening Trend Index indicates that more buyers are returning to the market.

S&P 500The advance is also broadening, with the S&P 500 equal-weighed index ($IQX) testing resistance at the recent high of 7000. Breakout would offer a target of 7400.

S&P 500 Equal-Weighted Index

Financial Markets

The Chicago Fed National Financial Conditions Index declined to -0.52 on August 16, signaling that monetary conditions are again easing.

Chicago Fed National Financial Conditions Index

However, Bitcoin continues to consolidate around $60K, warning that financial market conditions are still unsettled.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are headed for a test of support at 3.7% while declining Trend Index peaks below zero warn of growing long-term buying pressure, driving down yields.

10-Year Treasury Yield

Expectations of Fed rate cuts are driving yields lower and weakening the Dollar, which is bullish for gold.

Dollar & Gold

The Dollar Index is testing the band of long-term support between 100 and 101. Declining Trend Index peaks below zero warn of growing long-term selling pressure. A breach of 100 would signal a bear market, with a long-term target of 94.

Dollar Index

Gold is retracing to test support between $2,475 and $2,500 per ounce. Rising Trend Index troughs above zero indicate growing long-term buying pressure. Respect of support is likely to confirm our target of $2,600.

Spot Gold

Silver is expected to test support at $29 per ounce. Respect is likely and would confirm our target of $31.50.

Spot Silver

Crude Oil

Brent crude is testing support between $76 and $77 per barrel. A breach would offer a target of $72 to $73 per barrel, the lows from 2023.

Brent Crude

Conclusion

Our short-, medium-, and long-term outlook:

Short-term

Easy monetary conditions will likely continue until after the November election, with a September Fed rate cut of 0.25% almost certain. The S&P 500 is expected to test resistance at its recent high of 5670. Breakout is likely to offer a target of 6000.

Falling interest rates and a weakening Dollar are expected to boost demand for gold and silver, with short-term targets of $2,600 and $31.50 per ounce, respectively.

Medium-term

Our 2025 outlook is for weak industrial demand from China and increased push-back against their dumping of excess production in international markets. Resulting low crude oil and base metal prices are expected to ease global inflationary pressures. Central banks are likely to reduce interest rates to cushion the impact of a contraction in economic activity.

Low long-term yields and a Dollar bear market are expected to be bullish for gold and silver. We expect the S&P 500 to peak at 6000, with stocks growing increasingly bearish as earnings contract and activity declines despite low interest rates.

Long-term

China is expected to suffer from a decade of low growth as it struggles to deal with excessive debt levels and overinvestment in real estate, infrastructure, and industrial capacity. The US and most developed nations also struggle with high debt levels and will endeavor to keep real interest rates near zero. High asset inflation will likely result, causing strong demand for precious metals, real estate, and stocks.

Acknowledgments

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Stocks rally on PPI fall

Stocks were boosted by falling producer price index (PPI) growth, which indicates low CPI readings are likely later today. Gold continues to test resistance at $2,475 per ounce, boosted by falling long-term Treasury yields and a weaker Dollar.

Stocks

The S&P 500 broke resistance at 5400 and is headed for a test of the descending trendline at 5500. The Trend Index is rising but below zero, warning of longer-term selling pressure.

S&P 500

The Russell 2000 Small Caps ETF (IWM) is testing resistance between 210 and 215, with the Trend Index indicating secondary buying pressure.

Russell 2000 Small Cap ETF (IWM)

Stocks will likely receive a further boost if we get low CPI growth for July, as expected.

Financial Markets

Bitcoin retraced to test its new support level at $60K [red line]. Respect of support is likely and will confirm rising liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are falling, headed for a test of support between 3.7% and 3.8%. Low Treasury yields are bullish for stocks, bonds, and especially gold.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index is testing support at 102.5, while a Trend Index peak below zero indicates long-term selling pressure. A weak Dollar is also bullish for gold.

Dollar Index

Gold continues to test resistance at $2,475 per ounce, while rising Trend Index troughs above zero signal long-term buying pressure. A breakout is likely, offering a target of $2,600.

Spot Gold

Silver remains in a downtrend because of weak industrial demand from the Chinese solar industry.

Spot Silver

PPI Inflation

The producer price index (PPI) dipped to 2.27% growth for the 12 months to July.

Producer Price Index (PPI)

Monthly growth collapsed to an annualized rate of 1.2%.

Producer Price Index (PPI) - Monthly

Services inflation tends to be the most persistent, so a fall to 2.56% annual growth in services PPI is encouraging.

Producer Price Index (PPI): Services

Monthly services PPI contracted at an annualized rate of 1.9%, which flags a slowing economy.

Producer Price Index (PPI): Services - Monthly

Low PPI inflation is encouraging and increases the likelihood of low CPI readings later today. Negative services PPI warns that the economy may contract, increasing the probability of a Fed rate cut in September.

Energy

Nymex WTI crude respected resistance at $80 per barrel.

Nymex WTI Crude

Brent crude similarly found resistance at $82 per barrel.

Brent Crude

Low crude prices are expected to ease inflationary pressures, increasing the likelihood of a Fed rate cut in September.

Conclusion

We expect low CPI readings later today to further boost stocks. Falling long-term Treasury yields are bullish for stocks, bonds, and especially gold. The weakening Dollar is also bullish for gold, which continues to test resistance at $2,475 per ounce. A gold breakout is likely and will offer a target of $2,600.

Acknowledgments

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Gold threatens breakout as stocks pause ahead of CPI report

The rally in stocks paused ahead of tomorrow’s CPI update. However, gold threatens another breakout, boosted by low Treasury yields and a weakening Dollar.

Stocks

The S&P 500 stalled below resistance at 5400. The Trend Index peak below zero warns of strong selling pressure, and another test of support at 5200 is likely.

S&P 500

The Nasdaq QQQ ETF shows similar hesitancy at resistance at 450. Trend Index peaks below zero again warn of strong selling pressure, and we expect another test of support between 418 and 420.

Invesco Nasdaq 100 ETF (QQQ)

Treasury Markets

Ten-year Treasury yields respected resistance at 4.0%, warning of another test of support between 3.7% and 3.8%. Trend Index peaks below zero warn of strong buying pressure, driving yields lower.

10-Year Treasury Yield

Low Treasury yields are bullish for gold.

Dollar & Gold

Declining Treasury yields are also bearish for the Dollar. Trend Index peaks below zero warn of selling pressure and we expect another test of support at 102.50.

Dollar Index

The Japanese Yen has similarly found resistance at 148, while the Trend Index peak below zero warns of strong selling pressure. We expect another test of support between 141 and 142 against the USD.

Japanese Yen

Low Treasury yields and a weak Dollar have boosted demand for gold. Spot gold is testing resistance at its recent high of $2,475 per ounce, with Trend Index troughs above zero signaling buying pressure. A breakout is likely and would offer a target of $2,600.

Spot Gold

Silver broke resistance at $27.50 per ounce but remains in a downtrend until recovery above $29.

Spot Silver

Crude Oil

Brent crude broke resistance at $80 per barrel on fears of an outbreak of conflict between Iran and Israel.

Iran could carry out “significant” attacks on Israel as early as “this week,” United States National Security Council spokesman John Kirby said on Monday.

“We have to be prepared for what could be a significant set of attacks,” he told reporters, adding that Washington shared Israeli assessments that such a move “could be this week.” ~ Deutsche Welle

Brent Crude

In other news, OPEC announced that they had cut forecasts for oil demand growth in 2024 and 2025, citing weak demand from China. The cuts may delay OPEC members’ planned production increases. (Reuters)

Conclusion

Stocks show hesitancy ahead of tomorrow’s inflation report. Further weakening of CPI is likely and is expected to lower long-term Treasury yields.

Gold is testing resistance at its recent high of $2,475 per ounce. A breakout is likely, with a target of $2,600.

Crude oil prices rallied on fears of an attack on Israel by Iran “as early as this week.” However, weak demand from China is expected to maintain the current bear market.

Acknowledgments

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Worst is over……for now

The worst is over. For now.

Buyers manage to halt the slide in the S&P 500 at close to the 5200 support level. Expect further tests but support is likely to hold.

S&P 500

The Russell 2000 Small Caps ETF (IWM) similarly encountered strong support at 200. We expect retracement to test resistance at 210 but another test of support is likely.

Russell 2000 Small Caps ETF (IWM)

Ten-year Treasury yields are testing long-term support at 3.8%. The low level should boost demand for stocks (value) and precious metals.

10-Year Treasury Yield

Dollar Index found support at 102.50 on the weekly chart below. Retracement is expected to test resistance at 103 but another test of support is again likely.

Dollar Index - Weekly

Bitcoin broke support at $56K but is now retracing to test the new rtesistance level. Respect would confirm the global liquidity contraction, possibly forcing the Fed to intervene.

Bitcoin

Brent crude is testing support between $76 and $77 per barrel despite rising fears of escalation in the Middle East. We expect strong support at this level and retracement to test resistance at $80 is likely.

Brent Crude

Conclusion

The worst is over for now but it would be sensible to wait until the dust settles.

Though we couldn’t resist a few cheeky bids on stocks we have been following for a while.

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Death of the Yen carry trade

Markets seem convinced that the recent stock sell-off in the US is due to growth concerns — after a weak labor report. We think they are mistaken. The real cause of the sell-off is the unwinding Yen carry trade.

Hedge funds have been making a killing on the Yen carry trade, but they just got killed. Borrowing cheaply in Yen and investing in stocks and Treasuries in the US, the trade benefited from ultra-low interest rates in Japan, far higher short-term rates in the US, massive appreciation in the top ten stocks on the S&P 500, and a rapidly weakening Yen against the Dollar.

But the Bank of Japan just pulled the rug from under them, raising interest rates and indicating that they plan to normalize monetary policy over time. The move caused a sharp rise in the Japanese Yen, with the US Dollar plunging below 150.

USD/Japanese Yen

Japanese stocks followed, possibly due to concerns over the impact of a strong Yen on export sales.

Nikkei 225 Index

The contagion soon spread to neighboring markets.

South Korea KOSPI 100 Index

Stocks

Unwinding carry trades caused a sell-off in US stocks as traders hastily closed their leveraged positions. The S&P 500 broke support at 5400, and the Trend Index crossed to below zero, warning of a correction to test 5200.

S&P 500

The equal-weighted index ($IQX) similarly broke support at 6800, offering a target of 6600. The long tail indicates strong buying pressure but this often fails, or takes several days, to reverse a sharp market fall.

S&P 500 Equal-Weighted Index

There was nowhere to hide, with the Russell 2000 Small Caps ETF (IWM) also breaking support and the Trend Index dipping below zero.

Russell 2000 Small Cap ETF (IWM)

Treasury Markets

The Fed left rates unchanged this week but indicated that rate cuts will likely commence in September. Treasury yields fell but the primary driver was the strong flight to safety from the stock sell-off, with the 10-year yield plunging to a low 3.8%. We expect retracement to test resistance at 4.0% but the Trend Index peak below zero warns of strong buying, with downward pressure on yields.

10-Year Treasury Yield

Financial Markets

Financial market liquidity remains steady. The Chicago Fed Financial Conditions Index declined to -0.58, indicating further monetary easing.

Chicago Fed Financial Conditions Index

Commercial bank reserves at the Fed edged lower for the third consecutive week but the changes were marginal.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K but shows no sign of a significant liquidity contraction at this stage.

Bitcoin (BTC)

Dollar & Gold

Unwinding carry trades also caused a sharp fall on the Dollar, with the Dollar Index testing support at 103.

Dollar Index

Gold failed to get much of a lift from the flight to safety, with most of the flow going to Treasuries.

Spot Gold

Silver, likewise, failed to benefit.

Spot Silver

Energy

Ismail Haniyeh was assassinated in Tehran, presumably by Israel. Iran’s supreme leader, Ayatollah Ali Khamenei, vowed that Israel would pay a price for killing the Hamas leader on Iranian soil, raising fears of escalation.

However, concerns over Middle East supply failed to move crude prices, with markets dominated by record US production of 13.3 million barrels per day.

EIA Crude Field Production

Nymex WTI crude is headed for a test of support between $72 and $73 per barrel. Breach would offer a target of $68. The US Department of Energy will likely support prices at this level, refilling the strategic petroleum reserve (SPR), as many shale producers’ cash costs are around $60 per barrel. Lower prices risk a drop in production as producers shut marginal wells.

Nymex WTI Crude

Uranium

Sprott Physical Uranium Trust (SRUUF) retreated below support at 18.00, confirming a bear market for uranium. Trend Index peaks below zero warn of strong selling pressure.

Sprott Physical Uranium Trust (SRUUF)

Base Metals

China over-invested in manufacturing capacity in an attempt to compensate for falling investment in their troubled real estate and infrastructure sectors. They now face resistance from international trading partners, unwilling to accept the massive surge in Chinese exports of manufactured goods and surplus steel and base metals. The dispute will likely cause increased trade protection and a sharp decline in global trade.

The down-trend in copper and aluminum is expected to continue.

Copper & Aluminum

Labor Market

A weak July labor report reinforced the Fed’s stance on early rate cuts, with job growth slowing to 114 thousand in July.

Employment Growth

The normally reliable Sahm recession indicator broke above 0.50 to indicate a recession. But the unemployment rate is rising off an unusually low base, so this time could be different.

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months. (Claudia Sahm)

Sahm Rule & Unemployment

Layoffs fell to 1.5 million in June which is different from what one would expect when the unemployment rate rises.

Layoffs & Discharges

Average weekly hours fell to 34.2, however, usually a warning that economic activity is slowing.

Average Weekly Hours

Job openings of 8.2 million in June are still above unemployment, indicating a tight labor market.

Job Openings

Continued claims for unemployment remain below 2.0 million, also indicating a tight labor market. Above 3.0 million would warn of recession.

Continued Claims

Average Hourly Earnings

Average hourly earnings growth declined to an annualized 2.75%, indicating that inflationary pressures are easing.

Average Hourly Earnings

Economy

Aggregate hours worked are growing at 1.3% year-on-year, suggesting low but positive GDP growth in the third quarter.Real GDP & Total Hours Worked

Heavy truck sales also held up well in July, indicating sustained economic activity.

Heavy Truck Sales

Employment in cyclical sectors — Manufacturing, Construction, and Transport & Warehousing — also grew by 40 thousand jobs in July, showing no sign of a recession.

Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Manufacturing

ISM manufacturing PMI declined to 46.8% but remained above the 42.5% threshold typically accompanying a recession.

ISM Manufacturing PMI

Though declining new orders indicate some slowing ahead.

ISM Manufacturing New Orders

Conclusion

Stocks are expected to undergo a correction, with the S&P 500 testing support at 5200. Sales are fueled by unwinding carry trades as the Japanese Yen sharply strengthened after the Bank of Japan raised interest rates and indicated that they plan to normalize monetary policy.

The sell-off in stocks fueled a flight to safety which mainly benefited Treasuries, causing a sharp fall in the 10-year yield to 3.8%.

Gold and silver were left on the sidelines but could still benefit from low long-term interest rates and a weakening Dollar.

Declining crude oil and base metal prices warn of weak industrial demand from China. China’s efforts to compensate by exporting excess production is likely to meet stiff resistance from trading partners. Increased trade barriers are expected to further slow Chinese manufacturing and commodity imports, impacting Australia and other resource-based economies.

The Sahm rule warns of a US recession but the unemployment rate is rising from an unusually low base and there are plenty of signs of continued robust economic activity in the US economy. Expectations of a recession are likely premature, with a slow-down more likely to occur in 2025.

The full impact of a hawkish Bank of Japan monetary policy on US Treasury and financial markets should not be underestimated. However, the change is likely to be gradual, with frequent consultation with the US Treasury to minimize disruption after the initial impact of unwinding carry trades.

Acknowledgements

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Uranium bear signal

The Sprott Physical Uranium Trust (SRUUF) broke support at 18.00, signaling a bear market for uranium.

Sprott Physical Uranium Trust (SRUUF)

Producers all show signs of selling pressure: Cameco (CCJ.us) in Canada, Kazatomprom (KAP.uk) in Kazakhstan, Boss (BOE.ax) in Australia and Paladin (PDN.ax) in Africa (Namibia & Malawi) and Australia.

Uranium Producers

Conclusion

We remain long-term bulls on uranium, with demand expected to grow as the industry expands at a faster rate than supply. But the short- to medium-term looks decidedly bearish.

Notes

There seems to be some confusion about sodium-cooled reactors and we have expanded our note to clarify:

The Natrium fast reactor uses sodium (the metal) as a coolant instead of water used in common light-water reactors. Sodium eliminates the danger of a high-pressure build up of steam in the containment vessel and/or separation of hydrogen from steam at extremely high temperatures, in the event of a melt-down, which could cause an explosion.

Heat generated by the sodium-cooled fast reactor is transferred through a heat exchange and stored as molten salts until required for power generation. This has several advantages:

  1. Sodium melts at 371K (98°C) and boils at 1156K (883°C), a difference of 785K (785°C) between solid and gas states, compared to just 100K for water (between ice and steam) at normal atmospheric pressure. The boiling point of sodium is much higher than the reactor’s operating temperature, requiring a far thinner reactor vessel as it is not pressurized.
  2. Sodium does not corrode steel reactor parts, instead it protects metals from corrosion. Molten salts, on the other hand, cause corrosion problems at high temperatures.
  3. The reactor in shutdown mode can be passively cooled. Air ducts are engineered so that decay heat after shutdown is removed by natural convection, with no pumping required.
  4. The reactor is self-controlling. If the temperature of the core increases, the core expands slightly, allowing more neutrons to escape the core and slow the reaction.
  5. Sodium does have a downside: it reacts with air and water and can cause fires. So it is far safer to store the heat as non-flammable molten salts, away from the reactor core.
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Stocks battered by headwinds from Asia

Falling demand from China and rising inflation in Japan are both having an impact on stocks and Treasury markets. Precious metals have also suffered from the sell-off, while crude and industrial metals warn of a global contraction.

Stocks

The top 7 technology stocks all fell, led by a steep plunge in Tesla (TSLA) and Nvidia (NVDA), two stocks with considerable exposure to China.

Top 7 Technology Stocks

The Nasdaq plunged 3.7%, its second 3.0% draw-down in July confirms selling pressure signaled by declining Trend Index peaks. Lawrence MacDonald:

The NDX went 17 months without a 3.0% drawdown. To us this means a lot. Looking back 20 years, these events come in patterns and clusters, NOT isolated events. This speaks to high volatility ahead.

Nasdaq 100 ETF (QQQ)

The S&P 500 recorded its first 2.0% draw-down in 357 trading days. Declining Trend Index peaks reflect selling pressure. Breach of support at 5400 is likely and would offer a target of 5200.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) broke support at 6800, offering a target of 6600.

S&P 500 Equal-Weighted Index

Declines were across the board, with both the Russell 1000 Large Cap ETF [blue] and Russell 2000 Small Cap ETF [pink] falling sharply.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM)

Treasury Market

Two-year Treasury yields are falling in anticipation of an early rate cut by the Fed.

2-Year Treasury Yield

But 10-Year yields respected support at 4.20%, signaling a test of 4.5%.

10-Year Treasury Yield

Liquidity in financial markets is strong but rising long-term yields could come from Japanese selling in support of the Yen.

Japanese Yen

Jim Grant on the prospects for US and Japanese interest rates:

How the turntables have turned: as the Federal Reserve and Bank of Japan each prepare to render their respective rate decisions next week, recent events suggest a shift in the zeitgeist. Thus, former New York Fed president William Dudley took to the Bloomberg Opinion page Wednesday to lobby his former colleagues for a July cut, citing a weakening labor market along with ebbing inflationary pressures and moderating wage growth.

“I’ve long been in the ‘higher for longer’ camp. . . [but] the facts have changed, so I’ve changed my mind,” Dudley writes…..

Monetary crosswinds are swirling in the Far East. Futures assess the likelihood of a July BoJ hike from the current 0% to 0.1% range at 72%, up from 51% three weeks ago. Similarly, more than 90% of economists surveyed by Bloomberg “see the risk” that the BoJ will opt to pull the trigger, turning the page on its longstanding negative, now, zero-rates policy in the face of mounting price pressures.

To that end, core CPI grew a 2.6% annual clip in June, remaining north of the bank’s self-assigned 2% goal for the 27th consecutive month. On Friday, Tokyo’s Cabinet Office bumped its forecasted inflation rate over the fiscal year ending March 2025 to 2.8% from 2.5%.

“We expect underlying inflation to remain around 2% until early 2025, which we think will prompt the BoJ to hike rates both this month and in October,” writes Marcel Thielant, head of Asia-Pacific at Capital Economics, adding that pronounced currency weakness is placing upward pressure on the price level, as evidenced by a recent pickup in the “other industrial products” CPI component.

The prospect of simultaneous Fed and BoJ policy pivots duly resonates in the currency market, as the yen has snapped higher by 5% over the past three weeks to 154 per dollar after marking a near 40-year low against the buck. Hefty outlays from the Ministry of Finance in service of propping up the yen – estimated by Reuters at $38 billion in July alone – have added oomph to the present course correction.

“This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY positioning that is now facing intense pressure from Ministry of Finance intervention to support the [yen],” Richard Franulovich, head of FX strategy at Westpac Banking Corp, commented to Bloomberg this morning. “Local politicians have become more vocal about the economic dangers from unfettered JPY weakness,” he added.

Financial Markets

Monetary easing continues, with the Chicago Fed Financial Conditions Index declining to -0.58% on July 19, signaling rising liquidity in financial markets.

Chicago Fed Financial Conditions Index

Dollar & Gold

The Dollar Index continues to test support at 104, despite strengthening long-term Treasury yields.Dollar Index

Gold fell to $2,375 per ounce, signaling a test of long-term support at $2,300. Respect of $2,300 remains likely and would be a long-term bull signal for gold.

Spot Gold

Silver fell to $28 per ounce, signaling a bear market driven by falling industrial demand. Expect a test of support at $26.

Silver
Industrial demand for silver is falling as Chinese solar manufacturers face severe overcapacity:

China should push struggling solar manufacturers to exit the market as soon as possible to reduce severe overcapacity in a sector that’s vital to the energy transition, according to a major industry group. Central and local government, financial institutions, and companies should coordinate to speed up industry consolidation, Wang Bohua, head of the China Photovoltaic Industry Association, said at a solar conference in Zhejiang province on Thursday. ~ Bloomberg

Crude Oil

Nymex WTI crude ticked up slightly but is unlikely to reverse its steep down-trend, headed for a test of support between $72 and $73 per barrel.

Nymex WTI Crude

Low crude prices are likely to lead to falling inflation, increasing pressure on the Fed to cut interest rates.

Industrial Metals

Copper and aluminum continue in a strong down-trend as Chinese demand falls.

Copper & Aluminum

Iron ore has so far respected support at $106 per tonne. The steel industry faces similar overcapacity to other industrial metals and has only survived so far by exporting steel, driving down prices in international markets.

Iron Ore

But resistance is growing. Iron ore is likely to plunge if international markets, like India below, erect barriers to Chinese dumping.

Indian Steelmakers Suffer from Chinese Steel Exports

Conclusion

Financial market liquidity is strengthening but stocks and Treasury markets are being battered by headwinds from Asia.

The Bank of Japan is expected to hike interest rates at its next meeting in response to rising inflation caused by the weakening Japanese Yen. The result is likely to be bearish for US Treasuries, driving up long-term yields.

Falling demand from China is likely to impact on revenues from Western multinationals with large exposure, leading to a correction in stocks as growth prospects fade.

The probability of a rate cut at the next Fed meeting grows increasingly likely. Inflationary pressures are declining — as crude oil plunges in response to weak global demand — and economic headwinds are rising.

Gold and silver are likely to diverge. Silver is likely to enter a bear market as industrial demand from China fades, while gold is likely to benefit from safe-haven demand as the global economy contracts.

Industrial metals are already in a bear market which is likely to worsen as international resistance to China exporting its overcapacity grows.

Acknowledgements

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Uranium stutters

Sprott Physical Uranium Trust (SRUUF) broke support at 18.50 and is now retracing to test the new resistance level. Respect is likely and would signal a bear market for uranium.

Sprott Physical Uranium Trust (SRUUF)

The bear market is related to short- to medium-term demand and supply. Long-term demand for U308 is projected to grow by more than 50% by 2040, whereas supply — including restarted idle capacity and new mines planned and under development — is forecast to shrink to less than 50% of supply over the same time frame.

Uranium Demand & Supply Projections

Conclusion

Respect of resistance at 18.50 by the Sprott Physical Uranium Trust (SRUUF) would confirm a bear market for uranium.

As with copper, we are long-term bulls on uranium and other resources required for the transition to low CO2 energy. A bear market in uranium would provide an opportunity to build a long-term position at low prices.

Notes

  • The Rook 1 Project is a proposed new uranium mine and mill development located in northwestern Saskatchewan, Canada.

Acknowledgements

Posted on

Stocks and precious metals headed for a correction

Stocks are retreating across the board after climbing to dizzy heights in recent weeks. They continue to enjoy support, however, from falling Treasury yields and robust financial market liquidity. Support from crude oil is less certain, with a potential up-trend that could delay interest rate cuts.

Gold and silver are also retreating after strong gains in recent weeks. The correction appears to be a secondary movement. Base metals copper and aluminum are also weakening but the sell-off appears far stronger.

Stocks

Three out of seven mega-caps in the S&P 500 (Nvidia, Tesla, and Meta Platforms) show gains on Thursday, while four declined.

Top 7 Technology Stocks

The S&P 500 as a whole declined steeply, headed for a test of support at 5500.

S&P 500

The equal-weighted index ($IQX) took a similar pounding, breaking support at 6900. Retracement that respects the new resistance level would confirm a target of 6600.

S&P 500 Equal-Weighted Index

The retreat is across the board, with the Russell 2000 Small Cap ETF (IWM) [pink] falling faster than Russell 1000 Large Caps ETF (IWB) [blue] after spectacular gains earlier in the week.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM),

Treasuries

Ten-year Treasury yields are retracing to test resistance at 4.2%. Respect is likely and would confirm our short-term target of 4.0%. Declining Trend Index peaks below zero continue to warn of downward pressure on yields. The low inflation outlook is bullish for bonds.

10-Year Treasury Yield

Financial Markets

Commercial bank reserves at the Fed finished largely unchanged for the week ended Wednesday, July 17, suggesting stable liquidity levels.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K; respect would signal rising liquidity in financial markets.

Bitcoin

Labor Market

Initial claims climbed to 243K for the week ended July 13. This still well below levels normally seen leading up to a recession.

Initial Claims

Continued unemployment below 2.0m indicate a tight labor market.

Continued Claims

The Conference Board Leading Economic Indicator shows signs of a recovery after initially warning of a recession with a fall below -5.0%.

Conference Board Leading Economic Indicator

Dollar & Gold

The Dollar index reversed its sharp fall from Wednesday. Penetration of the descending trendline would warn of another test of 105 but we think this is unlikely considering the fall in Treasury yields.

Dollar Index

Gold retreated below support at $2,450 per ounce, indicating another test of $2,400. Respect of $2,400 would signal another attempt at $2,500, while breach would warn of a correction to $2,300.

Spot Gold

Silver followed through below $30, headed for a test of primary support at $29.

Spot Silver

Declining Trend Index peaks warn of medium-term selling pressure. But respect of support at $29 per ounce would suggest a target of $35 per ounce.

Spot Silver

Crude Oil

Nymex WTI crude steadied at close to $83 per barrel. Respect of resistance at $84 would be a strong bear signal.

Nymex WTI Crude

Brent crude is similarly testing resistance at $86 per barrel. Breach of support at $84 would be a strong bear signal.

Brent Crude

Base Metals

Copper broke support at $9,400 per metric ton. Expect retracement to test the new resistance level but respect is likely and would confirm the long-term target of $8,000.

Copper

Copper and aluminum track each other closely. The down-trend below has a likely target of $2,200 and is bearish for copper.

Aluminum

Conclusion

Stocks and precious metals appear headed for a much-needed correction after climbing to dizzy heights in recent weeks.

Of the three pillars, falling Treasury yields and robust financial market liquidity continue to support stocks. But crude oil is less certain, with a potential up-trend that would threaten higher inflation and could delay interest rate cuts.

Gold and silver are also retreating, after strong gains in recent weeks, in what appears to be a secondary correction. Support would provide a base for further gains.

But weakness in copper and aluminum is more concerning, signaling slowing demand from China which could easily trigger a global recession.

Acknowledgements

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