Tag: Copper

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S&P 500 makes new high

Bond markets were closed Monday for Columbus Day, but financial market conditions show further signs of easing. Equities powered ahead, with the S&P 500 making a new high at 5859.

Stocks

The S&P 500 broke resistance at 5800, strengthening commitment to our target of 6000 by year-end. Rising Trend Index troughs signal long-term buying pressure.

S&P 500

The advance is broad, with the equal-weighted index ($IQX) breaking resistance at its previous high of 7300. This offers a target of 7500.

S&P 500 Equal-Weighted Index

Financial Markets

Moody’s Baa corporate bonds spread narrowed to 1.54%, signaling ready availability in credit markets.

Moody's Baa Corporate Bond Spreads
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Bitcoin also broke above its six-month trend channel, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar Index continues to strengthen as Treasury yields rise. This may seem counterintuitive, given the prospect of further rate cuts ahead, but the strong September jobs report has increased bond market concerns about an inflation recovery.

Dollar Index

Gold found support at $2,600 per ounce but has hesitated at $2,650. A lower Trend Index peak would warn of another test of support at $2,600. The Shanghai Gold Exchange no longer trades at a premium, with the iAu99.99 contract quoted at 605.04 RMB/gram, equivalent to $2,643 per ounce at the current exchange rate of 7.12 CNY to the Dollar.

Spot Gold

Silver is also hesitant, testing short-term support at $31 per ounce.

Spot Silver

Crude Oil

Brent crude is retracing to test support at $76 per barrel after Israel confirmed they would not strike Iranian oil targets and OPEC cut their oil demand forecast for 2024 and 2025.

Brent Crude

Brent [crude] fell 5%, or more than $4, in after-hours trading following a media report that Israeli Prime Minister Benjamin Netanyahu told the U.S. that Israel is willing to strike Iranian military targets and not nuclear or oil ones…..

OPEC on Monday cut its forecast for global oil demand growth in 2024 and also lowered its projection for next year, marking the producer group’s third consecutive downward revision. China, the world’s largest crude oil importer, accounted for the bulk of the 2024 downgrade as OPEC trimmed its growth forecast for the country to 580,000 barrels per day (bpd) from 650,000 bpd. China’s crude imports for the first nine months of the year fell nearly 3% from last year to 10.99 million bpd, data showed. Declining Chinese oil demand caused by the growing adoption of electric vehicles (EV), as well as slowing economic growth following the COVID-19 pandemic, has been a drag on global oil consumption and prices. (Reuters)

Base Metals

Copper is testing short-term support at $9,500 per tonne after it respected resistance at $9,900. Breach of support would offer a target of $9,250.

Copper

Aluminum similarly retreated from resistance at $2,650 per tonne and will likely test support at $2,500.

Aluminum

China’s deflationary pressures also worsened in September, according to official data released on Saturday. A press conference the same day left investors guessing about the overall size of a stimulus package to revive the fortunes of the world’s second-largest economy.

“The lack of a clear timeline and the absence of measures to address structural issues, such as weak consumption and reliance on infrastructure investments, have only increased ambiguity amongst market participants,” noted Mukesh Sahdev, the global head of commodity markets-oil at Rystad Energy. (Reuters)

Iron Ore

Iron ore is expected to retrace to test support at $100 per tonne following a sharp rise after China’s stimulus announcement.

Iron Ore

Conclusion

Financial markets show signs of a promising rise in liquidity, with falling corporate bond spreads and Bitcoin breakout above its six-month trend channel. The S&P 500 responded with breakout above 5800, strengthening our commitment to a target of 6000.

Gold and silver display strong uptrends but hesitate in response to a rising Dollar. Increased fears of an inflation rebound are behind the recent rally in long-term Treasury yields and the Dollar. We expect the uptrend in gold and silver to continue, with low real interest rates, whether or not inflation fears fade.

We expect that China will struggle to recover from its current economic slump. The announced stimulus program remains vague and does not address the underlying issue of weak domestic consumption. Deflationary pressures will likely keep a lid on crude oil and industrial metal prices for several years.

Low crude oil prices are also likely to keep inflation in check, leading to low long-term interest rates in the West.

Acknowledgments

Posted on

China sizzle turns to fizzle

China’s announcement of economic stimulus and hints at an even larger “bazooka” ahead caused a sizzling rally on the Shanghai exchange, with the CSI 300 leaping 20% in the last week of September.

Shanghai Shenzhen CSI 300 Index

Hong Kong’s Hang Seng Index displays an even steeper rally.

Hang Seng Index

However, a failure to follow through this week with sufficient detail of the stimulus package caused the rally to fizzle, with a sharp correction on both indices. Today, the Hang Seng is testing support at 20500.

China Stimulus

Crude Oil

Brent crude reversed sharply as prospects faded for a demand recovery in China.

Brent Crude

Treasury Markets

Ten-year Treasury yields stalled and will likely re-test new support at 4.0%.

10-Year Treasury Yield

According to the theory of interest developed by Swedish economist Knut Wicksell, the equilibrium or natural rate of interest—at which inflationary and deflationary pressures are in balance—is when the cost of borrowing is higher than the average return on new investment. This means that the 10-year Treasury yield–the risk-free rate–should be roughly equal to nominal GDP growth, approximating the return on new investment. The chart below shows that the 10-year Treasury yield, at 4.0%, is significantly lower than nominal GDP growth of 5.7% for the 12 months ended in Q2.

Wicksell Analysis: Nominal GDP Growth & 10-Year Treasury Yield

With the economy showing little sign of slowing, the likely outcome is either higher long-term interest rates or a build-up of long-term inflationary pressure.

Stocks

The S&P 500 gained almost 1.0% on Tuesday, with a shallow retracement and rising Trend Index troughs signaling buying pressure.

S&P 500

Nvidia led the advance of mega-cap stocks, breaking above its August high, while all seven advanced yesterday.

Top 7 Technology Stocks

The equal-weighted index lagged as large caps failed to match mega-cap gains.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin continues to test the upper border of its trend channel. A breakout would be a bullish sign for financial market liquidity.

Bitcoin (BTC)

Dollar & Gold

The Dollar Index is expected to retrace to test new support at 102. Respect would confirm an advance to 104.

Dollar Index

Gold is headed for a test of support at $2,600 per ounce, but respect will likely confirm a re-test of $2,700.

Spot Gold

Silver is testing support at $30 per ounce, with respect again likely to signal a re-test of resistance at $32.

Spot Silver

Metals

Copper retreated in response to China’s disappointing stimulus. Expect a correction to test support at $9,250 per tonne.

Copper

Iron ore also reflects disappointment, retreating to $106.30 per tonne.

Iron Ore

Conclusion

A disappointing lack of detail on China’s newly announced stimulus led to a retreat in Chinese stocks and global crude oil, copper, and iron ore.

Ten-year Treasury yields are expected to retrace to test support at 4.0%. While yields are likely to remain low as the Fed cuts interest rates, the long-term equilibrium rate is expected to be higher—between 5% and 6%.

Respect of support at 5650 on the S&P 500 confirms our year-end target of 6000, but the advance is exceedingly narrow and precarious.

Gold is headed testing support at $2,600 per ounce, but respect is likely and would signal a re-test of $2,700.

Acknowledgments

Posted on

China’s manufacturing contraction

China faces growing push-back from trading partners in its efforts to export its way out of a recession. Dumping excess production in export markets has provoked increased tariffs on manufactured goods such as EVs and commodities such as steel. Declining demand in export markets caused a sharp fall in the Caixin/S&P Global manufacturing PMI for September, with the New Orders sub-index falling to its lowest level in two years.

Caixin/S&P Global manufacturing PMI

BEIJING, Sept 30 (Reuters) – China’s manufacturing activity shrank sharply in September as new orders at home and abroad cooled, pulling down factory owners’ confidence to near record lows, a private-sector survey showed on Monday. The Caixin/S&P Global manufacturing PMI fell to 49.3 in September from 50.4 the previous month, missing analysts’ forecasts in a Reuters poll of 50.5. The reading marked the lowest since July last year.

…Even though production expanded for the 11th straight month in September, new orders fell significantly from August’s gain. The sub-index of new orders was the lowest in two years.
While exports have been a bright spot for the economy, new orders from abroad declined at the fastest pace since August last year. Chinese manufacturers said that a deterioration in foreign demand led to the fall in export orders.

Stimulus

George Magnus, former UBS chief economist, author, and commentator on China, writes that Chinese authorities are clearly spooked:

Early last week, the authorities announced the biggest monetary policy stimulus since Covid, comprising interest rate and mortgage rate cuts, reductions in the downpayment for second homes, additional help for state enterprises to buy unsold homes, and 800 billion yuan ($113 billion, £85 billion) of liquidity facilities to allow non-bank financial firms to buy equities and listed firms to buy back their own shares. A 1 trillion yuan ($142 billion, £106 billion) bank re-capitalisation program is also considered likely.

These measures were rocket fuel for stock markets, favouring not least the state enterprises and institutions that constitute much of the ownership of shares. Yet, while the measures generally may bring temporary relief, they will not really boost the economy much. China’s economic problems are not due to interest rates being too high, a shortage of liquidity, or credit supply constraints and China’s property market needs much more than patchy support designed to stop it from adjusting to decades of overbuilding and a bursting bubble.

There are some positives, Magnus notes:

The government is expected to announce during or soon after the Golden Week holiday in the first week of October, a 2 trillion yuan ($284 billion, £212 billion) borrowing programme, split roughly equally between measures to support consumption, and help to alleviate local government indebtedness problems.

The latter amounts to a shift in a limited amount of debt ownership from local to central government, which Beijing has previously railed against, but which is more financial engineering than economic stimulus. The consumption part, however, could have a more meaningful impact. Some is about extending the hitherto sparsely used new-for-old trade-in support for consumer durables and business equipment upgrades. At best this borrows future consumption. The reported introduction of a monthly 800 yuan ( $113, £85) child benefit payment for all but first children, equivalent to about 30 per cent of median post tax monthly income, could certainly give household consumption a shot in the arm.

Stock Market Rally

The Shanghai Composite has made an impressive rally since the announcement.

Shanghai Composite Index

Shadowed by a similar move on Hong Kong’s Hang Seng Index.

Hang Seng Index

Industrial Metals

Copper broke resistance at $9,500 per tonne after an initial rally caused by a spike in AI data center construction in the US.

Copper

Alumini=um shows a similar breakout, above $2,500 per tonne.

Aluminum

Iron ore so far shows a muted response.

Iron Ore

Crude Oil

Brent crude remains solidly in a bear market.

Brent Crude

Conclusion

Efforts to revive business investment by lowering interest rates are unlikely to have much of a long-term effect when the underlying problem is a shortage in domestic consumption. The private sector will be reluctant to invest when industries already suffer from overcapacity due to insufficient demand.

Overcapacity will also likely worsen as export orders decline due to increased tariffs from trading partners.

Measures to boost consumption through old-for-new “cash for clunkers” exchanges and child benefit programs are a step in the right direction. However, the roughly 1 trillion yuan ($142 billion) is a drop in the ocean compared to the scale required.

Most of the announced stimulus is aimed at papering over the cracks and meeting short-term GDP targets rather than the fundamental change in direction needed to address the underlying consumption deficit.

We expect short-term relief to be followed by a resumption of the deflationary contraction.

Acknowledgments

Posted on

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.

Top 7 Technology Stocks

The fall breached short-term support on the S&P 500 at 5550, signaling a correction to test 5400.

S&P 500

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.

S&P 500 Equal-Weighted Index

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.

Russell 2000 Small Cap ETF (IWM)

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.

ISM Manufacturing PMI

New Orders are also contracting, indicating further headwinds ahead.

ISM Manufacturing New Orders

Also, the Prices sub-index continues to expand, warning of persistent inflationary pressure.

ISM Manufacturing Prices

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.

Manufacturing, Construction, and Transport & Warehousing

Non-residential construction spending continues to strengthen even when adjusted for inflation, benefiting from government programs to re-shore critical supply chains.

Non-Residential Construction Spending adjusted for inflation

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%:

Caixin China Manufacturing PMI & NBS China Manufacturing PMI

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.

Moody's Baa Corporate Bond Spreads

However, Bitcoin has respected resistance at $60K [red line], warning of shrinking liquidity.

Bitcoin (BTC)

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%.
10-Year Treasury Yield

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.

Dollar Index

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.

Spot Gold

Silver is more bearish, and a breach of support at $27.50 per ounce would test the August low at $26.50.

Spot Silver

Energy

Brent crude broke support at $76 per barrel and is headed for a test of long-term support at $73.

Brent Crude

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.

Nymex WTI Crude

Uranium

Uranium continues its downtrend, with the Sprott Physical Uranium Trust (SRUUF) headed for another test of support at 17.

Sprott Physical Uranium Trust (SRUUF)
However, we are bullish on the long-term prospects as resistance to the expansion of nuclear energy fades.

EU's New Pro-Nuclear Energy Chief

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.

Copper

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.

Aluminum

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.

 

Iron Ore

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

Posted on

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

Posted on

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

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

Posted on

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.

Bitcoin

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%.

S&P 500

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.

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

The S&P 500 made a small gain but the weak close and declining Trend Index warn of selling pressure.

S&P 500

The equal-weighted index ($IQX) shows a similar weak close, retracing to test support at 6800.

S&P 500 Equal-Weighted Index ($IQX)

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).

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

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.

Spot Gold

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.

Spot Silver

Crude Oil

Nymex WTI crude continues to test support at $82 per barrel. Breach of $80 would be a strong bear signal.

Nymex WTI Crude

Brent crude retreated below support at $86 per barrel. Breach of $84 would offer a similar strong bear signal.

Brent Crude

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.
Aluminum

Copper and aluminum tend to track each other closely, so the breach is bearish for copper as well.

Copper

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.

Sprott Physical Uranium Trust (SRUUF)

Several uranium stocks, apart from Canadian miner Cameco (red), are testing support levels. Uranium Stocks

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

Posted on

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

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.

S&P 500 & S&P 500 Equal-Weighted Index

Labor Market

The economy added 275,000 jobs in February, a strong result.

Employment

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.

Employment: Cyclical Sectors

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.

Unemployment Rate & 3-Month Moving Average

Average weekly hours worked ticked up to 34.3 hours but the downward trend warns that the economy is slowing.

Average Weekly Hours Worked

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.

Quit Rate

The decline in average hourly earnings annual growth is slowing.

Average Hourly Earnings

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.

Average Hourly Earnings - Monthly Change

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.

Real GDP Growth & Aggregate Weekly Hours Worked

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%.

10-Year Treasury Yield

The Chicago Fed Financial Conditions Index ticked up to -0.47 but continues below zero, signaling easy monetary policy.

Chicago Fed Financial Conditions Index

Commercial bank cash assets — primarily reserves at the Fed — are leveling off at $3.6 trillion.

Commercial Bank Cash Assets (Primarily Reserves at the Fed)

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.

Reverse Repo (RRP)

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.

Commercial Bank Time Deposits

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.

Dollar Index

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).

Spot Gold

Our long-term target of $2450 is calculated as $2050 + ($2050 – $1650).

Spot Gold

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

Brent Crude

Copper broke through resistance at $8500 per metric ton, signaling an advance to $9000, but expect retracement to test the new support level first.

Copper

China’s real estate/financial woes are weighing more heavily on iron ore which continues to test support at $114 per metric ton.

Iron Ore

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.

Sprott Physical Uranium Fund

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.

Washington Post: US Electricity Demand

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

 

Posted on

Gold soars as UST yields fall

The S&P 500 has retraced to test short-term support at 5050, accompanied by a retreat in the Equal-Weighted Index and Russell 2000 Small Caps. The outlook remains bullish, however, with Trend Index troughs high above zero signaling extraordinary buying pressure.

S&P 500

Bond market anticipation of June rate cuts is growing. 10-Year Treasury yields broke support at 4.20%, signaling a decline to test support at 3.80%.

10-Year Treasury Yield

Gold is at a new high of $2129 per ounce. We expect retracement to test support at $2080 but respect would offer a ST target of $2180 per ounce.

Spot Gold

Gold versus TIPS

Economic Activity

ISM Services PMI recorded its 14th month of expansion in February, retreating to 52.6% from 53.4% in January. The decline suggests continued but slower growth.

ISM Services PMI

Crude & Commodities

Nymex WTI light crude continues to respect resistance at $80 per barrel. Breach of $78 would suggest a correction to the ascending trendline at $75.

Nymex Light Crude

Copper continues to test resistance at $8500 per metric ton, indicating some resilience in the Chinese economy — by far the biggest buyer of industrial metals.

Copper

In China, Caixin Services PMI eased to 52.5 in February, from 52.7 in January — maintaining the expansion since January last year.

Caixin Services PMI

Earlier, Caixin Manufacturing PMI edged up to 50.9, compared to 50.8 in January. But whipsawing around 50 indicates poor and erratic growth which is affecting metals prices.

Caixin Manufacturing PMI

Iron ore continues to test support at $114 per metric ton. Breach would warn of another test of $100. The Chinese government is likely to do enough to keep the economy from collapse but does not have the means to stimulate on a large scale.

Iron Ore

Conclusion

The 10-year treasury yield is expected to test support at 3.80%, offering further upside for Gold.

Our short-term target is $2180 per ounce and our long-term target is $2450.

Acknowledgements

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