Sprott Physical Uranium Trust (SRUUF) broke support at $19, warning that uranium is still in a bear market.
After a strong uptrend in the second half of 2023, uranium reversed in 2024. SRUUF breach of support at $17 would warn of another decline.
Nvidia leads the plunge
Stocks plunged after Nvidia (NVDA) fell by 9.5% on reports that the US Department of Justice subpoenaed the chipmaker over complaints that it is violating antitrust laws. (Quartz)
Weak US and China manufacturing activity has also been cited as a cause for market bearishness, but that seems unlikely.
Stocks
Selling in Nvidia [cerise] soon spread to other big-name stocks, with all seven mega-caps closing lower on Tuesday.
The fall breached short-term support on the S&P 500 at 5550, signaling a correction to test 5400.
The equal-weighted index ($IQX) retraced to test support at 7000. Trend Index troughs above zero indicate longer-term buying pressure. Breach of support would offer a target of 6800, but respect is as likely to confirm our target of 7400.
Small caps also weakened, with the Russell 2000 iShares ETF (IWM) breaching support at 215 to indicate another test of long-term support at 200. A Trend Index peak at zero warns of selling pressure.
ISM Manufacturing
The ISM Manufacturing PMI edged up to 47.2% in August. Although the cyclical sector is a relatively small percentage of the overall economy, it has a disproportionate impact during recessions as it sheds a large number of jobs. This is the sixth consecutive month of contraction (below 50), but the uptick indicates the contraction is slowing.
New Orders are also contracting, indicating further headwinds ahead.
Also, the Prices sub-index continues to expand, warning of persistent inflationary pressure.
However, the bearish outlook for manufacturing is offset by solid growth in other cyclical sectors, with combined employment in manufacturing, construction, and transport & warehousing reaching 27.85 million.
Non-residential construction spending continues to strengthen even when adjusted for inflation, benefiting from government programs to re-shore critical supply chains.
China Manufacturing Activity
The official National Bureau of Statistics manufacturing PMI for China fell to 49.1 in August, indicating contraction. However, the downturn is contradicted by a rise in the private sector Caixin PMI to 50.4%:
Financial Markets
Credit markets still reflect easy financial conditions, with Moody’s Baa corporate bond spread at a low 1.69%. Spreads above 2.5% indicate tight credit.
However, Bitcoin has respected resistance at $60K [red line], warning of shrinking liquidity.
Treasury Markets
Ten-year Treasury yields are again testing support at 3.8%. Trend Index peaks below zero warn of long-term selling pressure. Breach of support would indicate another attempt at 3.7%.
Low LT yields are bearish for the Dollar and bullish for gold.
Dollar & Gold
The recent rally in the Dollar Index is losing steam. Tuesday’s weak close suggests another test of support between 100 and 101.
Gold is retracing to test support at $2,475 per ounce. Trend Index troughs high above zero indicate long-term buying pressure. Respect would indicate another advance to test $2,600. Breach is less likely but would warn of a correction.
Silver is more bearish, and a breach of support at $27.50 per ounce would test the August low at $26.50.
Energy
Brent crude broke support at $76 per barrel and is headed for a test of long-term support at $73.
Nymex WTI crude similarly broke support at $72 per barrel, offering a target of $68. We expect the DOE to increase purchases to re-stock the Strategic Petroleum Reserve below $70, providing support for shale drillers whose margins are squeezed at these levels.
Uranium
Uranium continues its downtrend, with the Sprott Physical Uranium Trust (SRUUF) headed for another test of support at 17.
However, we are bullish on the long-term prospects as resistance to the expansion of nuclear energy fades.
Base Metals
After its recent rally, copper is testing short-term support at $9,000 per tonne. Breach is likely and would warn of another decline as China’s economy slows.
Aluminum leads the way, breaking short-term support to warn of another test of the band of long-term support between $2,100 and $2,150 per tonne.
Iron & Steel
Iron ore recovered above $100 per tonne, but respect of the descending trend line would warn of another decline. Reversal below $100 would confirm our target of $80.
Conclusion
Investors are jumpy as mega-cap stocks trade at inflated prices, boosted by passive investment inflows from index ETFs. We expect the S&P 500 to find support at 5400 and maintain our target of 6000 before the end of the year.
One factor that could upset the apple cart is tightening liquidity. However, the Fed and Treasury will likely support liquidity in financial markets, at least until after the November elections. If they withdraw support, then all bets are off.
Falling crude oil prices will likely ease inflationary pressure, while a slowing Chinese economy is expected to add deflationary pressure. Long-term interest rates are expected to remain low, weakening the Dollar. Gold will likely benefit, with another attempt at our target of $2,600 per ounce.
Acknowledgments
Death of the Yen carry trade
Markets seem convinced that the recent stock sell-off in the US is due to growth concerns — after a weak labor report. We think they are mistaken. The real cause of the sell-off is the unwinding Yen carry trade.
Hedge funds have been making a killing on the Yen carry trade, but they just got killed. Borrowing cheaply in Yen and investing in stocks and Treasuries in the US, the trade benefited from ultra-low interest rates in Japan, far higher short-term rates in the US, massive appreciation in the top ten stocks on the S&P 500, and a rapidly weakening Yen against the Dollar.
But the Bank of Japan just pulled the rug from under them, raising interest rates and indicating that they plan to normalize monetary policy over time. The move caused a sharp rise in the Japanese Yen, with the US Dollar plunging below 150.
Japanese stocks followed, possibly due to concerns over the impact of a strong Yen on export sales.
The contagion soon spread to neighboring markets.
Stocks
Unwinding carry trades caused a sell-off in US stocks as traders hastily closed their leveraged positions. The S&P 500 broke support at 5400, and the Trend Index crossed to below zero, warning of a correction to test 5200.
The equal-weighted index ($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.
There was nowhere to hide, with the Russell 2000 Small Caps ETF (IWM) also breaking support and the Trend Index dipping below zero.
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.
Financial Markets
Financial market liquidity remains steady. The Chicago Fed Financial Conditions Index declined to -0.58, indicating further monetary easing.
Commercial bank reserves at the Fed edged lower for the third consecutive week but the changes were marginal.
Bitcoin is retracing to test support at $60K but shows no sign of a significant liquidity contraction at this stage.
Dollar & Gold
Unwinding carry trades also caused a sharp fall on the Dollar, with the Dollar Index testing support at 103.
Gold failed to get much of a lift from the flight to safety, with most of the flow going to Treasuries.
Silver, likewise, failed to benefit.
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.
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.
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.
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.
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.
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)
Layoffs fell to 1.5 million in June which is different from what one would expect when the unemployment rate rises.
Average weekly hours fell to 34.2, however, usually a warning that economic activity is slowing.
Job openings of 8.2 million in June are still above unemployment, indicating a tight labor market.
Continued claims for unemployment remain below 2.0 million, also indicating a tight labor market. Above 3.0 million would warn of recession.
Average Hourly Earnings
Average hourly earnings growth declined to an annualized 2.75%, indicating that inflationary pressures are easing.
Economy
Aggregate hours worked are growing at 1.3% year-on-year, suggesting low but positive GDP growth in the third quarter.
Heavy truck sales also held up well in July, indicating sustained economic activity.
Employment in cyclical sectors — Manufacturing, Construction, and Transport & Warehousing — also grew by 40 thousand jobs in July, showing no sign of a recession.
ISM Manufacturing
ISM manufacturing PMI declined to 46.8% but remained above the 42.5% threshold typically accompanying a recession.
Though declining new orders indicate some slowing ahead.
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
- Associated Press: Mourners bury Hamas chief Haniyeh in Qatar as more escalation looms over the Middle East
- ISM: Manufacturing PMI
- Wolf Richter: Japanese Stocks Plunge, Yen Rises from the Ashes as BOJ Hikes, Ends Free Money, and Starts QT
- Jim Grant: Wing and a Prayer
- Charles Schwab: Stock Market Update
- EIA: Crude Field Production
- CoinDesk: Bitcoin Prices
Uranium bear signal
The Sprott Physical Uranium Trust (SRUUF) broke support at 18.00, signaling a bear market for uranium.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
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.
The S&P 500 Equal-Weighted Index ($IQX) broke support at 6800, offering a target of 6600.
Declines were across the board, with both the Russell 1000 Large Cap ETF [blue] and Russell 2000 Small Cap ETF [pink] falling sharply.
Treasury Market
Two-year Treasury yields are falling in anticipation of an early rate cut by the Fed.
But 10-Year yields respected support at 4.20%, signaling a test of 4.5%.
Liquidity in financial markets is strong but rising long-term yields could come from Japanese selling in support of the 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.
Dollar & Gold
The Dollar Index continues to test support at 104, despite strengthening long-term Treasury yields.
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.
Silver fell to $28 per ounce, signaling a bear market driven by falling industrial demand. Expect a test of support at $26.
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.
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.
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.
But resistance is growing. Iron ore is likely to plunge if international markets, like India below, erect barriers to Chinese dumping.
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
- Jim Grant: Yen Diagram
- Lawrence MacDonald: Nasdaq Volatility
- Michael Pettis: Chinese solar manufacturers warns about “severe overcapacity”
- Bloomberg: Chinese Solar Group Urges Faster Consolidation as Glut Deepens
- CNBC: 2-Year Treasury Yields
- Macrobusiness: Iron ore trapdoor opens
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.
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.
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
- Prof. John Quakes/Cantor Fitzgerald: Uranium Demand & Supply Projections
Small caps signal Risk On
Falling Treasury yields and a surge in liquidity in financial markets is bullish for stocks, bonds and precious metals. The rotation from growth to value has slowed, while increased interest in small caps signals risk on for stocks.
Crude and base metals are weakening as demand from China slows. Uranium prices are also testing support, despite long-term growth prospects.
Financial Markets
Bitcoin rebounded from $56K to $64K, confirming a resurgence of liquidity in financial markets. Retracement that respects support at $60K would strengthen the bull signal.
Treasuries
Ten-year Treasury yields are testing support at 4.2%, reflecting optimism over an early rate cut. Breach of support is likely and would offer a target of 4.0%.
Stocks
The sector rotation between growth and value has slowed, with both the Russell 1000 Growth ETF (green) and Value (blue) advancing at a similar rate.
The S&P 500 made a small gain but the weak close and declining Trend Index warn of selling pressure.
The equal-weighted index ($IQX) shows a similar weak close, retracing to test support at 6800.
But the rotation into small caps continues, with the Russell 2000 Small Caps ETF (Pink) closing the gap with the large cap Russell 1000 ETF (blue).
Precious Metals
Gold respected support at $2,400 per ounce, signaling another test of $2,450. Rising Trend Index troughs continue to signal buying pressure.
Silver remains below resistance at $31 per ounce, with a lower Trend Index peak warning of secondary selling pressure. Another test of $30 is likely.
Crude Oil
Nymex WTI crude continues to test support at $82 per barrel. Breach of $80 would be a strong bear signal.
Brent crude retreated below support at $86 per barrel. Breach of $84 would offer a similar strong bear signal.
Falling crude prices would ease the prospect of resurgent inflation and increase the likelihood of an early Fed rate cut.
Base Metals
Aluminum broke support at $2,420 per metric ton, warning of another decline. Retracement that respects the new resistance level would strengthen the bear signal.
Copper and aluminum tend to track each other closely, so the breach is bearish for copper as well.
Uranium
The Sprott Physical Uranium Trust (SRUUF) respected resistance at $20.50, signaling another test of support at $18.50. Breach of $18.50 would signal a down-trend for uranium prices.
Several uranium stocks, apart from Canadian miner Cameco (red), are testing support levels. 
Conclusion
Treasury yields are declining as prospects for an early rate cut grow. Stock prices are also supported by rising liquidity in financial markets.
The rotation from growth to value sectors has slowed but the move to small caps is accelerating, signaling a more aggressive risk on stance from investors.
Weak crude prices are also bullish for stocks and bonds. The prospect of lower inflation is likely to result in lower Treasury yields.
Gold respected support at $2,400 per ounce, indicating another test of $2,450, boosted by the prospect of falling Treasury yields and a weaker Dollar. Silver lags behind, encountering stronger selling pressure and less domestic demand from China.
Aluminum broke support, signaling a down-trend. This is a bear signal for copper which tends to track closely.
Uranium is also looking bearish, with several stocks testing support levels.
Acknowledgements
- CoinDesk: Bitcoin Prices
Strong US jobs data but signs that growth is slowing
The S&P 500 retreated Friday, the bearish engulfing candle and a lower peak on the Trend Index warn of a test of support at 5050. The longer-term outlook remains bullish, with rising Trend Index troughs above zero signaling unusual buying pressure.
S&P 500 (purple below) outperformed the broader Equal-Weighted S&P 500 (lime green) in February, a bullish sign. Periods when $IQX outperforms the general index ($INX) can highlight when the top stocks are no longer participating in the advance — a strong bear signal.
Labor Market
The economy added 275,000 jobs in February, a strong result.
Of the cyclical sectors that normally lead the economic cycle, manufacturing showed a small loss of 4K jobs but construction and transport & warehousing showed gains of 23K and 20K respectively.
The unemployment rate increased to 3.9% as more people entered the workforce. The 3-month moving average of the unemployment rate has increased 27 basis points (red below) from its preceding low. According to the Sahm Rule — developed by former Fed economist Claudia Sahm — a 50 basis point increase signals the start of a recession, while 35 points provides an early warning.
Average weekly hours worked ticked up to 34.3 hours but the downward trend warns that the economy is slowing.
Another good indicator is the quit rate which soars when the labor market is tight and jobs are readily available. The down-trend since 2022 indicates that the heat is coming out of the job market.
The decline in average hourly earnings annual growth is slowing.
But the February monthly rate fell sharply, after a strong January. The 3-month moving average growth rate of 1.0% — 4.0% annualized — suggests further easing ahead despite a robust economy.
Aggregate weekly hours worked (purple below) are growing at an annual rate of 1.2%. We are unlikely to see productivity benefits from AI this year and real GDP growth (blue) is expected to converge with the slower labor growth rate.
Financial Markets
10-Year Treasury yields found short-term support above 4.0%. Retracement to test the new resistance level at 4.20% is now likely. Respect of resistance would confirm the target of 3.80%.
The Chicago Fed Financial Conditions Index ticked up to -0.47 but continues below zero, signaling easy monetary policy.
Commercial bank cash assets — primarily reserves at the Fed — are leveling off at $3.6 trillion.
Strong growth in bank reserves over the last 6 months is unlikely to be repeated, with a decline expected after the Fed’s reverse repo (RRP) balance is drained. Money market funds are switching to T-Bills. After the RRP is depleted, further Treasury issuance is likely to be taken up by private investors — either through direct purchases or by switching from bank deposits to money market funds.
Bank time deposits are still growing but the rate of growth, especially in retail deposits (blue below), has fallen dramatically over the past 12 months. Negative growth would be a strong recession warning.
Gold & the Dollar
The Dollar Index broke support at 103, warning of a decline to 100. Retracement that respects the new resistance level at 103 would confirm the target.
Gold continues to climb, reaching close to $2200 per ounce on during the day. A weaker close signals some profit taking but is so far insufficient to set off retracement. Follow-through above $2200 would lead us to revise our short-term target to $2250 — calculated as $2050 + ($2050 – 1850).
Our long-term target of $2450 is calculated as $2050 + ($2050 – $1650).
Crude & Commodities
Brent crude continues in a narrow range between $82 and $84 per barrel. Downward breakout would offer short-term relief but supply issues threaten a rally to test resistance at $90 per barrel — warning of higher inflation in the months ahead.
Faster-than-expected land inventory drawdowns due to seaborne trade disruptions from the Red Sea crisis have prompted Goldman Sachs to revise up its forecast for summer peak Brent Crude prices to $87 per barrel, up by $2 from earlier expectations.
“OECD commercial stocks on land have drawn somewhat faster than expected as the redirection of flows away from the Red Sea has increased inventories on water,” analysts at the investment bank wrote in a Sunday note, as carried by Reuters. ~ Oilprice.com
Copper broke through resistance at $8500 per metric ton, signaling an advance to $9000, but expect retracement to test the new support level first.
China’s real estate/financial woes are weighing more heavily on iron ore which continues to test support at $114 per metric ton.
Uranium has fallen about 20% from its peak earlier in the year, with the Sprott Physical Uranium Trust (SRUUF) testing support at 20. Respect of support would suggest another advance with a target of 30.
Please note: This is not a recommendation to buy SRUUF. It is simply being used as an indicator of physical uranium prices.
Growth in electricity demand is likely to have more than doubled in 2023 as data centers, crypto-mining and re-shored manufacturing facilities joined the grid.
Conclusion
Demand for stocks and Gold is booming. Investors seek real assets ahead of anticipated June rate cuts by the Fed and a likely resurgence in inflation.
The labor market remains tight but there are signs that upward pressure on average hourly earnings is easing as growth in aggregate weekly hours worked slows.
Declining reverse repo (RRP) balances at the Fed warn that bank reserves are likely to decline in the not-too-distant future. Liquidity is expected to tighten unless the Fed slows QT after the RRP is drained. The current $95 billion per month reduction in the Fed holdings of securities cannot be sustained without hurting liquidity in financial markets. A liquidity contraction is unlikely before the November elections but would cause a sharp fall in stock prices.
An alternative for the Fed would be to encourage commercial banks to buy Treasuries by excluding USTs from bank SLR leverage calculations. But that seems less likely than tapering QT, especially after the Silicon Valley Bank disaster where SVB took huge losses on their holdings of long-duration Treasuries and mortgage-backed securities.
We are overweight Gold, Critical Materials and Defensive stocks. We feel that Technology stocks and Industrial Real Estate are over-priced and will wait for better opportunities in 2025.
Acknowledgements
- Luke Gromen, FFTT: March 8, 2024
- Eric Basmajian, EPB Research for his notes on the Sahm Rule
- Oilprice.com: Goldman Raises Forecast of Brent Oil Summer Price to $87
- RJ Bono for the Washington Post headline
Nuclear: “Energy security is national security”
Dr Stephen Wilson, Professor of Energy Management in the School of Mechanical & Mining Engineering at the University of Queensland, debunks the latest CSIRO Gencost report.
Conclusion
LCOE should not be taken seriously. The cost of energy rises as the percentage contribution from renewables grows.
Failure to address energy security is a national security issue.
Eleven reasons for optimism in the next decade
This might seem more like a wish list than a forecast — there are always risks that can derail predictions — but we believe these are high probability events over the long-term.
Our timeline is flexible, some events may take longer than a decade while others could occur a lot sooner.
Also, some of the reasons for optimism present both a problem and an opportunity. It depends on which side of the trade you are on.
#1 US Politics
The political divide in the United States is expected to heal after neither President Biden nor his predecessor, and current GOP front-runner Donald Trump, make the ballot in 2024. The first due to concerns over his age and the latter due to legal woes and inability to garner support from the center. A younger, more moderate candidate from the right (Nikki Haley) or left (Gavin Newsom?) is likely to be elected in 2024 and lead the reconciliation process, allowing Congress to focus on long-term challenges rather than political grandstanding.
Nikki Haley & Gavin Newsom – Wikipedia
#2 The Rise of Europe
Prime Minister of Estonia, Kaja Kallas – Wikipedia
Europe is expected to rediscover its backbone, led by the example of Eastern European leaders who have long understood the existential threat posed by Russian encroachment. Increased funding and supply of arms to Ukraine will sustain their beleaguered ally. NATO will re-arm, securing its Eastern border but is unlikely to be drawn into a war with Russia.
#3 Decline of the Autocrats
We are past peak-autocrat — when Vladimir Putin announced Russia’s full-scale invasion of Ukraine on February 23, 2022.
Vladimir Putin announces invasion of Ukraine – CNN
Russia
The Russian economy is likely to be drained by the on-going war in Ukraine, with drone attacks on energy infrastructure bleeding Russia’s economy. Demands on the civilian population are expected to rise as oil and gas revenues dwindle.
Fire at an oil storage depot in Klintsy, southern Russia after it was hit by a Ukrainian drone – BBC
China
The CCP’s tenuous hold on power faces three critical challenges. First, an ageing population fueled by the CPP’s disastrous one-child policy (1979-2015) and declining birth rates after the 2020 COVID pandemic — a reaction to totalitarian shutdowns for political ends.
Second, is the middle-income trap. Failure to overcome the political challenges of redistributing income away from local governments, state-owned enterprises and existing elites will prevent the rise of a consumer economy driven by strong levels of consumption and lower savings by the broad population.
Third, the inevitable demise of autocratic regimes because of their rigidity and inability to adapt to a changing world. Autocratic leaders grow increasingly isolated in an information silo, where subordinates are afraid to convey bad news and instead tell leaders what they want to hear. Poor feedback and doubling down on past failures destroy morale and trust in leadership, leading to a dysfunctional economy.
Iran
Iranian Ayatollah Ali Khamenei – Wikipedia
Demographics are likely to triumph in Iran, with the ageing religious conservatives losing power as their numbers dwindle. The rise of a more moderate, Westernized younger generation is expected to lead to the decline of Iranian-backed extremism and greater stability in the Middle East.
#4 High Inflation
The US federal government is likely to avoid default on its $34 trillion debt, using high inflation to shrink the debt in real terms and boost GDP at the same time.
#5 Negative real interest rates
High inflation and rising nominal Treasury yields would threaten the ability of Treasury to service interest costs on outstanding debt without deficits spiraling out of control. The Fed will be forced to suppress interest rates to save the Treasury market, further fueling high inflation. Negative real interest rates will drive up prices of real assets.
#6 US Dollar
The US Dollar will decline as the US on-shores critical industries and the current account deficit shrinks. Manufacturing jobs are expected to rise as a result — through import substitution and increased exports.
#7 US Treasury Market
USTs are expected to decline as the global reserve asset, motivated by long-term negative real interest rates and shrinking current account deficits.
Central bank holdings of Gold and commodities are likely to increase as distrust of fiat currencies grows, with no obvious successor to US hegemony.
#7 Nuclear Power
Investment in nuclear power is expected to skyrocket as it is recognized as the only viable long-term alternative to base-load power generated by fossil fuels. Reactors will be primarily fueled by coated uranium fuels (TRISO) that remove the risk of a critical meltdown.
TRISO particles consist of a uranium, carbon and oxygen fuel kernel encapsulated by three layers of carbon- and ceramic-based materials that prevent the release of radioactive fission products – Energy.gov
Thorium salts are an alternative but the technology lags a long way behind uranium reactors. Nuclear fusion is a wild card, with accelerated development likely as AI is used to solve some of the remaining technological challenges.
#8 Artificial Intelligence (AI)
Scientific advances achieved with the use of AI are expected to be at the forefront in engineering and medicine, while broad productivity gains are likely as implementation of AI applications grows.
#9 Semiconductors
Demand for semiconductors and micro-processor is likely to grow as intelligent devices become the norm across everything from electric vehicles to houses, appliances and devices.
#10 Industrial Commodities
Demand for industrial commodities — lithium, copper, cobalt, graphite, battery-grade nickel, and rare earth elements like neodymium (used in high-power magnets) — are expected to skyrocket as the critical materials content of EVs and other sophisticated devices grows.
Expected supply shortfall by 2030:
Prices will boom as demand grows, increases in supply necessitate higher marginal costs, and inflation soars.
#11 Stock Market Boom
Stocks are expected to boom, fueled by negative real interest rates, high inflation and productivity gains from AI and nuclear.
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Conclusion
There is no cause for complacency — many challenges and pitfalls face developed economies. But we so often focus on the threats that it is easy to lose sight of the fact that the glass is more than half full.
Our long-term strategy is overweight on real assets — stocks, Gold, commodities and industrial real estate — and underweight long duration financial assets like USTs.
Acknowledgements
- World Politics Review, Alexander Clarkson: In Russia and Iran, External Aggression Masks Internal Vulnerabilities
- McKinsey: The semiconductor decade, A trillion-dollar industry
- ZeroHedge: Skyrocketing Battery Mineral Demand Set to Outpace Supply By 2023, February 14, 2024
- Wikipedia: China’s One-Child Policy