Tag: Copper

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Bond Market Deja Vu from 2022

Key Points

  • Investors are dumping long-term government bonds, with the yield on 30-year Treasuries rising to 5.13%.
  • Sovereign bonds across the UK, the EU, and Japan are all affected by the sell-off.
  • The S&P 500 and the Dow retreated on Friday by 1.2% and 1.1%, respectively.
  • Gold and silver fell steeply.
  • Copper, Lithium, Critical Materials, and Uranium are also experiencing a sell-off.
  • President Trump hinted at another major strike on Iran, with his Sunday “The Clock is Ticking” post on Truth Social.
  • Brent futures jumped to above $111 per barrel early Monday.

Investors are dumping long-term government bonds. The 30-year Treasury yield broke resistance at 5.0%, rising to 5.13% on Friday before easing slightly to 5.12% early Monday.

30-Year Treasury Yield

High bond yields, above the rate of inflation, increase the risk of a solvency crisis where the borrower can’t meet its interest payments. Issuing new debt to cover interest payments accelerates debt growth, causing debt-to-GDP to spiral out of control.

UK Gilts 30-year yield jumped to 5.85%.

30-Year UK Gilts Yield

The French 30-year climbed to 4.67%.

30-Year UK Gilts Yield

Italian 30-year yields are at 4.75%.

30-Year UK Gilts Yield

France and Italy have higher debt-to-GDP ratios than the UK. The primary reason they enjoy lower yields is that their long-term yields are suppressed. The Bank of England, on the other hand, is shrinking its balance sheet to restore fiscal stability.

The yield on the 30-year German Bund is even lower because of Germany’s strong fiscal position, with much lower debt levels.

30-Year German Bund Yield

The Japanese 30-year yield is shooting upwards. JGB yields should be much higher because of Japan’s precarious debt-to-GDP ratio. However, the Bank of Japan buys government bonds (JGBs) to suppress the yield and avoid a solvency crisis.

Adding to the selloff on Monday was news that Japan’s government will likely issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the war, worsening already strained government finances. Yields on ​the 30-year Japanese government bond (JGB) jumped more than 10 bps to their highest on record at 4.200% while the 10-year yield touched its highest since October 1996 ​at 2.800%. (Reuters)

The yield on the 30-year JGB has since weakened slightly to 4.10%.

30-Year JGB Yield

The chart below, by Robin Brooks, compares long-term government bond yields (on the left axis) to countries’ debt-to-GDP ratios (on the bottom axis). Yields in Japan (JP), Greece (GR), and Italy (IT) are being suppressed, while yields in Australia (AU), New Zealand (NZ), and the UK (GB) are higher due to more conservative central bank policies.

JGB Yield & Debt-to-GDP Ratio

Why are Long-term Yields Rising?

There are several overlapping reasons why long-term yields are rising:

Increased defense spending expands government deficits and raises debt-to-GDP ratios, increasing the risk of fiscal dominance.

Fiscal dominance is where the central bank prioritizes bond market stability over currency stability, lowering interest rates while tolerating higher inflation, to prevent a solvency crisis in the bond market.

The US-Iran conflict has caused oil shortages, driving crude oil prices higher. High oil prices are fueling a steep rise in inflation, increasing the risk of capital erosion for bond investors.

The US Fed has entered into a $100 billion currency swap agreement with the United Arab Emirates. The facility will help the UAE to survive the loss of oil revenues while the Strait of Hormuz is closed. Further currency swaps with other Gulf States will likely follow. The currency swaps are effectively a medium-term loan from the Fed, but risk becoming a standing facility if the conflict in the Gulf is not quickly resolved. Their primary purpose is to avoid the Gulf States selling reserves to make up for lost oil revenue. The sell-off of hundreds of billions of US Treasuries would flood the market and drive up yields.

The AI boom has driven a massive surge in capital spending by mega-cap technology companies as they vie for market share in a rapidly expanding market. Much of the capital spending is funded through long-term debt issuance, leading to a steep increase in the supply of high-quality long-term debt.

US-Iran Conflict

President Donald Trump on Sunday again threatened Iran:

“For Iran, the Clock is Ticking, and they better get moving, FAST, or there won’t be anything left of them,” Trump said in a Truth Social post. “TIME IS OF THE ESSENCE!” (CNBC)

Trump’s post caused a sharp jump in Brent crude futures prices when the market opened on Monday.
Brent Crude Futures (ICE July'26)

Stocks & Financial Markets

The S&P 500 retreated below 7500, falling 1.2% on Friday.

S&P 500

The Dow similarly retreated below 50,000, falling 1.1%. A decline below support at 49,000 would signal a correction.

Dow Jones Industrial Average

Bitcoin1 retreated below support at 80,000, warning of further market risk aversion.

Bitcoin (BTC)

10-year Treasury yields jumped to 4.6%. The breakout above 4.5% offers a short-term target of 4.75%. Rising Trend Index troughs indicate strong upward pressure on long-term yields.

10-Year Treasury Yield

Dollar & Gold

A Dollar shortage is driving up the US Dollar Index as global markets struggle with crude oil shortages and rising prices, a fiscal crisis among Gulf States that have lost their primary source of revenue, and lower US trade deficits.

Dollar Index

The Dollar enjoyed similar strong demand after Russia invaded Ukraine in February 2022, followed by a steep fall in November, when energy markets had stabilized.

Dollar Index

Gold is testing support at 4500. A breach of 4400 would signal a test of 4000, but respect of support remains more likely.

Spot Gold

In 2022, Gold initially shot up after Russia’s 24 February invasion of Ukraine, but then declined for 6 months until energy markets stabilized and the Dollar weakened.

Spot Gold

Silver fell steeply last week and is headed for a test of support at 71.

Spot Silver

Energy

Brent crude continues its uptrend, and another test of resistance at $120 per barrel is likely.

Brent Crude

The Dow Jones Global Oil & Gas Index respected support at 580, headed for a test of resistance at 620. Trend Index troughs above zero signal buying pressure.

Dow Jones Global Oil & Gas Index

Uranium

Uranium is taking a beating, with the Sprott Uranium Miners ETF2 (URNM) breaking secondary support at 64. A breach of support at 58 would signal a primary downtrend.

Sprott Uranium Miners ETF (URNM)

Lithium

All strategic materials are under pressure, even Lithium, which has enjoyed strong demand from booming EV sales. Sprott Lithium Miners ETF2 (LITP) broke its new support level at 16.50. Follow through below 15 would signal a correction.

Sprott Lithium Miners ETF (LITP)

Critical Minerals

Critical materials show similar selling pressure, with Sprott Critical Materials ETF2 (SETM) testing support at 35.50, while a lower Trend Index peak warns of selling pressure.

Sprott Critical Materials ETF (SETM)

Copper

Copper retreated below 14,000 after a strong run-up.

Copper

Sprott Copper Miners ETF2 (COPP) reflects similar selling pressure, breaking initial support at 42, while a lower Trend Index peak signals selling pressure.

Sprott Copper Miners ETF (COPP)

Conclusion

We expect a similar playbook to 2022, after Russia’s full-scale invasion of Ukraine: rising energy prices, followed by rising long-term bond prices, and a stronger Dollar.

S&P 500

The S&P 500 suffered a 26% drawdown in 2022, and stock prices will likely weaken, though partly cushioned by the AI boom. We also expect weakness in Gold, Silver, and strategic materials like Uranium, Lithium, Critical Minerals, and Copper — until energy markets stabilize.

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.
  2. 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.
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Xi Has Trump Over a Barrel

Key Points

  • Producer prices jumped by 6.0% over the 12 months to April, warning of higher consumer prices ahead.
  • 10-year Treasury yields responded with a rise to 4.48%.
  • Xi Jinping has the upper hand in negotiations with Donald Trump because of China’s large strategic oil reserves, which they could use to keep prices in check.
  • The S&P 500 reached a new high at 7444, while the Dow is consolidating in a bullish narrow range below 50,000.
  • The Main Street US economy is under the pump, but Semiconductors, Construction, and Heavy Electrical industries are booming due to datacenter spending.
  • Lithium, Copper, and Critical Materials show signs of buying pressure, but Uranium is lagging.

Producer prices jumped by 6.0% for the 12 months to April 2026, driven by rising fuel prices and transportation costs. The cost of rising fuel prices is spreading through the economy, with the core index (excluding food and energy) leaping to 5.2%. The chart below shows the impact of energy shortages on producer prices after Russia’s full-scale invasion of Ukraine in 2022. We expect the impact of the Strait of Hormuz closure to be more severe.

Producer Price Index (PPI)

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Silver and Lithium Shine

Key Points

  • Silver broke through resistance at $80 per ounce, signaling a fresh advance.
  • Gold remains rangebound.
  • Oil & Gas stocks are weak, while crack spreads are widening.
  • Copper, Uranium, and Critical Materials show signs of buying pressure, following the Lithium breakout.
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Trump Talks “Peace Deal” But Nothing Stops This Train

Key Points

  • President Trump again baits financial markets with the prospect of a peace agreement.
  • Brent Crude (July’26 futures) is testing support at $100 per barrel.
  • However, the crude market faces critical shortages even if a peace deal is signed.
  • The S&P 500 rallied to a new high at 7365, while the Dow threatens a breakout above 50,000.
  • The ISM Services PMI warns that growth is slowing, while soaring prices signal inflationary pressures.
  • Lithium is in a strong uptrend, while Copper, Critical Materials, and Uranium show signs of a recovery.
  • The RBA hiked rates this week and would like to hold for a while, but rising prices may force further hikes.

ISLAMABAD/WASHINGTON/TEL AVIV, May 7 (Reuters) – U.S. President Donald Trump predicted a swift end to the ​war with Iran as Tehran considered a U.S. peace proposal that sources said would formally end the conflict while leaving unresolved key U.S. demands that Iran suspend ‌its nuclear program and reopen the Strait of Hormuz.

An Iranian foreign ministry spokesperson cited by Iran’s ISNA news agency said Tehran would convey its response, while Iranian lawmaker Ebrahim Rezaei, a spokesperson for parliament’s powerful foreign policy and national security committee, described the proposal as “more of an American wish-list than a reality.”

“They want to make a deal. We’ve had very good talks over the last 24 hours, and it’s very possible that we’ll make ​a deal,” Trump told reporters in the Oval Office on Wednesday, saying later “it’ll be over quickly.”

Trump has repeatedly played up the prospect of an agreement to end the war ​that started on February 28, so far without success. The two sides remain at odds over a variety of difficult issues, such as Iran’s nuclear ⁠ambitions and its control of the Strait of Hormuz, which before the war handled one-fifth of the world’s oil and gas supply.

A Pakistani source and another source briefed on the mediation ​said an agreement was close on a one-page memorandum that would formally end the conflict. That would kick off discussions to unblock shipping through the strait, lift U.S. sanctions on Iran and set ​curbs on Iran’s nuclear program, the sources said.

A separate senior Pakistani official involved in the talks told Reuters on Thursday that negotiators were hopeful of reaching a deal but noted gaps between the sides remained.

Brent Crude (July futures), buoyed by optimism over a prospective peace deal, is retracing to test support at $100 per barrel.

Brent Crude Futures (ICE July'26)

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First Wave of Gulf War Hits CPI

Key Points

  • CPI jumped by almost 0.9% in March, fueled by a steep rise in crude oil prices.
  • A 21.2% jump in gasoline prices accounted for nearly three quarters of the monthly ​CPI increase.
  • We expect further waves as rising costs reach agriculture, mining, and transportation before filtering through to the broader economy.
  • The S&P 500 stalled at 6800.
  • University of Michigan consumer sentiment plunged to its lowest level since the late 1970s.

The first wave of price hikes hit CPI in March, with the index jumping 0.865%, fueled by a steep rise in crude oil prices driven by the war in the Persian Gulf.
CPI & Core CPI - Monthly

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Jobs Rise but Prices Soar, Growth Slows and Liquidity Tightens

Key Points

  • Non-farm employment jumped by 178,000 in March, well above the expected 60,000.
  • The unemployment rate declined to 4.3%.
  • Growth in aggregate hours worked, however, slowed to 0.4% over the past year.
  • The ISM Manufacturing Prices index jumped to 78.3%, warning of a price shock.
  • Aluminium prices soared to nearly $3,600/tonne due to supply shortages caused by the war in the Persian Gulf.
  • Brent crude closed the week at $109 per barrel, with no end to the Iran war in sight.

The BLS reported a 178,000 increase in non-farm payroll in March, well above the 60,000 forecast. Employment growth has been erratic, averaging less than 15,000 over the past 6 months.

Employment Growth

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No Quick Exit

Key Points

  • Brent crude futures (May’26) rose after President Trump paused his threatened attack on Iran’s energy facilities until April 6.
  • The S&P 500 broke primary support at 6550.
  • The Dollar strengthens with the prospect of higher interest rates.
  • Gold tests primary support at $4,400 per ounce.

Brent crude rallied to $109 per barrel on news that negotiations may take longer than initially indicated. Retracement will likely respect support at $105 per barrel, signaling another test of $114.

Brent Crude Futures (ICE May'26)

Markets continue to receive conflicting messages on the war with Iran.

President Trump said he would extend a pause to attack Iran’s energy facilities to April 6, a little over a week after the original deadline that was set to end Friday.

“As per Iranian Government request, please let this statement serve to represent that I am pausing the period of Energy Plant destruction,” Trump said in a Truth Social post. “Talks are ongoing and, despite erroneous statements to the contrary by the Fake News Media, and others, they are going very well. Thank you for your attention to this matter!” (CNBC)

Iran’s Foreign Minister ruled out direct talks with the US but says they are reviewing the US 15-point proposal submitted through Pakistani intermediaries.

House Speaker Mike Johnson said Wednesday that Operation Epic Fury is “almost done” and is “wrapping up.”

….Johnson said that the objectives of the operation “have been met,” but access to the Strait of Hormuz still needs to be “straightened out.” (CBS)

The military buildup continues:

WASHINGTON, March 24 (Reuters) – The Pentagon is expected to send ​thousands of soldiers from the U.S. Army’s elite 82nd Airborne Division to the Middle East, two people familiar with the ‌matter told Reuters on Tuesday, adding to a massive U.S. military buildup even as President Donald Trump talks about a possible deal with Tehran to end the war.

The New York Post:

The Pentagon is reportedly considering a plan to send an additional 10,000 troops to the Middle East amid the war with Iran.

The potential deployment would likely include infantry and armored vehicles and would be on top of the 5,000 Marines and sailors and roughly 2,000 members of the Army’s 82nd Airborne Division who have already been dispatched to the region, according to the Wall Street Journal.

When one party threatens the other, it is normally a sign that the negotiation is not going well:

President Trump is ready to “unleash hell” on Iran if Tehran does not accept a deal to end the war in the Middle East, the White House warned on Wednesday.

“If Iran fails to accept the reality of the current moment, if they fail to understand that they have been defeated militarily and will continue to be, President Trump will ensure they are hit harder than they have ever been hit before,” Press Secretary Karoline Leavitt said in a briefing.

“President Trump does not bluff and he is prepared to unleash hell.” (CBS)

Iran and Israel seem to have longer-term objectives, but President Trump is desperate for an off-ramp. Opinion polls show the war is unpopular in the US:

Reuters/Ipsos Opinion Poll

The Iranians know that the closer it gets to the US midterms in November, the greater their leverage.

Trump has few good options: escalate the conflict or settle on a potentially bad deal with a weakened yet defiant Iran that has choked off much of the world’s oil supply….

A clear and quick victory could pay dividends for Trump politically. But a settlement that credibly contains Iran appears to be far off….

The terms required to wind the war down may involve concessions to Tehran that do not satisfy Israel, which appears to want to press ahead. (Reuters)

Copper continues its downtrend, warning that the global economy is slowing.

Copper

Mega-cap technology stocks are dragging the major indices lower. The Roundhill Magnificent 7 ETF (MAGS) signals a strong bear trend after breaking primary support at 63 in early February.

Roundhill Magnificent 7 ETF (MAGS)

The S&P 500 has now followed with a breach of primary support at 6550, confirmed by the recent dead cat bounce.

S&P 500

The Dow Jones Industrial Average is testing the primary support band between 45,500 and 46,000. A breach would confirm the S&P 500 bear market signal.

Dow Jones Industrial Average

The S&P 500 Equal-Weighted Index ($IQX) shows that large caps are now outperforming mega caps, which had led the market for several years. It’s all relative, however. Declining Trend Index peaks below zero warn of selling pressure.

S&P 500 Equal-Weighted Index

Bitcoin1 continues to test the support band between 64,000 and 70,000, indicating that financial markets have become risk-averse.

Bitcoin (BTC)

10-year Treasury yields respected support at 4.3%, offering a short-term target of 4.65% as the prospect of further rate cuts fades.

10-Year Treasury Yield

The US Dollar Index is testing resistance at 100, driven by the prospect of higher interest rates.

Dollar Index

Gold is testing primary support at $4,400 per ounce. Respect, indicated by recovery above $4,600, would indicate another test of $5,000, while a breach would offer a target of $4,000.

Spot Gold

Conclusion

Mixed messaging over negotiations with Iran indicates that progress is slow. Conflicting objectives between the US and Israel may also prevent a quick resolution to the war against Iran. A quick exit is unlikely.

A downtrend in copper prices warns that the global economy is slowing.

The S&P 500 broke support at 6550, signaling a primary downtrend. A Dow Jones Industrial Average breach of primary support at 45,500 would confirm a bear market.

The prospect of higher interest rates, with the market pricing out further rate cuts, has strengthened the Dollar, triggering a selloff in gold. A breach of primary support at $4,400 per ounce would offer a target of $4,000, while respect of support would signal another test of $5,000.

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.
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Crude Oil Spikes But Gold Falls

Key Points

  • Iranian missiles damaged Qatar’s Ras Laffan Industrial City, the world’s largest LNG export facility.
  • Brent crude futures spiked to $115 per barrel.
  • The Fed kept the fed funds target rate unchanged at 3.50%-3.75%.
  • Gold is testing support at $4,800 per barrel.

From CNBC:

Qatar said Wednesday that Iranian missiles caused “extensive damage” at Ras Laffan Industrial City, home to the largest liquefied natural gas, or LNG, export facility in the world….

Qatar halted LNG production on March 2 due to Iranian drone strikes at Ras Laffan and Mesaieed Industrial City. The Gulf state is the second-largest LNG exporter in the world, after the US Qatar accounts for nearly 20% of global LNG exports, according to data from energy consulting firm Kpler.

Iran is also attacking oil export facilities outside the Persian Gulf to further restrict global energy supply. From Reuters yesterday:

Omani ​crude – exported from a terminal outside the Strait of Hormuz – is trading at a record premium of $51 a barrel to Brent, compared with an average of just 75 cents in February, pushing the outright price to around $150 a barrel for May ​loading.

A similar pattern is playing out elsewhere. Cash premiums for Dubai crude jumped to $56 a barrel on Monday from an average of 90 cents in February, according to data from S&P Global Platts and Reuters.

The surge reflects the enormous uncertainty over the actual amount of supply available amid repeated Iranian strikes on oil terminals in Oman and at Fujairah, the United Arab Emirates’ main oil-exporting terminal outside Hormuz.

Brent crude futures (ICE May’26) climbed to $115 per barrel.

Brent Crude Futures

Fed Monetary Policy

Meet the new head of monetary policy at the Fed.

Iran's Supreme Leader: Mojtaba Khamenei

Spoiler alert: it’s not Kevin Warsh. Iranian cleric, Mojtaba Khamenei, recently appointed supreme leader of the Islamic state, now dictates global monetary policy.

Iran’s chokehold over Gulf states crude oil and LNG production will dominate global employment, inflation, and liquidity for the foreseeable future.

The Fed was on track for further rate cuts, with financial markets expecting three cuts by year-end as the economy slowed and the labor market shed 92,000 jobs in February.

Employment Growth

However, the attack on Iran has flipped the script. Rising crude oil prices are expected to increase inflationary pressure and restrict the Fed’s ability to cut rates.

Core PCE inflation, the Fed’s preferred measure of underlying inflation, had already increased to 3.1% for the 12 months to January 2026, from 2.6% in April 2025.

PCE & Core PCE

Rising energy prices (LHS) will likely cause a spike in CPI (RHS) similar to the increase in 2021 and ’22.

CPI & CPI Energy

Moody’s Baa corporate bond spread climbed to 1.85% on March 17, warning of tighter liquidity in financial markets.

Moody's Baa Corporate Bond Spread

The S&P 500 retreated to 6,625 following news of renewed Iranian attacks. We expect a test of primary support at 6550.

S&P 500

Copper broke support at $12,500 per tonne, anticipating a contraction in demand as the global economy slows.

Copper

Gold broke support at $5,000 per ounce, finding short-term support at $4,800. Axel Merk attributes the recent sell-off to “deleveraging among speculators, global growth headwinds, and an oversold condition in some markets after a very strong January run-up.”

Spot Gold

However, there was a similar sell-off in March 2020 (below), shortly after the outbreak of the COVID-19 pandemic. A liquidity contraction and the rebalancing of risk-parity funds caused a sell-off across all major asset classes, including stocks, bonds, and precious metals. Gold recovered in April, rallying to $2,050 per ounce by August 2020.

Spot Gold

Gulf states could also be liquidating reserves to support their economies while oil exports are restricted.

The monthly chart below shows the long-term uptrend since March 2024, when gold broke out above resistance at $2,000. We are now witnessing a pull-back to test primary support at $4,500. Respect of support will likely signal another strong advance.

Spot Gold

Conclusion

The Fed is powerless to fight inflation caused by the Iranian chokehold over global energy supplies. They are also constrained in their ability to use monetary policy to support a weak labor market because of the looming threat of inflation.

Our bullish thesis for gold remains. Precarious sovereign debt levels limit governments’ ability to support their economies without fueling inflation. Political leaders are also reluctant to adopt more restrictive fiscal policy because of the impact on their economies. The outcome will likely be prolonged currency debasement through inflation, with gold bullion eventually replacing US Treasuries as the global reserve asset.

Acknowledgments

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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.
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The real risk of a Fed rate cut

Key Points

  • ADP National Employment Report estimates that the private sector shed 32,000 jobs in November.
  • Traders are pricing in an 89% chance of a 25-basis-point rate cut by the Fed on December 10.
  • ISM Manufacturing and Services PMI shows inflation is not yet under control.
  • A rate cut will likely weaken the Dollar, increase demand for real assets, and drive up long-term yields.

The ADP National Employment report estimates that the economy lost 32,000 jobs in November, the 3-month moving average turning negative for the first time since the height of the pandemic in August 2020.

ADP Private Sector Jobs

Losses are heavily weighted toward small firms, which have taken a hit from tariffs, shedding 120,000 jobs in November, while mid-sized firms added 51,000 jobs and large firms 39,000.

ADP Private Sector Jobs

The Fed is expected to announce a 25-basis-point rate cut on December 10 in response to weak jobs data. Markets are pricing in an 89% probability of a cut, with the discount rate on 13-week T-Bills falling below the Fed’s current 3.75% to 4.00% target range for the fed funds rate.

3-Month T-Bill Discount Rate

Other parts of the economy remain resilient, with the ISM Services PMI increasing to 52.6% for November, well above the 48.6% breakeven level typical of past contractions.

ISM Services PMI

New orders also signal expansion, but the rate slowed to 52.9%.

ISM Services New Orders

Employment has improved over the past four months, but remains in a contraction.

ISM Services Employment

Most importantly, from the Fed’s perspective, 65.4% of enterprises reported increased prices, down from 70% in October but still reflecting strong inflationary pressures.

ISM Services Prices

The Manufacturing sector reported similar price rises in November, though the rate of increase is slowing.

ISM Manufacturing Prices

Financial Markets

The Chicago Fed National Financial Conditions Index edged higher to -0.522 for the week ending November 21.

Chicago Fed National Financial Conditions Index

Dynamic indicators, however, like Bitcoin below, continue to warn of a sharp contraction in financial market liquidity.

Bitcoin (BTC)

The secure overnight financing rate (SOFR) jumped to 4.12%, above the 4.0% rate the Fed charges on its standing repo facility (SRF), signaling that the Fed is struggling to control pricing in the $12 trillion repo market. Repo lending is primarily secured by US Treasury Bills and Notes, and a spike in the SOFR repo rate would trigger a sharp sell-off in the Treasury market.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

Rising long-term yields in Japan and Europe are sucking liquidity out of US financial markets. The Bank of Japan (BOJ) is also expected to hike its policy rate on December 18, with the 3-month Japanese Government Bill discount rate jumping to 0.633%, well above the current 0.50% policy rate.

Japanese Govt 3-Month Bill Discount Rate

A BOJ rate hike would likely trigger a sell-off in US financial markets as hedge funds unwind large carry trades funded in Japanese Yen.

The US Dollar Index broke support at 99 and is expected to fall sharply in December, taking a double hit from a Fed rate cut and a BOJ rate hike, which would narrow the current spread by an estimated 50 basis points.

Dollar Index

Treasury Markets

Long-term Treasury yields are softening in anticipation of a Fed rate cut, but could face a sell-off amid tightening liquidity.

10-Year Treasury Yield

Stocks

The S&P 500  also rallied in anticipation of a Fed rate cut, but again, the rally risks being undone by contracting liquidity.

S&P 500

Mag 7 technology stocks continue to show gains over the past 6 months, apart from Meta Platforms (META), with Alphabet (GOOGL) building an advantage in the competition to lead AI.

Magnificent 7 Technology Stocks

Small caps are also strengthening, with the Russell 2000 ETF (IWM) testing resistance at 250.

Russell 2000 Small Cap ETF (IWM)

Gold & Silver

Gold is retracing to test support at $4,200, with high prices taming investor enthusiasm for the present.

Spot Gold

Silver is consolidating in a narrow band above support at $58 per ounce. Respect of support would confirm our target of $62.

Spot Silver

Energy Metals

Energy metals are another prospective inflation hedge for investors.

The Sprott Uranium Miners ETF (URNM) broke resistance at 56, joining copper and lithium miners in an uptrend.

Sprott Uranium Miners ETF (URNM)

The Sprott Copper Miners ETF (COPP) broke resistance at 31.50, confirming a fresh advance.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF (LITP) is also in an uptrend since breaking resistance at 11.

Sprott Lithium Miners ETF (LITP)

Conclusion

Forced to choose between its two mandates, the Fed seems willing to prioritize maintaining full employment ahead of stable prices. Cutting rates while the unemployment rate is low (below 5.0%) may please President Trump, who wants to run the economy hot, but risks a sharp rebound in inflation.

High inflation would lower the debt-to-GDP ratio but would likely increase outflows from US Treasury markets and raise long-term interest rates as international bond investors demand a higher risk premium. It would also later necessitate a sharp increase in interest rates to get the genie back in the lamp.

Falling Bitcoin prices and rising secure overnight funding rates in the $12 billion repo market signal tight liquidity in financial markets. Unwinding carry trades may destabilize financial markets if the Bank of Japan hikes its policy rate on December 18 as expected. A Fed rate cut and a BOJ rate hike would narrow the current carry trade spread by an estimated 50 basis points, risking a sharp sell-off in several trillion dollars of US assets financed in Yen.

The danger is that the Fed may reintroduce QE to stabilize the repo market, as it did during the last Powell pivot in September 2019.

Demand for gold, silver, and energy metals — copper, lithium, and uranium — is likely to increase as concerns over inflation grow.

Acknowledgments

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