In today’s briefing:
- Why the November Election Matters to Gold
- Why the Breadth Divergence May Not Be Bearish
- VALE US: Exposure to High-Grade Iron Ore With >8% Dividend Yield
- Commodity Analysis – Crude Oil WTI Futures
- US Financial Markets Underprice Geopolitical Risks as Equities Flirt With Another Melt-Up
- Canadian Economy – June 12, 2024
- Greek Economy – May 20, 2024
- Comment on Exchange Rate EUR/USD – May 3, 2024
Why the November Election Matters to Gold
- The latest CBO fiscal update raises the odds of upside inflation surprises in the coming years, which would be bullish for gold.
- The intermediate-term outlook for inflation will largely depend on the outcome of the November election.
- We project that a Biden win would be bearish for bond prices and mildly bullish for stock prices. A Trump win would be bond and USD bearish and gold bullish.
Why the Breadth Divergence May Not Be Bearish
- Anxiety has been increasing among the technical analysis community over the blatant instances of narrow market leadership and negative breadth divergence.
- The bearish consequences of a negative breadth divergence can take over a year to be realized. Instead, they are warnings of bearish conditions than actionable tactical sell signals.
- We interpret current market conditions as highly extended that can pull back at any time, but investors should also recognize that the situation could resolve itself in a benign manner.
VALE US: Exposure to High-Grade Iron Ore With >8% Dividend Yield
- We like Vale (VALE US) for its exposure to high-grade iron ore (95% of EBITDA) and capital return discipline, with a current dividend yield of 8% and 3.5x EV-EBITDA.
- The cash flows from the iron ore business could be used to invest in base metals, such as copper, nickel, etc., to enhance the portfolio.
- The key risk remains the overhang from the Mariana Dam disaster being settled for ~25.7 billion USD (vs. the current market cap of 50 billion USD).
Commodity Analysis – Crude Oil WTI Futures
- According to Graph 1, during the period February 28th , 2024 – May 31st , 2024, a mixed trend was reflected in the prices of crude oil futures amid fluctuations.
- During the period under consideration, there was a notable increase in the price of crude oil until April 8th , 2024, whereas thereafter crude oil prices followed a downward trend returning to the levels seen at end of February 2024.
- The MA- 10 was recorded to perform higher than MA-20 from the beginning, whereas on April 23rd the MA-20 took over and started trading above the MA 10 until the end of the period under consideration.
US Financial Markets Underprice Geopolitical Risks as Equities Flirt With Another Melt-Up
- US equities have discounted the arrival of a lower federal funds rate (FFR). Upbeat corporate profit expectations and a lower FFR could easily produce an H2 equity market melt-up.
- Financial markets have largely ignored geopolitical risks. Holding assets in Western financial institutions now has counterparty risks. High budget deficits driven by defence spending are bearish for productivity and profitability.
- The appetite of private investors to buy longer-dated Treasuries will be tested by the arrival of persistently large budget deficits. Notably, the outlook for foreign participation is less certain.
Canadian Economy – June 12, 2024
- In the first quarter of 2024, Canada’s economy managed to grow by 1.6% (QoQ).
- This growth is mainly attributed to real private and final consumption expenditures but also to real fixed capital formation as they increased by about 1.2% to 1.6% (QoQ) each.
- Net exports slightly fell from 0.17% of GDP in fourth quarter of 2023 to 0.13% in the first quarter of 2024.
Greek Economy – May 20, 2024
- The 2024 GDP projections for Greece show a 2.07% growth rate, so that Real GDP would reach €198.512 billion, lower than the previous projections of €199.205 billion.
- In 2024, the IMF, OECD, and EU forecast an average growth rate of 2.07% for 2024 and 2.24% for 2025.
- The Public Debt is projected to increase from € 356.695 billion to €362.856 billion in 2024 but with a lower Debt-to-GDP ratio than the previous year of 156.3% (161.9% in 2023).
Comment on Exchange Rate EUR/USD – May 3, 2024
- During the period under consideration, i.e. April 3rd, 2024 to May 3rd, 2024, the EUR/USD pair posted both downward and upward swings.
- In the beginning, it faced a slight increase, while from April 9th until April 18th the pair faced a sharp decrease.
- After that, it fluctuated sideways and by the end of the period the pair traded at a higher level but still below the price level of the start of April.
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