[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

Chile is by far the world’s largest copper-producing country, accounting for about 23% of global production. After that we have the Democratic Republic of the Congo (DRC) and Peru. Together, these three countries account for almost 50% of global copper production, a potential major problem in the making.

As discussed in the article posted HERE, the output of Chile’s copper mines is projected to fall 8%-9% this year, which would make 2026 the weakest year for this country’s copper production in at least two decades. Also, the article notes that the slump in Chilean copper production “adds to a string of mine disappointments around the world that have opened the door to the first annual decline in global mined-copper output since 2017, just as demand strengthens with increased investment in data centers and power infrastructure.”

One of the reasons for this year’s decline in Chile’s copper production, and a reason why this country’s production likely will be sub-par again next year, is the Super El Niño. As discussed HERE, “El Niño is weakening the high-pressure system that normally keeps storms away from central Chile, allowing more rain-bearing fronts into the region.” Previously we have focussed on the adverse effects of the Super El Niño on agriculture, but in Chile it also is adversely affecting mining. There may be similar issues in Peru, the world’s third-largest copper-producing country, but even if its copper mines are not impacted by extreme El Niño weather it appears that Peru’s copper production has plateaued.

In the DRC, the world’s second-largest copper-producing country, there could be weather-related reductions to copper output associated with the Super El Niño, but the main threat at the moment is that the country is in the midst of the fastest-growing Ebola outbreak in its history, with more than 10,000 confirmed cases to date. In addition to being a major copper-producing country, the DRC is a major producer of tin, another metal that is critical for the datacentre building boom.

There have been large corrections in the prices of some industrial metals over the past several months, but the following charts show that the prices of copper and tin remain near their highs. This is most likely because production constraints associated with weather and disease are preventing relatively high prices from causing an adequate supply response to rising demand.

We would be bullish on the multi-year prospects for copper and tin based solely on projected demand growth, but adding the aforementioned production problems into the mix makes us even more so.

[This blog post is an excerpt from a recent commentary published at https://speculative-investor.com/]

A month ago, in our previous Recession Watch discussion, we wrote that although there were economic risks associated with the price action in the energy market (the record-high diesel price, in particular) and Trump’s counterproductive international trade policies, it was still the case that none of the most useful US economic indicators were pointing to an imminent recession. Since then the evidence has become more mixed, most likely because the parts of the economy that are benefiting from AI-related investment are very much still in the boom phase, whereas many other parts of the economy are weak.

Turning to the data, the monthly US employment numbers released on Friday 2nd October were weak in absolute terms and relative to expectations but provided almost no useful information about the state of the economy. Traders focus on these numbers, though, because they influence the Fed. Continued Claims for Unemployment Insurance (CCUI) is a better indicator of the state of the labour market and this statistic points to strength, given that the number of people refiling for unemployment insurance is at a 3.5-year low. Here’s the relevant chart:

As an aside, largely in response to lower-than-expected numbers in an inflation report on Wednesday (the PCE Price Index) and the monthly employment report on Friday, the probability — according to the Fed Funds Futures market — of a Fed rate hike at the next FOMC meeting (28th October) plunged over the past week from 64% to 22%. We reiterate that this shift was a response to economic data that influence the Fed but don’t necessarily say much about the actual economy.

Also pointing to a modicum of economic strength is the ISM Manufacturing New Orders Index (NOI), which, as illustrated below, remains near the top of its 4-year range and a long way above the level that it would have to breach (48) to generate a new recession warning.

CCUI and the NOI are on the positive side of the ledger, but we noted above that US economic indicators have become more mixed over the past month. For example, on the negative side of the ledger we have:

1. Some important cyclical sectors of the US stock market recently have been very weak, despite the boom in datacentre construction. The following daily chart of the iShares Transportation ETF (IYT) shows an example. This suggests that many parts of the economy are being hurt more by the high price of diesel and other cost pressures than helped by the AI-related investment boom.

2. The High Yield Index Option Adjusted Spread (HYIOAS) has signalled an upward trend reversal by breaking above its 65-week MA (the blue line on the following chart), that is, credit spreads have begun to widen. This is a necessary but far from a sufficient condition for a recession.

The longer the war in the Middle East continues the more negative will be the consequences for the US economy, the consequences for many other economies around the world having already been severe. Furthermore, as things stand today the war is far more likely to escalate than to end within the next few months. That being said, to borrow a phrase from the world of central banking, we will be data dependent. Regardless of what we think will be the economic consequences of major policy blunders, we will defer to objective indicators that in combination have worked for decades. At this time, these indicators collectively are becoming more negative, but they are not signalling that a recession is imminent.

[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]

The ‘super’ El Niño currently underway has contributed and will continue to contribute to extreme weather events or very unusual weather conditions, including reduced rainfall (and potentially severe drought) throughout Asia and an absence of Atlantic hurricanes. One of the likely future effects will be a relatively mild US winter. At least, that has been a result of a strong El Niño in the past. However, as discussed in a recent Bloomberg article, the greater the strength of the current El Niño, the greater the risk that historical weather and climate patterns will not be a reliable guide to the future.

The Bloomberg article linked above points out that traders have been betting for a few months now that a strong El Niño will deliver a mild US winter. Apart from the markets that facilitate direct betting on or hedging of future weather, this has been evident in the US natural gas (NG) futures market, where the total speculator net-short position is at its highest level since March-2020 and not far from a 20-year high.

Partly in response to speculation that the coming winter will be unusually mild, the January-2027 NG futures contract is at its lowest level in more than four years. Here’s a daily chart covering the past 12 months:

A relatively mild winter is the most likely outcome, but with this outcome already factored into current prices there is the potential for even an average winter to bring about a meaningful rally in the NG price. Also, the war in the Middle East has caused the price of NG in Europe to almost triple, resulting in Europe’s benchmark NG price now being almost 9-times the NG price in the US and creating an incentive to export as much Liquefied Natural Gas (LNG) as possible from the US. While this currently does not provide us with a set-up for a short-term NG trade with an attractive risk/reward, additional weakness or sideways movement in the price over the coming 1-2 months could generate such an opportunity.

[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

A Fed rate hike won’t enable more ships to go through the SOH or refineries to produce more diesel or farmers to grow more corn. In more general terms, when prices are rising due to supply restrictions, central-bank rate hikes are not a reasonable response. In fact, when the underlying problem is reduced supply due to temporary disruptions, a rate hike by the central bank is not only not part of the correct response but also gets in the way of the actions that are needed to fix the problem. What’s required is investment to increase production, not tighter monetary conditions to clamp down on demand. However, many commentators are arguing that the Fed should hike in September because “inflation is well above the Fed’s target!”.

Unfortunately, most members of the FOMC also fail to account for economic reality and instead react blindly to the high-profile “inflation” numbers and to employment reports that are inaccurate to the point of uselessness. Of course, Trump’s threats against the Fed do not help. That’s because to maintain the appearance of independence, if any members of the FOMC were leaning towards rate cuts (none of them are at the moment), the President’s threats likely would push them in the opposite direction.

So, the situation is that regardless of what caused the increased inflation numbers and what’s the best way to address the issue, the financial markets assume that any economic statistic will make a rate hike more likely if it hints at larger price increases or a stronger economy. Consequently, in response to the latest news, last week the probability assigned by the Fed Funds Futures market to a Fed rate hike at the FOMC meeting on 16th September went from 70% on Tuesday down to 50% on Thursday and back up to 59% on Friday. Gold was the market that was most sensitive to these probability swings.

In effect, at the end of last week the Fed Funds Futures market was assigning a probability of almost 60% to a Fed mistake in the form of a rate hike in mid-September. We will be surprised if this particular mistake is made, but if it is it could be the catalyst for deeper corrections in the gold, equity and currency markets, with the gold price and the SPX dropping and the Dollar Index rising.