How Resources and Commodities Impact the Broader Market

The news may be new and exciting to the mainstream, but it’s ‘old hat’ to our in-house tech expert, Sam Volkering.

I’m talking about asteroid mining.

The Financial Times reported earlier this week:

Mining in space will take a leap from the realms of science fiction towards commercial reality on Wednesday when Luxembourg launches an official initiative to promote the mining of asteroids for minerals.

Although space mining sounds futuristic, the basic technology already exists, said Mr Dordain: “We know how to get to asteroids, how to drill into them and how to get samples back to Earth.”

But it’s not a question of technology, it’s a question of financial viability.

Not to mention the natural laws of supply and demand.

In order for ‘space mining’ to be genuinely viable, it would require commodity prices to rise so high on Earth, and for the respective minerals to become so rare, that ‘space mining’ became the only option.

Rarity is the important factor here. I’m not just talking about the resource being hard to get. Because even if the resource was in some of the world’s most remote, inhospitable, dangerous, or deepest places, if the price was high enough, it would encourage explorers and producers to exploit the resource.

Anyway, it’s an exciting possibility. Space is one of the focal points of Sam Volkering’s work in Revolutionary Tech Investor. You can find out more details here.

As for ‘space mining’, we’ll see what comes of it…

It all connects

As for oil, it was time for a rebound. Yesterday afternoon, a barrel of West Texas Intermediate crude oil traded for US$32.53.

Gold rallied too, trading at US$1,142.

That’s due to a lower US dollar, which is now trading at 71.75 Aussie cents. That’s up 2.4% from this time yesterday.

So, was all our worrying about the falling oil price for nothing? Not quite…

Bloomberg reports:

Macquarie Group Ltd. cut its full-year forecast for the commodities and financial-markets business as falling oil prices and a selloff in U.S. credit markets take a toll on client activity. The shares slumped to the lowest in a year, even as the Australian investment bank said it expects full-year profit to rise overall.

This is important.

It shows again the interconnectedness of the market. The resources sector doesn’t operate in isolation.

It’s not good enough to look at the poor performance of mining stocks and say that it doesn’t impact you because you only invest in the banks.

Everything interacts.

It’s why I frequently show you the data for the number of active drilling rigs in the US.

It’s why I frequently show you the data for the number of distressed (junk) bonds traded on the market.

It’s why I update you with the latest price chart and yield for the SPDR Barclays High Yield Bond ETF [NYSE:JNK]. It now trades with a yield of 6.82%.

One month ago, the yield was 6.63%. One year ago it had a 5.91% yield.

I don’t tell you this info for fun, I tell you because it’s important. If you’re not looking for these danger signs in the market, you can’t possibly be prepared for when the worst happens.

Look at this chart:

Source: Bloomberg

Click to enlarge

I’m not even going to pretend that I was the first to spot the downward trend in this ETF. (A downward trend in this ETF’s price means an upward trend in this ETF’s yield.)

I only started to focus on this ETF where the line of the arrow starts, last August. Since then, the ETF has fallen 14% as bond yields have risen.

But what makes this even more alarming is that as high yield bonds slowly creep higher, so-called ‘quality’ bond yields creep lower.

Check out this chart. This isn’t a price chart, it’s a yield chart. It shows the yield of the generic 10-year US government bond:

Source: Bloomberg

Click to enlarge

The chart goes back one year. But the important part of this chart is what has happened since the start of this year — traced by the red arrow on the right.

The yield on 10-year US government bonds collapsed from 2.3% to just 1.89% today.

What does that say to you?

Is that a positive sign?

Not likely. It suggests that investors have become so fearful of the market, that they’re trading out of anything offering a higher yield and opting for anything perceivably low risk.

The longer this goes on, the greater the chance there is of big trouble brewing in the high yield bond market, and the greater the chance that the US Federal Reserve will have to reverse course on interest rates.


Kris Sayce

Ed Note: This is an excerpt of an article originally published in Port Phillip Insider.

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