Tag: Spot Gold

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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

Houthis and the blow-back

Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.

Stocks

The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.

S&P 500

The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.

10-Year Treasury Yield

Dollar & Gold

The Dollar strengthened, benefiting from the same flight to safety.

Dollar Index

Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.

Spot Gold

Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.

Spot Silver

ISM Manufacturing

The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.

ISM Manufacturing PMI

The New Orders sub-index at 46.1% warns of further slowing ahead.

ISM Manufacturing New Orders

So does the Employment sub-index at 43.9%.

ISM Manufacturing Employment

The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.

ISM Manufacturing Prices

Labor Market

Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.

Job Openings

Crude Oil

Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.

Brent Crude

Conclusion

Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.

We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.

The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.

Acknowledgments

Posted on

Narrow advance for stocks, bullish consolidation for gold

Falling CPI and plunging crude prices almost guarantee at least a 25-basis-point rate cut at next week’s FOMC meeting. Stocks rallied, led by mega-cap technology stocks, but the advance was narrow, with large caps failing to join the party.

Gold is bullish, boosted by falling long-term Treasury yields and a weak Dollar, but silver remains more bearish.

Stocks

Mega-cap technology stocks led the rally, with Nvidia (NVDA) posting solid gains.

Top 7 Technology Stocks

The move lifted the S&P 500 above resistance at 5500, signaling another test of the all-time high at 5670.

S&P 500

Large caps lagged, with the equal-weighted index ($IQX) failing to show much progress.

S&P 500 Equal-Weighted Index

Financial Markets

The Chicago Fed National Financial Conditions Index eased to -0.57, reflecting easy monetary policy.

Chicago Fed National Financial Conditions Index

Bitcoin respected support at $54K [red line], but the bearish declining triangle still warns of tighter financial market liquidity ahead.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields plunged to almost 3.6% before retracing to test new resistance at 3.7%. The steep fall from the 5.0% peak in October last year indicates market expectations of significant rate cuts ahead.

10-Year Treasury Yield

Dollar & Gold

Falling long-term interest rates are driving long-term Dollar weakness. Respect of resistance at 102 on the Dollar Index would confirm another decline, while breach of support at 100 would offer a long-term target of 93.

Dollar Index

A stronger Japanese Yen warns of a more hawkish monetary policy from the Bank of Japan. Rising Japanese interest rates will likely withdraw liquidity from US financial markets and weaken the Dollar.

Japanese Yen

Gold is expected to benefit from falling long-term interest rates and a weaker Dollar. The narrow bullish consolidation below $2,525 per ounce suggests another advance. Breakout above resistance would offer a target of $2,600.

Spot Gold

Silver lags behind gold, struggling to break resistance at $30 per ounce. Breach of support at $28 would warn of another test of long-term support at $26.50.

Spot Silver

CPI Inflation

Headline CPI fell sharply to 2.6% for the 12 months to August, but core CPI lifted to 3.3%.

CPI & Core CPI - Annual

Monthly CPI shows that the sharp drop in the headline rate is caused by the base effects of a spike in July of last year [red circle]. Rising core CPI over the past two months, with August growing at an annualized rate of 3.7%, warns of underlying inflationary pressures.

CPI & Core CPI - Monthly

Sticky prices inflation also increased, to an annualized rate of 3.5% in August, warning that underlying inflationary pressures persist.

Sticky Prices CPI

Shelter

Shelter CPI also increased to an annual rate of 5.2% in August, reflecting a trough in home prices in mid-2023. The Case-Shiller 20-City Composite Index [gray below] tends to lead Shelter by roughly 12 months.

CPI Shelter & Case-Shiller 20-City Home Price Index

Energy

However, the recent sharp fall in crude oil prices warns that inflationary pressures will likely ease in the months ahead.

Brent Crude

Energy CPI grew by -4.0% over the 12 months to August and is likely to fall further in September. The chart below shows how energy CPI [ocher below] plunged from a peak of 41.5% in June ’22, leading to a fall in headline CPI.

CPI & CPI Energy - Annual

Food

Food CPI also declined to an annual rate of 2.1% in August, close to the Fed’s target of 2.0%.

CPI Food

Conclusion

Mega-cap technology stocks lifted the S&P 500 above resistance at 5500, indicating another test of the previous high at 5670. Breakout would offer a target of 6000, but the advance is narrow. Large caps in the index show little in the way of net gains, with the equal-weighted index ($IQX) failing to make much progress.

The Chicago Fed National Financial Conditions Index continues to reflect easy monetary policy, but a bearish triangle on Bitcoin and a stronger Japanese Yen warn of tighter liquidity ahead.

The decline in headline CPI is primarily due to base effects from August last year, while core CPI and the sticky price index warn of persistent underlying inflationary pressures. However, a sharp fall in crude oil prices will likely drag overall CPI lower in September.

Falling 10-year Treasury yields reflect market expectations of significant rate cuts commencing on September 18. The Dollar rallied over the week, but the long-term downtrend is likely to persist as rates decline.

Low long-term interest rates and a weak Dollar are expected to be bullish for gold. A Dollar Index breach of support at 100 would confirm our $3,000 per ounce target for gold.

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

Short, medium and long-term outlook

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

Stocks

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

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

S&P 500 Equal-Weighted Index

Financial Markets

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

Chicago Fed National Financial Conditions Index

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

Bitcoin (BTC)

Treasury Markets

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

10-Year Treasury Yield

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

Dollar & Gold

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

Dollar Index

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

Spot Gold

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

Spot Silver

Crude Oil

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

Brent Crude

Conclusion

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

Short-term

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

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

Medium-term

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

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

Long-term

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

Acknowledgments

Posted on

Stocks rally on PPI fall

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

Stocks

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

S&P 500

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

Russell 2000 Small Cap ETF (IWM)

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

Financial Markets

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

Bitcoin (BTC)

Treasury Markets

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

10-Year Treasury Yield

Dollar & Gold

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

Dollar Index

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

Spot Gold

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

Spot Silver

PPI Inflation

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

Producer Price Index (PPI)

Monthly growth collapsed to an annualized rate of 1.2%.

Producer Price Index (PPI) - Monthly

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

Producer Price Index (PPI): Services

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

Producer Price Index (PPI): Services - Monthly

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

Energy

Nymex WTI crude respected resistance at $80 per barrel.

Nymex WTI Crude

Brent crude similarly found resistance at $82 per barrel.

Brent Crude

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

Conclusion

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

Acknowledgments

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Gold threatens breakout as stocks pause ahead of CPI report

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

Stocks

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

S&P 500

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

Invesco Nasdaq 100 ETF (QQQ)

Treasury Markets

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

10-Year Treasury Yield

Low Treasury yields are bullish for gold.

Dollar & Gold

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

Dollar Index

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

Japanese Yen

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

Spot Gold

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

Spot Silver

Crude Oil

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

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

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

Brent Crude

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

Conclusion

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

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

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

Acknowledgments

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Death of the Yen carry trade

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

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

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

USD/Japanese Yen

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

Nikkei 225 Index

The contagion soon spread to neighboring markets.

South Korea KOSPI 100 Index

Stocks

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

S&P 500

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

S&P 500 Equal-Weighted Index

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

Russell 2000 Small Cap ETF (IWM)

Treasury Markets

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

10-Year Treasury Yield

Financial Markets

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

Chicago Fed Financial Conditions Index

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

Commercial Bank Reserves at the Fed

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

Bitcoin (BTC)

Dollar & Gold

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

Dollar Index

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

Spot Gold

Silver, likewise, failed to benefit.

Spot Silver

Energy

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

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

EIA Crude Field Production

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

Nymex WTI Crude

Uranium

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

Sprott Physical Uranium Trust (SRUUF)

Base Metals

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

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

Copper & Aluminum

Labor Market

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

Employment Growth

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

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

Sahm Rule & Unemployment

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

Layoffs & Discharges

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

Average Weekly Hours

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

Job Openings

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

Continued Claims

Average Hourly Earnings

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

Average Hourly Earnings

Economy

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

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

Heavy Truck Sales

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

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

ISM Manufacturing

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

ISM Manufacturing PMI

Though declining new orders indicate some slowing ahead.

ISM Manufacturing New Orders

Conclusion

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

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

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

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

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

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

Acknowledgements

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