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LAST WEEK: U.S. equity markets rose last week after the major U.S. stock indexes turned in their worst quarterly performance since the COVID War began over two years ago.
The Dow Jones Industrial Average ended the week by adding 0.4 percent and the NASDAQ 0.3 percent. The Standard & Poor’s 500 index also gained 0.3 percent on Friday, but managed only a 0.1-percent improvement for the week.
Also last Friday, the yield on the two-year treasury note closed above that for the 10-year note. This “yield curve inversion” often has presaged a recession.
The yield on the 10-year note edged up to 2.374 percent from 2.324 on Thursday. Two-year yields settled at 2.430 percent.
On Friday, the rate on the two-year Treasury bond reached 2.44 percent while the 10-year was at 2.38 percent.
When The Street is confident in the future, long-term interest rates are higher than yields on short-term securities. When that ratio “inverts,” it signals jitters in the market about the economy in the near term.
A number of recessions were set in motion following yield curve inversions. And there is the reality that considering the trillions of cheap money pumped into equities and economies, the high rates will induce a credit squeeze, pushing the nation into a recession.
Prices fall as investors sell out of bonds, so yields rise to lure buyers back into the market. Higher short-term rates mean that investors are avoiding bonds that mature soon.
The yield curve inverted briefly on 28 March, as we reported in “Yield Curve Inverts for First Time in 16 Years, Hinting at Recession” (29 Mar 2022) but reverted before the market closed that day.
Treasury securities’ yields have closed higher for five of the past seven quarters as investors continue to anticipate the U.S. Federal Reserve making a series of interest-rate hikes to tackle inflation.
Overseas, the Shanghai Composite Index gained 0.94 percent on Friday and Hong Kong’s Hang Seng was up 0.19 percent.
The Nikkei 225 dipped 0.56 percent; South Korea’s KOSPI Index gave up 0.65 percent.
The pan-Europe Stoxx 600 added 0.54 percent.
FOR THE QUARTER: The Dow Jones Industrial Average dropped 4.6 percent during the quarter. The NASDAQ plunged 9.1 percent and the Standard & Poor’s 500 index sank 4.9 percent.
The disparity between the NASDAQ and S&P’s performance was the greatest since 2006, Dow Jones Market Data reported.
Although being down almost 20 percent at one point during the quarter, the NASDAQ has since cut its losses in half.
The Dow and S&P are about 6 percent off their highs for the period, safely removed from the 10-percent drop that defines a bear market.
Markets were battered by relentless inflation running at the fastest clip since 1982; commodity markets’ chaos wrought by sporadic COVID-related lockdowns as well as the Ukraine war and its resulting sanctions; and uncertainty over the U.S. Federal Reserve’s impending schedule of interest rate increases.
Not all sectors fared poorly: the S&P’s energy sector rose 38 percent during the period, its best quarter since 2008.
After rising as high as $139 a barrel immediately after Russia attacked Ukraine, oil prices ended the quarter barely above $100, even briefly trading below that mark on some days.
Also, meme or “me-too” stocks such as Gamestop and AMC Entertainment added 30 percent in March as individual investors appeared to return to the markets.
U.S. treasury bonds notched their most disappointing quarter since 1980, with the Bloomberg U.S. Aggregate Bond Index, which holds U.S. treasury bonds, high-grade corporate bonds, and mortgage-backed securities, losing 5.9 percent over the three months (see related story in this issue).
Some investors are concerned about disconnects between equities and other sectors of the investment market, The Wall Street Journal reported.
The treasury bonds’ yield curve briefly inverted in March, often a signal of an impending recession, as we reported in “Yield Curve Inverts for First Time in 16 Years, Hinting at Recession” (29 Mar 2022).
After casting off almost 25 percent of its value early in the quarter, Bitcoin ended the period virtually flat.
YESTERDAY: Stocks battled their way to another day of gains after a slow start thanks to gains in the technology sector. The Dow Jones Industrial Average edged up 0.3 percent. The NASDAQ was up 1.9 percent and the Standard & Poor’s 500 index grew by 0.8 percent.
The S&P 500 has had three-straight weeks of gains despite some headwinds like inflation, the possibility that the Federal Reserve raises interest rates more than 2.50% this year, and uncertainty stemming from the Ukraine War.
Twitter was one of the big winners after Elon Musk, the Tesla billionaire, announced that he purchased a 9.2 percent stake in the company.
Musk seemed to be flirting with the social media giant, and has been an outspoken advocate of promoting free speech and less censorship.
Oil and gas prices jumped after Russia’s invasion of Ukraine. Oil recently hit a 14-year high and the U.S. was forced to tap into its own oil reserves.
Exxon Mobil Corp announced Monday that its first-quarter results could be a seven-year record, Reuters reported. Brent crude closed up 3 percent on the day to $107.53 a barrel.
Bitcoin was down 1 percent on Monday to just below $46,000. Bitcoin surged last week to hit the $45,000 mark.
Gold inched lower 0.4 percent to end Monday’s trading at $1,932.78 per ounce.
Elsewhere, Europe’s Stoxx 600 scraped out a 0.9 percent gain, while the Nikkei 225 gave up 0.25 percent, with the yen down 0.0081 percent against the dollar.
The Shanghai Composite index gained 0.94 percent, the Hang Seng fell .95 percent, and South Korea’s Kospi was up 30 points or 1.1 percent
TODAY: With Ukraine peace talks making the news, European stocks closed higher with the Stoxx 600 inched lower .010 percent to 462.18.
Earlier trading in Asia-Pacific, before the announcement of possible positive peace talks, stocks mostly rose, following a sharp drop in oil prices overnight.
Hong Kong’s Hang Seng index was up nearly 2.10 percent, Shanghai composite increased .94 percent and Japan’s Topix closed down 0.23 percent and its Nikkei 225 closed up .19 percent.
Haruhiko Kuroda, the Bank of Japan (BOJ) governor, warned Tuesday that the yen’s fluctuations and recent declines could impact its imports sector, which could have a negative impact on the country’s emergence from COVID-19 outbreak, Reuters reported. We pointed out last week that the currency is hovering near a six year low.
“The recovery from the pandemic may be pausing,” Shunsuke Kobayashi, chief economist at Mizuho Securities Co, told Japan Today. “Even if crude oil prices fall from current levels toward $80 a barrel, it would still be hard for the Japanese economy.”
TREND FORECAST: While inflation is still moderately low in Japan compared to other nations, as we have noted, should the Ukraine War escalate and more sanctions be placed on Russia, and/or military conflict breaks out between Israel and Iran and oil prices spike, energy dependent Japan’s inflation numbers will soar, forcing the BOJ to raise interest rates.
On fears of rapidly rising interest rates, in the U.S., the Dow lost 280.7 points, or 0.8 percent, the S&P 500 fell 1.26 and the tech-heavy Nasdaq slumped 2.26 percent to close at 14,204.17.
GOLD/SILVER: Last week, gold closed at $1,920.00 per ounce and silver at $24.74 per ounce. And today, despite fears rising that the Fed will aggressively raise interest rates, gold—highly sensitive to rising rates since they increase the opportunity cost of holding non-yielding bullion—while down, was up a bit from last week. So too were silver prices.
And it should be noted, that demand for the safest of safe-haven assets, gold, persists as more new sanctions are being imposed on Russia, since the tighter the sanctions, so too are the prospects for higher inflation rates. And the higher inflation rises, so too will gold and silver prices rise.
Today gold fell $9 to close at $1,925 per ounce, and silver fell 0.75 percent to finish the day at $24.41 per ounce… around the same prices as last week.
TREND FORECAST: As we have noted, with inflation at its highest levels in 40 years before the Russian invasion of Ukraine—and now the sanctions imposed on Russia that have ratcheted inflation much higher—with the U.S. and NATO now announcing yet more sanctions inflation will rise. Thus, despite rising interest rates, rising inflation rates will keep precious metals prices at, or above, their current range.
Also, should tensions increase between Israel and Iran, which are again ramping up, both precious metals and oil prices will move higher.
And, the higher geopolitical tensions rise, the higher inflation rises, the deeper economies and equities will fall… and the higher precious metals will rise.
We maintain our forecast, that on the downside, should gold prices fall below $1,850 per ounce, they can sink down to the low $1,700 per ounce level. For gold to maintain strength and move higher, prices must solidify above $2,200 per ounce.
OIL: Brent crude oil ended last week at $104.39, down 11 percent in the biggest weekly drop since 2011 after president Joe Biden announced a plan to release one million barrels of oil from the U.S. Strategic Oil Reserve every day for the next six months.
Today, following the announcement that the European Union is imposing new sanctions on Russia that will hit its energy sector and tighten the global supply change, oil prices rose today.
Brent crude was up 63 cents at $108.16 per barrel and WTI moved up 47 cents to close at $103.70 per barrel.
TREND FORECAST: With extended COVID lockdowns in Shanghai and fears of a slowing economy, Brent Crude may continue to say in the low $100 per barrel range.
Oilprice.com reported that oil data analytics firm OilX said the Energy Information Administration has significantly overestimated compared to the final monthly oil demand; “US weekly data significantly overestimated total monthly oil demand, not just in other oils, but also for road fuels,” OilX said in a post on Twitter.
The analytics company said weekly March estimates showed demand strength has been weakening, and that “This may turn out even weaker if recent errors vs monthlies continue in a similar fashion.”
What may drive oil prices back higher are more sanctions on Russia, the failure of nations to pay for Russian oil in rubles as demanded, escalating tensions with Israel and Iran or other Middle East implosions… and/or a failure to make a deal with Iran so that sanctions are lifted and they can sell more oil.
Strategic Reserve Outflows
President Joe Biden has announced he is ordering the release of a million barrels of oil from the U.S. Strategic Petroleum Reserve every day for the next six months to help reduce prices for gasoline and other oil-based necessities.
The release is a response to the global spike in oil prices after oil deliveries out of Russia, the world’s second largest producer, were interrupted by the Ukraine war and OPEC refused to increase production.
The average U.S. gasoline price topped $4.30 a gallon last month, according to the U.S. Energy Information Administration, with prices reaching beyond $7 in parts of California.
The “record release will serve as a bridge until the end of the year when domestic production ramps up,” the Biden administration said in an accompanying statement.
Oil prices dropped sharply ahead of the announcement.
The release should help reduce fuel prices this year but will not address structural imbalances in the global oil market, Goldman Sachs analysts wrote in a 31 March note to clients.
Consumers also should not expect a sudden, sizable drop in pump prices, economist Ed Bell at Emirates NBD said in a CNBC interview.
“Markets are still going to be focused on supply going forward and the lack of it that we’re going to be seeing from Russia, the incremental additions we’re going to be seeing from OPEC+, and, so far, the lack of response from U.S. producers to high prices,” he said.
“For the longer term, this is a bit of a risky strategy for the U.S. to draw down its [strategic reserve] so heavily [as] we’re going into the more heavy-use summer months,” he added.
“We’re going to be drawing down inventories just as we’re going to be needing them in a time of uncertain supply conditions.”
If the world oil market remains tight for the foreseeable future, the drawdown helps “underpin a bullish case for oil prices” over the next 24 months, Bell said.
To ease gas prices’ bite on consumers, Connecticut, Florida, Georgia, and Maryland have suspended all or part of their gas taxes. California governor Gavin Newsom has proposed sending every vehicle owner in the state a $400 debit card and making public transit fare-free for three months.
TREND FORECAST: Domestic oil producers are not yet boosting production because their financial backers are insisting instead that the companies hoard cash and pay stockholders higher dividends, as we reported in “U.S. Oil Industry Will Not Raise Output, Executives Say” (29 Mar 2022).
If OPEC continues to refuse to pump more oil, the likelihood will grow that U.S. producers will convince their financiers to boost production enough to keep an oil shortage from crashing the economy but not so much that prices fall greatly.
If U.S. oil companies fail to respond to the growing crisis by mid-summer, the chances increase that Biden will invoke the Defense Production Act here as well and order oil companies to raise their output.
More broadly, history has shown that as oil prices increase, so does public interest in renewable energy and cars fueled by green power sources.
BITCOIN: As we go to press, bitcoin down about $1,000 from last week, is trading at $45,885 per coin. Having found strength in this range, the next point of substance will be in the $50,000 per coin range.
TREND FORECAST: We maintain our trend forecast that when bitcoin solidly breaks above $55,500 per coin, it will head toward new highs.
We also forecast, the downward breakout point would be hit should prices fall below $25,000 per coin. If they go that low, bitcoin could well fall back to the $10,000 range.
As we have been noting for over five years, a major factor in forecasting the future price of bitcoin and other crypto currencies is dependent upon government regulations.
(For more crypto trends and forecasts, please see our TRENDS IN CRYPTOS section.)