Has the next commodities supercycle begun?
The Nasdaq Sprott Energy Transition Materials Index fell 9.49% in February, giving back two-thirds of its year-to-date gains. The Index fell alongside virtually all risk assets as investors reversed earlier expectations that the U.S. Federal Reserve was close to ending its interest rate hikes.
The 2 YR U.S. Treasury yield reached a new high of 5.05% on March 8 and the U.S. dollar has staged a sharp rally back to resistance levels.18 Macroeconomic volatility remains high.Source: Bloomberg. Data as of 3/6/2023. The relative strength index is a momentum indicator that measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security. Included for illustrative purposes only.
During the Cold War, the U.S. and the Soviet Union engaged in an arms race to develop nuclear weapons and other technologies essential to maintaining military superiority and deterring potential adversaries. This competition drove significant investments in conducting research and development , stockpiling materials and developing supply chains to support military production.
Below are some high-level observations on the race to secure critical minerals, which we will expand on in future commentaries.From 1981 to 2020, U.S. Treasury yields were in one of the longest and most remarkable secular bull markets in history as interest rates and bond yields continued to decline. During this period, the broader commodities market relative to U.S. Treasuries was in an equally long secular bear market, as commodities continually underperformed bonds.
The coming inflationary push from the energy transition and reshoring of the U.S. industrial base will stress bond markets and boost commodity markets. If this is indeed the end of the 40-year bond bull market, the ramifications for capital markets will be epochal. The immediate question is whether the U.S. Treasury market , which saw two significant liquidity malfunctions in the past three years , can handle a substantial outflow of capital.
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