Silver Is Shining Bright

In another warning sign about the state of the US economy, the Treasury yield curve hit its highest level of inversion in decades last week. But EV firms are weathering the economic slowdown just fine, with Tesla and BYD – the world’s biggest EV companies – setting new sales records in the second quarter, according to results posted at the start of last week. Not wanting to be left behind, Toyota announced a major breakthrough in its battery tech that could see the world’s best-selling carmaker close the gap to its EV rivals. Elsewhere, traders are trimming their bullish dollar bets and loading up on the British pound instead. Over in commodities, Saudi Arabia and Russia announced last Monday that they plan to extend or make additional cuts to oil production in August in a move that sent prices rallying. Finally, the demand for silver is growing at a faster pace than its supply – a trend that’s largely driven by the metal’s increasing use in the manufacturing of solar panels. That’s leading to higher silver prices, which would not only impact the solar industry, but also other sectors that rely heavily on silver, including electronics, jewelry, and photography. Find out more in this week’s review.

Macro

The US Treasury yield curve hit its highest level of inversion in decades last week, with the two-year note's yield surpassing the 10-year rate by 111 basis points as traders price in further interest rate hikes by the Fed. The US central bank, having left borrowing costs unchanged last month after ten consecutive rate increases, is considering further tightening after robust economic data over the past few weeks. A final revision to US first-quarter GDP showed the economy growing at an annualized pace of 2% in the first three months of the year – well above the 1.3% rate previously reported. An inverted yield curve is often viewed as a harbinger of a recession because it suggests that investors expect lower interest rates in the future, typically associated with a slowdown in economic activity.

Stocks

Tesla and BYD – the world’s leading EV companies – set new sales records in the second quarter, according to results posted at the start of last week. Tesla’s deliveries hit a record 466,140 cars worldwide, outdoing Wall Street estimates of 448,350. China's top car brand, BYD, also recorded its best-ever quarterly sales, with 700,244 new-energy vehicles sold (new-energy vehicles refer to fully-electric vehicles and plug-in hybrids). Tesla's aggressive strategy of pursuing volume by reducing prices seems to be paying off, with second-quarter deliveries marking a 10% uptick from the previous quarter, and a massive 84% leap from the same time last year when lockdowns hampered the firm’s operations in China. What’s more, the firm also managed to trim the gap between production and deliveries – a figure closely watched by analysts – to 13,560 units in the second quarter, down from nearly 18,000 in the previous one.

But the real spark in last week's electrifying EV news came on Tuesday, when Toyota announced a major breakthrough in its solid-state lithium batteries with plans to fully commercialize the technology by 2027. The world’s best-selling carmaker claimed that the breakthrough will enable it to halve the size, cost, and weight of its batteries, and allow its EVs to have a range of roughly 1,200km and a charging time of 10 minutes or less. For Toyota, which has been much slower than rivals to roll out EVs, the new technology could be a huge game-changer to narrow the gap with Tesla.

Currencies

Hedge funds are expected to fully exit their bullish dollar bets as the Fed's aggressive bout of rate hikes nears an end. According to data from the Commodity Futures Trading Commission, leveraged funds' long positions on the dollar against eight currencies plunged by over 80% as of June 27 from the previous week. The drop brought the total number of long contracts on the dollar to 5,196 – the lowest point since March. The world's reserve currency has been on a declining trend since peaking in September, with the Bloomberg Dollar Spot Index falling in four out of six months this year.

Fed chair Jerome Powell indicated last month that the US might need one or two more rate hikes this year. However, hedge funds seem to be looking past this and are focusing on an anticipated onset of rate cuts, potentially beginning as early as the first quarter of next year, according to the interest rate futures market. What’s more, with persistent inflation issues in the eurozone and Britain, institutions like the European Central Bank and the Bank of England (BoE) might need to increase their rates further, possibly making the dollar less attractive in comparison.

In fact, despite signs that the pound’s strong rally this year may be flagging, currency speculators have increased their bullish bets on the sterling to their highest in nine years. Leveraged non-commercial funds upped their net long positions on sterling to almost 52,000 contracts for the week ended June 27 – the highest level since July 2014. This confidence is largely attributed to the BoE's inflation-curbing efforts to raise borrowing costs. As a result, the sterling has risen 5% against the dollar since January. But persistently high inflation in the UK has led to market expectations that the BoE will have to further tighten its monetary policy, even as other major central banks near the end of their tightening cycles. Traders are now betting that UK interest rates will climb as high as 6.5% by March. That’s amazing when you consider that as recently as May, rates were expected to peak at 5%.

However, there's disagreement among analysts and strategists about whether these bullish bets will be fruitful or lead to a pullback. While some argue that sterling's recent weakness signals that aggressive rate rises could induce a recession (leading to lower foreign capital flows and a weaker currency), others believe that higher UK interest rates will continue to support the pound. But too many bets on a stronger pound could lead to a market drop in of itself, as traders rush to abandon their positions if the market turns against them.

Commodities

The demand for silver is currently growing at a faster pace than its supply – a trend that’s largely driven by the metal’s increasing use in the manufacturing of solar panels. See, silver's superior electrical conductivity makes it an essential component in solar cell technology. What’s more, the solar industry is transitioning to more efficient versions of cells that use a lot more of the metal. So with a big worldwide push toward renewable energy sources and a rapidly expanding solar industry, particularly in China, the need for silver has spiked. Solar is forecast to make up 14% of total silver consumption this year, up from 5% in 2014.

However, this increasing demand is running into a supply challenge. The primary source of silver isn't from silver mines, but rather as a by-product from the mining of other metals like lead, zinc, copper, and gold. Given the relative scarcity of primary silver mines and the reluctance of miners to invest in large new projects, especially with lower profit margins for silver in comparison to other precious and industrial metals, it has become increasingly challenging to ramp up silver production to meet the growing demand. Supply was flat last year even as demand rose by nearly a fifth. This year, production is forecast to increase by just 2% while industrial consumption – the biggest demand driver for the metal – is set to climb by twice that.

This imbalance between silver supply and demand is creating a deficit in the market. In fact, the strain on supply is so significant that a study from the University of New South Wales forecasts the solar sector could exhaust between 85–98% of global silver reserves by 2050. If the current trends continue and no significant breakthroughs are made in increasing silver production or finding alternatives for it, the price of silver is expected to rise further. This would not only impact the solar industry, but also other sectors that rely heavily on silver, including electronics, jewelry, and photography.

Elsewhere, Saudi Arabia and Russia announced last Monday that they’re planning to extend or make additional cuts to oil production in August in a move that sent oil prices rallying. Saudi Arabia will extend the 1 million barrels-a-day production cut announced last month for July into August. That means the kingdom will pump about 9 million barrels a day over the summer, the lowest in several years, sacrificing sales volumes for what has so far been a minimal reward in terms of higher prices. The Saudi effort will be assisted by Russia, which will also make a voluntary supply cut of an additional 500,000 barrels a day next month.

This week

• Monday: Chinese inflation (June), eurozone economic sentiment index (July).
• Tuesday: UK labor market report (June).
• Wednesday: US inflation (June), Bank of Canada interest rate announcement.
• Thursday: China trade balance (June), UK monthly GDP (May), minutes from the European Central Bank’s latest meeting. Earnings: Delta Air Lines, PepsiCo.
• Friday: Earnings: Citigroup, JPMorgan Chase, UnitedHealth, Wells Fargo.