Tag: Brent crude

Posted on

Australia Braces for Oil Shortages

Key Points

  • Australia has roughly one month of emergency reserves of petrol, diesel, and gasoline.
  • Iranian attacks will likely lead to supply shortages and steep price hikes in food, commodities, and air travel.

Brent crude futures (May ’26) are testing resistance at $85 per barrel. A breakout will likely offer a short-term target of $90.

Brent Crude

March 5 (Reuters) – More tankers came under attack in Gulf waters on Thursday as the U.S.–Iran war escalated, and Iranian drones entered ​Azerbaijan, threatening to spread the crisis to more oil producers in the region.

A Bahamas-flagged crude oil tanker was targeted by an Iranian ‌remote-controlled boat laden with explosives while anchored near Iraq’s Khor al Zubair port, according to initial assessments. A second tanker at anchor off Kuwait was taking on water and spilling oil after a large explosion on its port side.

Nine vessels have come under attack since the conflict broke out between the U.S., Israel and Iran on Saturday. Iran ​launched a wave of missiles at Israel early on Thursday and also sent drones into Azerbaijan, injuring four people.

….Around 200 ships, including oil and liquefied natural ​gas tankers as well as cargo ships, remained at anchor in open waters off the coast of major Gulf producers, according to Reuters estimates based ​on ship-tracking data from the MarineTraffic platform.

Hundreds of other vessels remained outside the Strait of Hormuz unable to reach ports, shipping data showed.

Australian ​Energy Minister Chris Bowen said on Tuesday that Australia has 36 days of petrol, 34 days of diesel, and 32 days of jet fuel in reserve. While Bowen stressed this was the highest level in more than a decade, it’s far below the International Energy Agency recommendation of 90 days.

Compare that to Japan, which is similarly reliant on crude oil from the Middle East and holds emergency oil reserves equivalent to 254 days of consumption. (Reuters)

Ongoing shortages caused by even partial closure of the Strait of Hormuz could lead to fuel rationing in Australia.

Major industries that are heavily reliant on diesel fuel include long-haul road transport, agriculture, and mining. Iron ore operations in the Pilbara region, a major earner of export revenue, alone consume hundreds of millions of liters of diesel each year. (Reuters)

The aviation industry is also vulnerable to fuel shortages. Jet fuel prices in Asia’s ​trading hub Singapore climbed to $225.44 a barrel on Wednesday, a record high.

The spot price of jet kerosene has now gained 140% since the close of $93.45 a barrel on February 27, the day before the United States and Israel launched an aerial bombing campaign against Iran.

The problem is that much of the oil shipped through the Strait of Hormuz is medium-sour crude, a grade prized for its higher yield of middle distillates such as jet kerosene and diesel.

Even if refiners can source alternative crudes from Africa or South America, these grades tend to be lighter and yield more light distillates such as gasoline and naphtha. (Reuters)

The Dow Jones Global Oil & Gas Index has climbed 20% since mid-January.

Dow Jones Global Oil & Gas Index

Conclusion

Japan and China have large emergency stockpiles of crude and LNG and can probably survive several months of supply interruptions.

India, Australia, and Europe do not have that luxury and will likely suffer from a steep spike in prices and possible fuel rationing if the Strait of Hormuz remains closed.

In Australia, we expect food prices to jump if the price of diesel, used in agriculture and long-haul freight, rises. Mining costs will also likely rise due to diesel shortages, driving up the cost of materials.

Global aviation is also vulnerable because of the steep rise in jet fuel prices.

Acknowledgments

Posted on

Iran: What Comes Next?

Key Points

  • Combined air strikes on Iran by the US and Israel make good media coverage but are unlikely to lead to regime change.
  • An Iranian strategy that prolongs the conflict while increasing the cost to the US and its allies has the potential to frustrate US ambitions.
  • Rising crude oil prices and increased US deficits will likely fuel a sharp increase in inflation.

President Trump succeeded in diverting media attention from his troubles at home, with attention-grabbing headlines about Operation “Epic Fury” in Iran. But does he have a clear end goal? He claims the Iranians have requested talks, but they deny it. So what happens if the Iranians are unwilling to give Trump his media victory?

Predictions of a “short war” typically underestimate the opponent and the unpredictability of war.

Many things in war are unpredictable, but some are self-evident:

  • Israel does not have the manpower to wage a full-scale war against Iran.
  • The US public does not have the stomach for a large war, and US leaders want to avoid putting “boots on the ground” at all costs.
  • US allies in the Middle East are equipped with modern air defense systems that can protect them from most missile and drone attacks, but they don’t have the stockpiles of weapons to endure a sustained barrage over several months.
  • Oil tankers carry 21 million barrels of crude oil through the Strait of Hormuz every day. Four ships have already been damaged. Closing the Straits would halt the flow of 20% of global oil production, causing a massive supply shortage and spike in oil prices.

Crude Oil Flows Through the Strait of Hormuz

Brent crude prices shot to above $80 per barrel on Monday.

Brent Crude

Robin Brooks compares the current price rise to Russia’s invasion of Ukraine in 2022:

Today’s post …. benchmarks the current shock versus Russia’s invasion of Ukraine four years ago. Russia is a massive oil producer and – at the time – markets worried it would get shut out of the global economy. Yesterday’s spike in oil prices was more than three times as big as the rise on Feb. 24, 2022, the day Russia invaded Ukraine. That’s a big shock no matter how you cut it.

Iranian officials say they have closed the Strait of Hormuz. US Central Command says that is not the case. But tanker rates and insurance costs have skyrocketed.

Lloyds List highlights the steep rise in very large crude carrier (VLCC) rates:

BALTIC Exchange indexes for very large crude carriers loading in the Middle East Gulf reached record highs on Monday. Iranian attacks on tankers and insurers’ withdrawal of war risk cover have effectively closed the Strait of Hormuz.

Spot rate strength in the MEG has cascaded through global freight prices, leading to a surge in rates for VLCCs and other tanker segments worldwide.

The Baltic Exchange’s MEG-China TD3C index went parabolic after the outbreak of war, coming in at a record $423,736 per day on Monday, up 94% from Friday.

Crude Oil Tanker Rates

Global Impact

China gets about 45% of its crude oil needs from the Middle East, with 11% from Iran.

Global Oil Trade

  • Russia, as a large oil exporter, would benefit from a spike in crude oil prices. So would Canada and African exporters like Angola.
  • Large oil importers — China, India, Japan, the rest of the Asia-Pacific region, and Europe — would all suffer from a steep rise in crude oil prices.
  • The US is a net oil importer. While less affected than other major importers, the US has experienced steep rises in inflation during past spikes in crude oil prices.

The 1973 Yom Kippur War and the Arab oil embargo caused a massive jump in crude oil prices, with CPI reaching 12.0% (red- RHS). The Iran-Iraq war in 1980 caused an even steeper spike in inflation, with CPI at nearly 15%.

WTI Crude & CPI

During the 1990 Gulf War, CPI rose above 6.0%. However, during the 2003 Iraq War, deflationary forces— from the collapse of the Dotcom bubble and China’s entry into the WTO — helped offset inflationary pressures from higher crude oil prices.

WTI Crude & CPI

Crude oil prices had already spiked in 2021, but Russia’s full-scale invasion of Ukraine in February 2022 lifted annual CPI to 9.0%.

WTI Crude & CPI

US Deficits

The US federal debt is at a precarious 122% of GDP, and budget deficits remain stubbornly high. The US does not have much spare capacity to wage an extensive or protracted war without generating high inflation.

Federal Debt to Nominal GDP (%)

Conclusion

China’s dependence on crude oil imports is its Achilles heel. The country imports 11 million barrels of crude oil per day, and much of that flows through the Strait of Hormuz.

Chinese leaders will be watching the US-Iran conflict with alarm. US control of the Strait of Hormuz would have China at its mercy. China’s blue-water navy is decades away from being able to challenge US naval supremacy in the Indian Ocean. The only effective way for them to intervene in the current conflict would be to supply Iran with advanced weapons that can challenge US naval dominance.

The Iranians have been battered by air strikes before. They know that a full-scale US invasion is unlikely, and that nothing short of that will likely remove them from power. Their best strategy is patience. They can afford to wait the Americans out. Increase the cost of the war and frustrate US efforts to achieve a decisive outcome. Another protracted conflict in the Middle East, with sky-high oil prices causing a steep rise in inflation, will soon sour US public opinion and lead to yet another retreat.

A protracted conflict in the Middle East would also increase US fiscal deficits. Inflation will likely rise, fueled by increased government spending and rising crude oil prices. Higher inflation and further increases in government debt would increase term premia on long-dated Treasuries. High long-term interest rates would raise the cost of servicing government debt and further increase the deficit.

Attempts by the Fed to suppress long-term interest rates, through QE or other means, would further fuel inflation.

Our strategy is to remain heavily overweight in gold and defensive stocks with stable income streams, and underweight long-term financial assets and high-multiple growth stocks.

Acknowledgments

Posted on

Supreme Court Setback for Trump

Key Points

  • In a 6-3 decision, the Supreme Court ruled that the International Emergency Economic Powers Act of 1977 doesn’t authorize President Donald Trump to impose tariffs.
  • The Yale Budget Lab estimated that households’ average cost burden would fall by about half in 2026, to between $600 and $800, if the Supreme Court ruled against the tariffs.
  • However, Trump administration officials previously said they would use different legal pathways to achieve an outcome similar to the IEEPA tariffs.
  • President Trump signed a proclamation Friday night that will impose a 10% duty on most imports for up to 150 days, as permitted under Section 122 of the Trade Act of 1974.
  • Businesses may be able to claim refunds for IEEPA tariffs paid, but are unlikely to pass these on to consumers.

Last year, President Trump used the International Emergency Economic Powers Act of 1977 (IEEPA) to impose tariffs on US trading partners.

He declared a national emergency, saying an influx of illegal drugs from Canada, Mexico, and China had created a public health crisis, and that large and persistent trade deficits had undermined US manufacturing. His administration used IEEPA to levy tariffs on imports to manage the perceived crises: a 10% baseline tariff on all US trading partners and higher duties on Canada, Mexico, and China.

Chief Justice John Roberts

Chief Justice John Roberts

In a 6-3 decision, the Supreme Court ruled on Friday that the IEEPA doesn’t authorize the president to impose tariffs.

“The Government reads IEEPA to give the President power to unilaterally impose unbounded tariffs and change them at will,” according to the court.

“That view would represent a transformative expansion of the President’s authority over tariff policy,” their opinion argued. “It is also telling that in IEEPA’s half-century of existence, no President has invoked the statute to impose any tariffs, let alone tariffs of this magnitude and scope.”

The Yale Budget Lab estimated that households’ average cost burden would fall by about half in 2026, to between $600 and $800, if the IEEPA tariffs were overturned.

Before the ruling, Trump administration officials had said they would use different legal pathways, if overruled, to achieve roughly the same outcome as the tariffs. (CNBC)

President Trump signed a proclamation Friday night that will impose 10% tariffs on most imports to the United States, to replace the 10% IEEPA baseline tariff rate overturned by the earlier Supreme Court ruling.

The new tariffs take effect Monday and are levied under Section 122 of the Trade Act of 1974, which allows the president to impose duties of up to 15% for 150 days to address “large and serious” balance-of-payments issues. (CBS News)

Businesses will likely claim refunds for the estimated $175 billion in IEEPA tariffs paid to date, but consumers will not receive any direct benefit. (Reuters)

Treasury Markets

10-year Treasury yields increased on news of the Supreme Court ruling, but remain close to primary support at 4.0%.

10-Year Treasury Yield

Stocks

The S&P 500 rallied on the prospect of reduced tariffs, but will likely reverse on news of Trump’s Friday night proclamation.

S&P 500

Financial Markets

The Chicago Fed National Financial Conditions Index reached -0.568 on February 13, signaling loose monetary conditions.

Chicago Fed National Financial Conditions Index

However, Bitcoin1 (BTC) remains below 70,000, indicating that financial markets are shedding risk assets.

Bitcoin (BTC)

Inflation

The Fed’s favored measure of underlying inflation, the core PCE index, jumped by 0.355% in December 2025, warning of an upsurge in price pressures.

Core PCE Inflation - Monthly

Annual growth in the core PCE inflation index lifted to 3.0%, and the headline PCE index increased to 2.9%.

PCE & Core PCE

The University of Michigan (UOM) survey of consumers reported a median expected price increase of 3.4% over the next year, with the 3-month average declining to 3.9%.

University of Michigan: 1-Year Inflation Expectations

Consumers

Consumer sentiment from the February UOM survey remains near record lows since the survey commenced in 1960.

University of Michigan: Consumer Sentiment

Participants’ assessment of current economic conditions is also near the lowest ebb in more than 60 years.

University of Michigan: Current Economic Conditions

Economy

Real GDP growth slowed to 0.35% in the fourth quarter, or 1.4% annualized, according to the US Bureau of Economic Analysis. Aggregate weekly hours worked grew at a slower 1.0% over the 12 months to January 2026, suggesting that GDP growth will likely slow further.

Real GDP & Growth in Total Hours Worked

Dollar & Gold

The US Dollar Index met resistance at 98 after news of the Supreme Court ruling, and we expect the downtrend to continue.

Dollar Index

Gold rallied to above $5,100 per ounce, signaling another test of resistance at $5,500.

Spot Gold

Conclusion

The Supreme Court ruling against President Trump’s tariffs checks his expansive use of emergency powers in pursuit of his economic agenda. The ruling also increases the economic uncertainty that has bedeviled Trump’s economic policy, making it difficult for corporations to make long-term investment decisions.

Declining real GDP growth in the fourth quarter highlights that the US economy is heavily reliant on massive capital investment in AI data centers to keep the country out of a recession, while the broader economy shudders from one mishap to the next.

Consumer sentiment and perceptions of current economic conditions are near sixty-year lows, again reflecting the narrow economic recovery, which has failed to benefit most Americans despite low unemployment. Republicans are going to find it difficult to hold a majority in Congress after the November midterm elections, delivering a further setback to Trump’s economic agenda.

The Supreme Court decision, led by conservative Chief Justice John Roberts, is a sign that conservatives will increasingly resist Trump’s disregard for the checks and balances built into the Constitution. We have likely passed “peak Trump” on the economic front, though he will likely try to stay in the spotlight with his geopolitical agenda.

We maintain our overweight position in gold and defensive stocks with stable cash flows, while avoiding high-multiple technology stocks and long-term financial instruments.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
Posted on

Bitcoin Plunge Signals Risk-Off

Key Points

  • Bitcoin plunged to $71,200, warning that financial markets are becoming risk-averse.
  • Brent crude surged to nearly $70 per barrel amid heightened US-Iran tensions.
  • Volatility following the CME margin hike, effective Monday, triggered a broad selloff in precious metals and energy transition metals.

Bitcoin2 (BTC) broke support at 85,000, the steep decline warning that financial markets are shedding risk assets.

Bitcoin (BTC)

The S&P 500 index retreated below 6900, but long tails and a rising Trend Index indicate strong buying interest.

S&P 500

However, the Roundhill Magnificent 7 ETF (MAGS) is headed for a test of primary support at 63, while Trend Index peaks at zero warn of selling pressure. A breach of support would be a strong bear signal.

Roundhill Magnificent 7 ETF (MAGS)

10-year Treasury yields are testing resistance at 4.3%. A breakout would offer a short-term target of 4.4%.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index is testing resistance at 98, but remains in a long-term downtrend. Respect of resistance will likely signal another decline.

Dollar Index

Gold is testing resistance at $5,000 per ounce after Friday’s sharp fall.

Spot Gold

The primary reason for the sharp fall in copper and precious metals was not Trump’s nomination of Kevin Warsh as the next Fed Chair. On January 29, the CME announced that it was again increasing margin requirements on futures contracts, effective Monday, February 2.

Comex Margin Increase

Comex Margins

The increase in CME margin requirements is intended to discourage leveraged speculation in key contracts that show signs of overheating.

Silver had a higher speculative interest, making it more susceptible to the margin hike, with the metal testing support at $70 per ounce.

Spot Silver

Energy & Energy Transition Metals

Brent crude is testing resistance at $70 per barrel on heightened US-Iran tensions.

Brent Crude

The Dow Jones Global Oil & Gas index is in a strong uptrend, with rising Trend Index troughs reflecting buying pressure.

Dow Jones Global Oil & Gas Index

Copper

The margin hike had less effect on copper, which retreated to $13,000 per tonne from its recent peak of $13,500 per tonne.

Copper

Copper miners were more susceptible to the risk-off shift in financial markets, with Sprott Copper Miners ETF1 (COPP) testing support at 40.

Sprott Copper Miners ETF (COPP)

Uranium

Uranium was not directly affected by the CME margin hike but was caught up in the broader selloff, with the Sprott Uranium Miners ETF1 (URNM) testing support at 70.

Sprott Uranium Miners ETF (URNM)

Lithium

Lithium suffered a similar fate, with Sprott Lithium Miners ETF1 (LITP) breaking support at 14.

Sprott Lithium Miners ETF (LITP)

Critical Minerals

Critical materials experienced a similar selloff, with Sprott Critical Materials ETF1 (SETM) testing support at 34.

Sprott Critical Materials ETF (SETM)

Conclusion

The CME margin hike, which took effect on Monday, was intended to cause a correction in copper and precious metals. However, the selloff spread to uranium, lithium, and critical materials. Risk aversion also spread to financial markets, as evidenced by a steep fall in risk assets such as Bitcoin.

Mega-cap technology stocks have experienced a selloff, with the Roundhill Magnificent 7 ETF (MAGS) approaching its primary support level. A breach of support would be a strong bear signal for the broader S&P 500 index, with market leaders falling behind their second-tier counterparts.

We can expect further CME margin hikes as the exchange seeks to curb speculative excesses. Volatility will likely discourage speculation but have minimal impact on the secular rise in demand for gold, copper, uranium, lithium, and critical materials.

Acknowledgments

Notes

  1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
  2. We analyze Bitcoin (BTC) — the most volatile risk asset — to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell, for which we are ill-equipped to express an opinion, nor is it a commentary on the merits of the cryptocurrency.
Posted on

Bond yields and the dollar fall as gold reaches a new high

Key Points

  • Long-term Treasury yields are falling steeply in anticipation of more Fed rate cuts as the economy slows.
  • The S&P 500 is retracing to test short-term support at 6500.
  • Financial market liquidity remains strong, supporting stocks.
  • The dollar is weakening, and gold and silver soared to new highs.

10-year Treasury yields fell to 4.046% testing the long-term band of support between 4.0% and 4.1%.

10-Year Treasury Yield

Expectations of steeper Fed rate cuts grow as more evidence emerges of a slowing economy. The Cass Freight Index is in a strong downtrend, and a fall below 1.0 would signal a recession. A useful barometer of economic activity, the index measures the number and cost of freight shipments across North America based on data from hundreds of large shippers.

Cass Freight Index

The current turmoil over tariffs — after the US Appeals court overruled Donald Trump’s “reciprocal” tariffs and his earlier “fentanyl” tariffs against China, Canada, and Mexico — will likely cause a sharp contraction in capital investment due to the uncertainty, almost guaranteeing a recession. Trump has lodged an appeal with the Supreme Court, but a decision is unlikely before next year. Unless he can get a stay on the lower court’s ruling, Treasury will be forced to fund the billions of dollars in tariffs collected.

While some believe that overturning the tariffs would cause a blowout in the fiscal deficit, we believe that the promise of a boost in revenue from tariffs was more spin than substance. There are no free lunches in economics; when something looks too good to be true, it usually is. Most of the cost of tariffs is currently borne by US corporations, but will likely be pushed onto consumers through price increases over the next year.

Goldman Sachs: Estimated Incidence of Tariff Costs

Where corporations do not pass on tariffs to customers, their profits and corporate tax paid to the Treasury will decline. Falling profits also hurt stock prices, reducing capital gains taxes. US consumers and corporations will directly or indirectly pay for the tariffs, and the impact on net Treasury receipts will likely be marginal.

Our biggest concern is not the loss of tax revenues, but the economic impact of policy uncertainty.

Stocks

The S&P 500 is retracing to test its latest support level at 6500, but rising Trend Index troughs indicate buying pressure, and respect of support will likely signal a further advance.

S&P 500

The equal-weighted S&P 500 ($IQX), more representative of large caps than the headline index, tests similar support at 7600. Rising Trend Index troughs again indicate buying support and likely continuation of the uptrend.

S&P 500 Equal-Weighted Index

Financial Markets

High-yield bond spreads are declining, indicating the return of loose financial conditions supporting high stock prices.

Junk Bond Spreads

Bitcoin (BTC) respected support at 110K, further indicating easing financial conditions — a bullish sign for stocks.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening in line with the outlook for interest rates. A US Dollar index breach of the long-term band of support between 96.5 and 97 would strengthen our long-term target of 90.

Dollar Index

Gold closed at a new high of $3,645 per ounce, while rising Trend Index troughs signal buying pressure. Expect a retracement to test support between $3,500 and $3,600, but respect will likely confirm an advance to $4,000 by the end of the year, as the dollar weakens.

Spot Gold

Silver is testing resistance at $41.50 per ounce. Again, we expect a retracement followed by a further advance, with a target of $44.

Spot Silver

Energy

Brent crude held steady at close to $66 per barrel after the OPEC+ meeting on the weekend decided on a smaller-than-expected initial increase in production of 137,000 barrels per day, in a phased unwinding of the 1.66 million barrels per day post-COVID production cut.

Brent Crude

Conclusion

Cyclical pressures are driving long-term yields lower, with a slowing economy likely to cause steeper-than-expected Fed rate cuts. Added uncertainty over tariffs increases the risk of a recession.

Loose financial conditions, boosted by falling Treasury yields, support stock prices, but a slowing economy would be bearish for earnings.

The dollar is weakening in response to the expected fall in interest rates, and a US Dollar Index breach of support between 96.5 and 97 would strengthen our long-term target of 90.

We expect gold and silver to rise as the dollar weakens, with respective targets of $4,000 and $44 per ounce by the end of the year.

 

Acknowledgments

Posted on

Weak jobs and falling crude = September rate cut

Key Points

  • The Fed will likely cut interest rates in September after a weak jobs report.
  • Falling crude oil prices also ease inflationary pressure.
  • Long-term Treasury yields fall, anticipating a rate cut.
  • The dollar weakened as yields softened, while gold soared to a new high of $3,600 per ounce.

The August labor report disappointed with a low 22,000 job growth compared to an expected 75,000. Another June data revision saw jobs contract by 13,000, after initial reported gains of 147,000 were revised down to 14,000 last month.

Employment Growth

Growth in total weekly hours worked came to a complete halt in August, with annual growth falling to 0.7%. Real GDP growth will likely follow.

Total Hours Worked

The uptrend in continued claims confirms the August rise in the unemployment rate to 4.3%.

Unemployment

The unemployment level ( 7.4m ) now exceeds job openings ( 7.2m ), but only by 200K.

Job Openings

Temporary jobs fell to 2.5 million, a level typically seen during recessions.

Temporary Employment

Layoffs and discharges are in an uptrend.

Layoffs & Discharges Rate

The 2.0% quit rate indicates that employees are no longer confident in finding new jobs.

Quit Rate

Average hourly earnings growth slowed to an annualized rate of 3.3% in August, but year/year growth was steady at 3.9%, still indicating a balanced labor market.

Average Hourly Earnings

Crude Oil

OPEC+ has injected a lot of downside pricing risk into the oil markets this week, fueling speculation that the second wave of voluntary cuts totaling 1.65 million b/d could be unwound much quicker than previously expected. According to news reports, Saudi Arabia is interested in pushing ahead with the unwinding during the September 7 meeting, citing the need to regain market share. (OilPrice.com)

The move has the potential to create a massive oversupply. Brent crude fell to $65.50 per barrel on Friday, but if the Saudis succeed, expect a test of support at $60. Falling crude prices would squeeze shale producer margins, causing a drop in US production.

Brent Crude

Lower energy prices would ease inflationary pressures in the US, allowing more room for Fed rate cuts.

ISM Services

The ISM services PMI improved to 52% in August, indicating expansion.

ISM Services PMI

New orders jumped to 56%, signaling an improving outlook.

ISM Services New Orders

However, services employment signals contraction, confirming the weak labor report.

ISM Services Employment

A steep 69.2% for the prices sub-index also warns of strong inflationary pressures.

ISM Services Prices

Contracting employment and rising prices in the large services sector warn of stagflation. We expect the Fed to cut in September, but then pause to see how this affects prices.

Stocks

A weak labor report is a bearish sign for stocks despite the prospect of a Fed rate cut. A reversal of the S&P 500 below support at 6400 would warn of a correction.

S&P 500

We expect the Dow Jones Industrial Average to test support at 45,000. Respect of support would confirm another advance. A breach is less likely, but would signal a test of 44,000.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed Index retreated to -0.526, warning that financial conditions are tightening.

Chicago Fed National Financial Conditions Index

Tighter financial conditions are also highlighted by a decline in bank reserves to below $3.2 trillion.

Commercial Bank Reserves at the Fed

Bitcoin is testing support at 110K. A breach would warn of a swing to risk-off in financial markets, which would be bearish for stocks.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields plunged to 4.09%, heading for a test of long-term support at 4.0% as speculators pile into bonds ahead of the expected September rate cut. However, we have warned of the risk that long-term yields rise in response to a Fed cut — as in September last year.

10-Year Treasury Yield

Dollar & Gold

The dollar weakened in response to the poor jobs report, anticipating falling interest rates.

Dollar Index

Gold surged to a new high at $3,600 per ounce before closing at $3,587. Expect another test of support at $3,500, but respect will likely confirm another advance — and our year-end target of $4,000.

Spot Gold

Silver is retracing to test support at $40, but respect will likely confirm another advance and a target of $44.

Spot Silver

Conclusion

Weak jobs growth in August warns that economic growth is slowing, but the ISM services report warns of strong price pressures in the services sector. We expect a Fed rate cut in September but then a pause as the Fed remains wary of stagflation, with low growth and rising prices.

We expect the dollar to weaken in response to rate cuts, with gold and silver soaring to new highs.

The Fed should take care to avoid a repeat of last September, when Fed rate cuts sparked a sell-off in long-term Treasuries, signaling the bond market’s displeasure with monetary and fiscal policy. We believe they will aim for a gradual decline, with a pause after the September cut to assess the impact of tariffs and a slowing economy on prices.

A Saudi move to increase crude oil production would likely drive Brent crude to $60 per barrel or below, giving the Fed more room to cut rates.

Acknowledgments

Posted on

Gold, the Dollar and a big hole in the desert

Summary

  • 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.

S&P 500

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.

10-Year Treasury Yield

However, the dollar continues to weaken, with the US Dollar Index testing support at 98. A breach would confirm our target of 90.

Dollar Index

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.

Brent Crude & USD Index for Advanced Economies

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.

Spot Gold

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.

Acknowledgments

Posted on

Rising recession risk threatens bond market

Summary

  • Trade talks with China have stalled
  • 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.

S&P 500

Strong liquidity supports financial markets, with the Chicago Fed National Financial Conditions Index falling to -0.606, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

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.

10-Year Treasury Yield

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.

ISM Manufacturing PMI

Manufacturing inventories surged in March as manufacturers brought forward purchases to get ahead of April’s tariff increases.

ISM Manufacturing Inventories

Imports also surged in the first quarter, followed by a steep plunge in May.

ISM Manufacturing Imports

Exports are contracting at a similar rate.

ISM Manufacturing Exports

Prices is the only sub-index that has surged, warning of steeply rising input costs.

ISM Manufacturing Prices

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.

Brent Crude

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.

Dollar Index

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.

Spot Gold

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.

Acknowledgments

Posted on

Inflation dips?

The 10-year Treasury yield retreated after the release of December CPI data, with breach of the rising trendline signaling a correction to test support at 4.5%.

10-Year Treasury Yield

However, the monthly chart below shows the long-term uptrend is unchanged, with the 10-year yield expected to reach 5.0%. Breakout above resistance would warn of an advance to 6.0%.

10-Year Treasury Yield

CPI Inflation

Core CPI (ocher) dipped slightly to 3.2% for the twelve months to December, while headline CPI (red) increased to 2.9%, holding stubbornly above the Fed’s 2.0% target.

CPI & Core CPI - Annual

Monthly data shows a sharp spike in headline CPI in December, increasing at an annualized rate of 4.7%. Core CPI, however, slowed to 2.7% (annualized).

CPI & Core CPI - Monthly

Energy

The difference is energy costs, excluded from core CPI, which jumped 2.63% in December, warning of rising energy prices in 2025. The December increase equates to an annualized rate of more than 30%.

CPI Energy

Energy prices are a key vector for transmitting inflation. Prices rise steeply during a boom as expanding demand outstrips inelastic supply, and the opposite occurs during a recession when falling energy demand causes a surplus. Energy prices (orange below) rose ahead of headline CPI (red) in 2021 and fell ahead of its subsequent decline in 2022 – 23.

CPI & CPI Energy - Annual

Incredible Charts+The Patient Investor

Don’t Miss Out!

Australia Day Special – Sign up for Incredible Charts Premium Service by 26 January and secure a FREE 1-year subscription to The Patient Investor.

Cut through the clutter and get the insights you need to stay ahead with The Patient Investor market analysis newsletter (normal price $234.00). Includes regular updates on key trends in the macro economy, technical updates, and Colin Twiggs’ proprietary weekly market snapshot

Save Now

Services

CPI for services (excluding shelter) was a low 0.099% in December or 1.2% annualized. Services generally indicate more persistent inflation, so the Fed will likely treat this as a win.

CPI Services excluding Shelter Rents

Long-term Inflation Outlook

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.

University of Michigan: 5-Year Inflation Expectations

We do not anticipate a significant hike in CPI in early 2025, but there are warning signs of a rebound.

Brent Crude

Brent crude has climbed to above $80 per barrel on fears that new sanctions on Russian shipping will impact supply. Retracement that respects support at $80 would confirm another advance.

Brent Crude

Stocks

Mega-cap technology stocks rebounded from yesterday’s fall, with the two most volatile Nvidia (NVDA) and Tesla (TSLA) showing gains.

Top 7 Technology Stocks

The S&P 500 index recovered above resistance at 5850, indicating another test of the high at 6100.

S&P 500

Large caps also enjoyed support, with the equal-weighted index ($IQX) testing resistance at 7200. Breakout would indicate another test of 7600.

S&P 500 Equal-Weighted Index

Growth stocks rebounded from their recent sell-off relative to defensive stocks. However, the Russell 1000 Large Cap Value ETF (IWD) has outperformed the Russell 1000 Large Cap Growth ETF (IWF) over the past month.

Russell 1000 Large Cap Value ETF (IWD) & Russell 1000 Large Cap Growth ETF (IWF)

Financial Markets

Bitcoin is again testing resistance at $100K. Reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds, but there are signs that financial conditions are easing. Breakout above $100K would confirm.

Bitcoin (BTC)

Expanding liquidity is partly attributable to a $350 billion fall in Fed overnight reverse repo operations in January after an equally sharp rise in December caused a contraction.

Fed Overnight Reverse Repo Liabilities

The Chicago Fed National Financial Conditions Index declined to -0.63 on January 10, suggesting similar financial easing to 2021.

Chicago Fed National Financial Conditions Index

Moody’s Baa corporate bond spread has also narrowed to 1.44%, the lowest since the 1990s, which indicates ready credit availability.

Moody's Baa Corporate Bond Spreads

Gold

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.

Spot Gold

The monthly chart below shows the long-term view, where breakout above resistance at $2,800 (green) would offer a target of $3,600.

Spot Gold

Conclusion

Our three pillars supporting financial markets are 10-year Treasury yields, crude oil prices, and financial market liquidity.

Financial market liquidity is strong and supports demand for stocks and bonds with easy access to leverage.

Crude oil prices have been subdued since 2023, with strong production from non-OPEC+ producers (especially the US) and weak demand from China. However, geopolitical tensions now threaten supply, with Brent crude rising above $80 per barrel. The risk is that higher energy prices cause a resurgence of inflation and drive up long-term interest rates.

Inflation concerns over a tight labor market were temporarily allayed by December’s weak core CPI and services CPI growth. However, rising energy costs will likely increase input costs, causing a rebound in the months ahead. Market concerns over inflation are expected to grow as the incoming administration attempts to stimulate an economy already at close to capacity. The 10-year Treasury yield may briefly retrace to test support but is then likely to continue its long-term uptrend. Breakout above 5.0% would offer a target of 6.0%, which would be bearish for stocks and bonds.

We are underweight growth stocks trading at high earnings multiples and are avoiding financial instruments with a duration longer than two years.

Gold will likely benefit from a higher long-term inflation outlook and rising geopolitical tensions. We are overweight gold and defensive stocks trading at reasonable multiples relative to earnings.

Acknowledgments

Posted on

Inflation fears threaten higher interest rates

Markets are hesitant ahead of December CPI data due for release in a few hours.

Fearful of a resurgence in inflation, Treasury investors are driving up long-term interest rates, with the 10-year yield headed for a test of 5.0%.

10-Year Treasury Yield

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.

University of Michigan: 5-Year Inflation Expectations

Producer prices are also rebounding, with services PPI recovering to 4.02% in December.

PPI Services

We do not anticipate a significant hike in CPI, but there are warning signs of a rebound.

Brent Crude

Brent crude climbed to $80 per barrel on the threat of new sanctions on Russian shipping impacting supply. Retracement that respects support at $76 would warn of another advance.

Brent Crude

Energy prices are a key vector for inflation. The chart below shows how energy CPI (orange) rose ahead of headline CPI (red) in 2021, and its fall in 2022 – 23 was instrumental in inflation’s subsequent decline.

Energy CPI & Headline CPI

Stocks

Mega-cap technology stocks are dragging the S&P 500 down, with former frontrunner Nvidia (NVDA) falling 7.2% over the past two months. Tesla (TSLA) has also shed almost half its December gains.

Top 7 Technology Stocks

The S&P 500 index is retracing to test resistance at 5850. Respect would warn of a further decline to 5700.

S&P 500

Large caps enjoy more support, with the equal-weighted index ($IQX) respecting key support at 7000.

S&P 500 Equal-Weighted Index

Rising long-term interest rates have set off a migration from high-multiple growth stocks to more defensive value sectors, with the Russell 1000 Large Cap Value ETF (IWD) outperforming the Russell 1000 Large Cap Growth ETF (IWF) in the past few weeks.

Russell 1000 Large Cap Value ETF (IWD) & Russell 1000 Large Cap Growth ETF (IWF)

Financial Markets

Bitcoin struggles to break resistance at $100K as financial market liquidity tightens. A reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds.

Bitcoin (BTC)

Gold

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.

Spot Gold

The monthly chart below shows the long-term view, where breakout above $2,800 would offer a target of $3,600.

Spot Gold

Conclusion

Rising long-term Treasury yields reflect the growing risk of long-term inflation.

The outlook is bearish for growth stocks trading at high earnings multiples and financial instruments with a duration longer than two years.

We remain bullish on gold and defensive stocks.

Acknowledgments

Powered by WordPress / WordPress Maintenance Service By Website Helper