Market news & insights

We have been scratching our heads as to what exactly drove some of the strong price action in pairs, equities and bonds off the back of a further hawkish turn from the Fed at its June meeting. So, what exactly has promoted the moves on markets and what else should we as traders acknowledge from the Fed meeting First Powell has pointed to a positive change in the latest CPI inflation report. The 3.3% year on year rate was better than expected and is finally moving back in the right direction after the first quarter saw raises rather than declines.

Chair Powell's comments at the press conference leaned more dovish, emphasising "broad" labour market data indicating that the labour market had returned to a pre-pandemic balance. He noted that further loosening might be seen as unnecessary and expressed no concern about an overly strong labour market despite recent robust payroll readings. Here is a decent chunk of his message: "If the economy remains solid and inflation persists we're prepared to maintain the target range for the federal funds rate as long as appropriate.

If the labour market were to weaken unexpectedly or if inflation were to fall more quickly than anticipated, we're prepared to respond. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate. We'll continue to make our decisions meeting by meeting based on the totality of the data and its implications for the economic outlook and the balance of risks," However, he cautioned that there are clearly big areas of concern namely, owner's equivalent rent (OER) did not decelerate (again) and with an 5.3% annual rate in the latest release it is eons away from where the board needs it to be.

If OER continues at this pace, it will be challenging for the FOMC to bring inflation sustainably back to 2% or gain confidence that it is heading there. Chair Powell emphasised the need for consistent structural data reasoning to move – clear in this quote "One reading isn't enough. You don't want to be too motivated by any single data point." This is pretty clearly reflected in the latest Dot Plot, which is now signalling only cut in 2024 down from 3 at the March meeting.

We have highlighted that in the orange and blue lines that shows the marked difference between the two. The critical question now is whether there is sufficient data for the September FOMC meeting to justify starting the rate cut cycle in 2024. You only have to look at the record highs in US indices and the collapse in US yields to think September is near enough to a certainty.

Is this the view of the FOMC? The Committee will receive three more employment reports and three more CPI reports before the September meeting. Given their preference for communicating actions ahead of time, the timing of the first-rate cut will be significant and well flagged.

If you look back at the dot plots there is something clearly communicated there. Currently, 11 out of 19 board members expect to hold rates until December or even into 2025. Thus, as the majority see a holding pattern you could even argue that waiting for the fourth CPI and employment report plus 2 quarterly GDP reports if the board was to wait until November would be a more likely outcome.

Of the eight participants who favour two rate cuts this year, it's estimated that this includes three to five regional Fed Presidents that are non-voting members and have minimal influence on policy. All things being equal and judging by his public comments and history Powell is likely among those favouring a single cut, he will need to build consensus among the board members that are voting members and that appears easier said than done considering several of these players are hawks and will sit in the group that is holding rates out to 2025. To realistically consider a rate cut in September, a significant shift in data is needed in the next two months.

This is why we are asking the market – is less more? Less cuts, less clarity on inflation but clear drive into bullish positions? We know not to ‘fight momentum and the trend’.

But it is also prudent to stop and ask if a swing back is likely. Unless there is a substantial weakening in growth and employment the prospects of a September cut look poor. And, given the FOMC's cautious approach over the past 18 months and substantial lead time required for such decisions.

The consensus forecast in the labour market, sees moderation not a rapid decline, which does not support a rate cut in September. Thus mind the blow back as this concept builds momentum and shoves markets back the other way. So, what exactly has moved the dial in markets to be so positive?

We think it’s the comments he made during his press conference that somewhat poured cold water on what have traditionally been seen as bedrock data. First - Powell downplayed the importance of the Fed's summary of economic projections (SEP) and the "dots," describing them as mere possibilities. This feels like the good old days of the Yellen era where she too would remind everyone that forecasts are just that forecasts not actuals.

Will point to something that might have been missed – he also stated that officials could revise forecasts and dots after the release of CPI data, though " most don’t." Here are some of the key revisions in the SEP - an expected increase in core PCE inflation from 2.6% to 2.8%, reflecting higher-than-expected inflation in Q1 remembering that this is the measure the Fed needs to at or around 2%. The unemployment rate and GDP growth were left unchanged at 4.0% and 2.1%, respectively. Second – The dot plot projections showed an upward revision of 25 basis points for 2025.

Really this is just a push back of the rate expectation for this year. But and it is a large and consistent but – The dot plots suggest once the cuts begin the path of quarterly rate cuts once they begin cuts will be rather consistent. This view has not changed since reaching the peak of the hike cycle.

So if this is indeed the case – market positioning is banking on this time next year being the ‘middle’ of a significant rate cutting cycle.

We know that this is slightly contrary to the consensus views but we think it needs to be said. The communication from the RBA (Reserve Bank of Australia) is unusually unclear, confusing and conflicted. The view conveyed in statement, press conference and minutes currently we would argue counter each other.

And the reason for this we believe is because the RBA is a reluctant hawk and is frightened to act. Let us now present why we think this and what it will mean for FX and yields in particular. The RBA has just completed a mass review of its operations and one of the key changes was to improve transparency.

This included press conferences, extended meetings, and more public discussions from members. The catch with this has been the mixed communications. Take for example the statement which was extremely ambiguous.

It was filled with terms like uncertainty, mixed signals, and complexity. It explains why the statement has this line: ‘the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.’ That’s fair – things are complex and we understand why the board is waiting for more data. That was countered with this: ‘ The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.’ Historically, whenever the Board has included such a resolute statement in its communications, they followed up with a cut or a hike in the preceding meetings – the frightened hawk is there and strongly suggests that a rate hike is likely.

The initial AUD reaction to the statement we think shows why the communication is mixed. Then take the press conference – Governor Bullock’s were much stronger than the statement, indicating a significant stance, not really clear in the statement. As mentioned, the Board stated they are not ruling anything in or out, but in reality, they have dismissed the possibility of rate cuts.

That was confirmed when Bullock was asked on this exact point and confirmed that rate hikes were the only things discussed. There was no ongoing discussion about cuts in the near or medium term as they do not expect inflation to reach their target by mid-2026. The Board’s concern is that inflation is notably higher than expected, employment is solid and that overall demand is still generating inflation.

The reaction to all this was clear here: The next notable reaction was the interbank market. All though it doesn’t appear like much in this chart. Please understand this change is actually from a ‘cut’ to ‘hike’ so yes there is a 10% chance of a hike, that is from a 10% chance of a cut.

July will be crucial with substantial data releases, including the second quarter CPI (July 31), GDP figures, and the wage price index. Current forecasts suggest that inflation and employment are performing better than expected, raising concerns about the need for a potential harder landing in the economy to return inflation back to target. The focus is now shifting towards slowing down the economy further despite the per capita recession because in the RBA’s view the impact on the household’s price power in the future from high inflation is still too high.

Future Rate Decisions All things being equal – with the RBA turning itself in knots and trying so hard to stay the course the RBA's commentary suggests it still has preference to hold rates if possible. The big issue as it acknowledges is the possible need for near term tightening due to a lack of progress towards inflation targets. Here is the market’s forecast for rates post the meeting on Tuesday Which probably explains the AUD/USD reactions in the following 24 hours It flatlined – thus the market is telling us that it needs a catalyst, and those catalysts are clearly coming in July.

So to finish what’s the key? A significant upside surprise in the RBA's core inflation measure could lead to a rate hike, despite slowing demand and labour market conditions. We get the monthly inflation data next week, this will be the first strike then the July 31 quarterly read.

This will be huge and will be the biggest AUD mover outside of an RBA meeting. We will be providing as much information on this release the closer we get to the release. However as shown the RBA is a terrified hawk and without this inflation beat, the risk of further tightening diminishes, with expectations for the RBA to remain on hold until potentially the first rate cut in February 2025.

The next RBA meeting on August 6 it’s going to be an interesting 6 weeks for AUD traders ahead of what is a likely live event.

Entries for longer-term stock investment approaches can be based on either long-term technical trends or more commonly, fundamental data related to a company’s current and projected performance. Despite the plethora of such suggestions, there is often a lack of clear guidance, or even a complete absence, of instructions on determining the timing of an exit from a long-term position. Logically, whether it’s a short-term technical entry or long-term fundamental entry, many of the “rules of the game” are similar, including the need for clear and unambiguous exit strategies seems paramount for consistently positive investment outcomes.

The approach originally used to make an entry decision can serve as a good starting point but there are other considerations that can potentially benefit outcomes. This article aims to briefly describe six potential exit approaches you could consider, providing some detail and examples as to how to action your chosen approach. Target Price Exit Strategy Setting Targets: Determine a fair value (and thus exit price target) by conducting in-depth fundamental analysis, utilizing metrics like Price-to-Earnings ratio (P/E), Cash flow, debt levels, book value, or longer-term technical levels.

On-going monitoring: Regularly track the price against this target. For example, if you calculate a fair value for a stock at $50, and it’s currently trading at $45, you might decide to sell once it reaches or exceeds $50. Other Considerations: Regularly review and adjust the target price, taking into account changes in fundamental factors impacting the relevant sector or market as a whole.

Ongoing Fundamental Awareness Ongoing Analysis: Continuously evaluate underlying fundamentals, such as earnings, balance sheets, cash flow, and management quality. Be vigilant not only when next company reporting dates are due but also for the often-unpredictable release of operational updates or changes in guidance. Trigger Points: Identify specific company indicators or information that would prompt an exit.

An example of this may be a sustained decline in revenue or mounting debt levels, particularly when beyond what was originally expected. Other Considerations: Implementing this strategy requires consistent research and a nuanced understanding of the particular business and industry factors influencing the investment. Having the optimum resources in place to be able to do this is vital and identifying these should be a primary goal of any fundamental investor.

Economic & Sector Changes On-going Analysis: Regularly review broader economic indicators like GDP growth, inflation, interest rates, or industry trends. Understand how such changes in these key data points may correlate with the asset price and establish exit criteria accordingly.For example, you may reconsider a position in a technology stock if there’s a widespread shift away from tech spending or growth concerns or regulatory changes that detrimentally affect the sector. Other Considerations: This strategy necessitates a broad understanding of economic cycles, industry dynamics, and how these elements interact with your particular investment holdings.

Additionally, it’s worth noting that appropriate resources should be in place to ascertain this as proactively as possible, or at worst in a timely manner. This may assist in preventing excess depreciation in asset price to the point where action is delayed and major capital damage has occurred. Dividend Targeted Approaches On-going Analysis: If part of your entry criteria and anticipated return from fundamental analysis-oriented trades is based on dividend yield to some degree, it is worthwhile to not only look at what is current but also perform ongoing evaluation of the reliability and/or growth of dividends.

Exit Criteria: Having established an expected return, it logically makes sense to have criteria in place to help decision making. For example a decrease in dividend yield below a certain threshold or a cut in dividends could be part of your potential exit plan for a specific investment. Other Considerations: As well as vigilance for the timing of company announcements where dividend changes are often announced, awareness of the yield of your current investment compared to others, and industry trends is required, as they could influence the sector and the market as a whole.

Time-Based Exits On-going Analysis: Often with time-based exits, there is alignment with a particular impending event. Examples of this type of event include a shift to EVs from petrol-fuelled cars or the impact on assets in the lead-up to an election. Either way, your investment time horizon needs to be reviewed should there be a change in circumstances and the rationale behind your initial thinking on entry.

Other Considerations: There is a discipline involved in exiting from a stock position that remains strong even after an event, or the impact of such, has passed. With a systematic approach to fundamental entries in place, it is legitimate to review whether other fundamental approach criteria are met and perhaps consider continuing to hold. Without this in place, or if no match with other approaches exists, logic would dictate that a planned exit is an exit, and you should action it as such, no matter how well this specific position has served you to date.

Portfolio Rebalancing On-going Analysis: Although not based on a specific entry approach, periodically evaluate your overall portfolio asset allocation is prudent. Reviewing whether the current holdings are still a fit with long-term investment aims and risk tolerance in current and ongoing market circumstances are appropriate rebalancing considerations. Rebalancing Exit Approach: Criteria for rebalancing should be pre-planned and clearly defined.

These may require consideration of multiple factors, such as an asset becoming an excessive portion of the portfolio on good performance, or changes in market or economic circumstances that threaten specific portions of the portfolio. Other Considerations: Continuous monitoring of the portfolio is required, and checking continuing congruence with desired asset allocation and your risk profile is vital. Rather than based on a specific entry approach, just to reinforce that the concept of rebalancing is one that is important across all of the approaches described above.

Summary Although they receive little “airplay” in comparison to technical approaches and exits, the exit strategies within a portfolio based on fundamental analysis entries are multifaceted, frequently interconnected, and equally important to master. Crafting a proficient exit system demands a comprehensive knowledge of each specific investment holding, and wider market and economic dynamics, in the context of your personal investment objectives, and risk tolerance. The need for a set of written system criteria for all actions, regular monitoring, thorough analysis, and disciplined adherence to predetermined exit criteria are essential.

Ideally, as traders, our aim is often to identify potential entries at the start of a new trend (so “first in the queue”) and exit at the end of that trend. Of course, we often will identify a price move where a trend may already be established and are therefore faced with the decision as to “join in” mid-trend (we hope) with the aim of catching the rest of a trend move. The concern of this approach is of course the fear of potentially entering just prior to that trend changing.

There are “clues” we can use, such as candle body/wick size and volume which may help, but also there is a group of indicators termed ‘oscillators’ which work on the idea that there are points in a price move which the underlying asset (be it a Forex pair or CFD) may be overbought (and hence a long trade could be deemed riskier), and oversold (where a short trade may be termed riskier). Although the Relative Strength Index (RSI) which we covered previous in an article (review "Adding the RSI to your entry or exit trading plan? "), is possibly a more commonly used oscillator for determining oversold and overbought situations, the stochastic although possibly seen as being slightly more complex, does appear to be frequently used by more experienced traders. This article aims to shed some light on how this indicator is used and what it may be showing you relative to price movement.

What is the stochastic trying to tell us? As with the RSI the Stochastic is an oscillator (whose value can theoretically lie between 0-100) which has identified key levels which may indicate whether a particular asset is overbought or oversold. A move into either of these two “zones” may suggest a trend change is more likely to be imminent.

The key levels are below 20 (oversold) and above 80 (overbought). See below a 30-minute chart for GBP/USD with the stochastic added using the default system settings (we have added horizontal lines from the drawing tools to make the key levels clearer. We will discuss settings later and the additional line but at a simple level, taking the blue line on the stochastic if it moves below 20, then you would be cautious and perhaps avoid entering a short trade (examples A and B), and perhaps avoid entering a long trade if it moves above 80 (see example C).

And the other dotted line? There are two lines that form the stochastic namely: %K (usually a solid line) – In this case blue as previously referenced above. %D (usually a dotted line) and is a moving average of %K (often set as an exponential) Slowing periods may also be set (default is 3). As a rule, the slower (bigger number the less “noisy” i.e. you will see less overbought and oversold conditions).

And how can it be used? a. As an additional entry criteria “tick” As referenced earlier, for entry, traders may use this as an additional tick (when other indicators may suggest entry) to make sure they do not enter a long trade on an overbought currency pair/CFD, or short trade on an oversold currency pair/CFD. b. As a warning to prepare for exit action in an open trade Though less commonly discussed, it would appear logical that if in a long trade for example and the Stochastic moves into an over-bought position this could be a warning to consider exit (more commonly used as a signal to tighten a trailing stop loss) c.

As a primary reversal signal Additionally, some traders may look to buy when moving out of an oversold situation when the EMA dotted line crosses the solid blue line. (and of course, the reverse when overbought). It would be rare to use this in isolation with no other indicators, using increasing volume, and candle change recognition would often be used also. The relatively fast default settings (5,3,3) may merit some review anyway but particularly in this case.

Which settings? As with any indicator you are in control of the settings and what you use for you is of course your choice. With the chart below, we have used the default 5,3,3 and added a 21,7, 7 to illustrate the difference of a less noisy set of perimeters.

In Summary Ultimately, and to finish, it is of course your choice as to which criteria you use for entry and exit. Remember, whatever these are for you, the key lessons of: a. specifically identifying how you are to use the criteria within your plan, b. the importance of forward-testing (as well as back-testing) of any system change, c. and of course, the discipline of following through are ALL critical whether you use the Stochastic, RSI or neither.

Slowing Growth and Potential Rate Cuts: Recent economic data suggests a slowdown in growth, contrary to earlier expectations of reaccelerating growth and inflation. Federal Reserve Chairman Jerome Powell's statements and recent economic indicators point towards the possibility of lower policy rates in the near future. Key indicators, such as the softening in job markets and overall economic activity, indicate that growth is decelerating rather than accelerating.

Core inflation remains above the Fed's target but is showing signs of a gradual decline, with core CPI at 0.29% month-over-month (MoM) in April. This trend could build the Fed's confidence that inflation is on a downward trajectory, potentially leading to rate cuts starting in July. These data trends have filtered into in the market itself.

The divergence between the S&P and US 2-year has been come very apparent as yields unwind from their hawkish bets that ramped up on Q1 data. That spread is becoming an interesting trade – it could close as fast as it has opened if data misses. On the data – what is core to the Fed’s view?

Inflation Trends: Core inflation remains elevated but shows signs of slowing. The April core CPI increase of 0.29% MoM aligns with the Fed's expectations of gradual inflation decline. The slow but steady decrease in shelter prices, particularly the owner’s equivalent rent (OER), is a positive sign.

However, the "supercore" non-shelter services sector's inflation is unlikely to slow significantly without a loosening of the labour market and that remains a headwind. That brings us to the next question what is the official views of the Fed? Federal Reserve Outlook: The recent Federal Open Market Committee (FOMC) minutes and statements from Fed officials suggest it still holds a cautious approach.

While there is no major shift towards a hawkish stance, the rhetoric indicates a readiness to cut rates if inflation data supports a premise it’s on a path to a more sustainable level. Yet the view from members is rather mixed, illustrated by the mixed views from members over the past week. Key Statements Vice Chair Philip Jefferson: Jefferson noted that while April's data is encouraging, it is too early to determine if the slowdown in inflation is sustainable.

He emphasized the current restrictive monetary policy and refrained from predicting when rate cuts might begin, stressing the importance of assessing incoming economic data and the balance of risks. Vice Chair of Supervision Michael Barr: Barr expressed disappointment with Q1 inflation readings, which did not increase his confidence in easing monetary policy. He reinforced the message that rate cuts are on hold until there's clear evidence that inflation will return to the 2% target.

Cleveland Fed President Loretta Mester: Mester anticipates a gradual decline in inflation this year but acknowledges that it will be slower than expected. She no longer expects three rate cuts this year and mentioned that the Fed is prepared to hold rates steady or raise them if inflation does not improve as anticipated. San Francisco Fed President Mary Daly: Daly sees no need for rate hikes but also lacks confidence that inflation is decreasing towards 2%.

She sees no urgency to cut rates, echoing the broader sentiment of caution among Fed officials. The conclusion from all this is that the Fed is still giving itself time. It’s of the view that the restrictive policy will need more time to work, suggesting a prolonged period of higher interest rates to combat inflation effectively and despite the movements in the bond market and USD.

Traders in the fed fund futures are still trading a full 50 basis points higher as of now compared to their bets at the March meeting. (Black v Blue line) Other data that matters: GDP and Consumer Spending: Despite strong GDP growth in the latter half of 2023, real GDP growth slowed significantly to 1.6% annualized in Q1 2024. Final private domestic demand was sustained primarily by consumer services spending, even as real goods spending declined. The weakening consumer spending on goods is beginning to spill over into the services sector, indicating broader consumer weakness.

Manufacturing and Investment: Data on manufacturing and business investment remains weak. Manufacturing production has stagnated, and orders for durable goods have not shown significant improvement. Residential fixed investment is also slowing, with housing starts and building permits both declining in April.

Housing Market: Existing home sales data, to be released soon, is expected to show a modest rebound from the previous month. However, ongoing weakness in the housing market, influenced by higher mortgage rates, remains a concern. Hot Copper – Too hot?

Copper has experienced significant price movements, with several key factors contributing to the recent trends in copper prices, spreads, and inventory levels. The following points provide an in-depth analysis of the forces at play: Tighter Physical Copper Market: Last week's record highs in COMEX and SHFE copper prices, alongside the COMEX-LME copper spreads indicate a very tight physical copper market. This saw the LME copper price smash a new record all-time high (above US$11,000 a tonne).

The dislocation in copper price benchmarks, such as the COMEX-LME spread, typically leads to adjustments in physical flows. However, current conditions are proving challenging, with generally low copper inventories and logistical issues. For example, traders in China are facing tight shipping schedules, making it difficult to move copper to the US.

Suggesting the price will hold in the interim De-commoditisation of Commodities: Deliverable Metal Scarcity: The elevated COMEX copper prices relative to other benchmarks can be partly attributed to the lack of deliverable metal. Only 17% of the metal in LME warehouses originates from countries with COMEX-approved brands. This scarcity of deliverable inventory means that most of the available copper cannot be used to satisfy COMEX contracts, driving up the COMEX copper premium.

RIO, BHP and the like all benefit from this. Influence of Financial Flows: Naturally this kind of move brings highten investor and trader interest. COMEX copper futures are experiencing all-time highs in long positioning and record open interest in copper options.

This surge in financial flows has pushed COMEX copper prices higher compared to other benchmarks and has been more resistant to reversal. What next? The tight inventory situation is likely to persist, especially if logistical challenges and shipping delays continue.

This will maintain upward pressure on prices and could lead to further dislocations between different copper price benchmarks. Efforts to alleviate bottlenecks will be crucial in normalizing price spreads and stabilizing the market. Any improvement in shipping schedules or inventory replenishment could ease some of the current tensions, but we do not hold our breathe for this to occur any time soon.

Conclusion The recent record highs in copper prices and spreads underscore a complex interplay of tight physical markets, and significant financial flows. Traders should closely monitor these dynamics and adapt their positions to capitalise on potential switches and further squeezes. But in the main Dr.

Copper is hot and likely to remain so until supply catches up.

The transportation of the world is becoming one of the most interesting trading places in markets as we clearly have a structural long-term change coming as the world moves from the black stuff (oil) to electricity. But the trader question is – what’s happening in these markets now? The black stuff - Oil Oil prices have softened due to several bearish factors impacting demand, inventories, and refining margins in the last few week and despite some easing of geopolitical risks, concerns remain.

Lets run through the key issues. Inventories and Demand Global Inventories: April restocking has continued into May, with a nearly 10 million barrel increase last week alone, bringing the month-to-date (MTD) build to over 17 million barrels. The US, Europe, and Japan all recorded stock builds in crude oil and refined products.

However we need to put this into perspective – total stockpiling is sit well below historical averages across all major regions. US Inventories: US crude oil inventories increased by 1.8 million barrels last week, expectations were for drawdown as we approach peak driving season. While gasoline and ethanol saw modest draws, other products experienced large stock builds – this likely comes down to demand.

Demand: US oil demand remains weak on a four-week moving average (4WMA) basis, though there was a slight uptick in weekly gasoline demand. However, this needs to be consistent to impact overall demand positively. Couple that with the fact International Energy Agency (IEA) has revised its 2024 oil demand growth forecast down to 1.07 million barrels per day (b/d), a decrease of 0.14 million b/d.

This slower growth trajectory is expected to continue into 2025, with demand growth predicted to decelerate to 0.7 million b/d. Prices positioning Price Activity: Money managers have been liquidating net long positions in crude oil, with ratios of gross longs to gross shorts for Brent and WTI significantly declining. This reflects a bearish outlook the but speculative bearish view has closed to a holding pattern.

The Outlook: Pricing and forecasting suggest a continued decline in prices, with Brent expected to average $86 per barrel in Q2 2024, but dropping to the $70s in the second half of the year and into the $60s by 2025. WTI is expected to average $82 per barrel in Q2 2024 then $66 by year end and as low as $51 by the end of 2025. Refining Margins and Seasonal Factors Refining Margins: Geopolitical risks and seasonal factors like summer heat and potential hurricanes pose upside risks for refinery margins in the near term.

However, the overall trend is towards weakening fundamentals and thus further margin squeezes. Seasonal Demand: With the Memorial Day weekend approaching, traditionally the start of the US driving season, there is hope for increased gasoline demand. However the longer term demand trend for gasoline remains soft as explained.

This remains uncertain and dependent on consistent weekly data. Other Factors Technical Support: Given the bearish fundamentals and the current positioning, technical support for oil prices appears weak. Options market data show declining interest and implied volatility has softened as the match lower has become more ordered.

Overall, the oil market is facing bearish pressures from high inventories, weak demand indicators, and reduced speculative interest, with only limited near-term upside risks. The focus remains on potential demand increases during the summer driving season and any unexpected geopolitical developments that could disrupt supply. The elephant in the room as ever remains OPEC.

With its 27% control of global oil markets further cuts to supply that have taken effect over the past 24 month will only get bigger. The Battery Stuff - Lithium Before we dive into the lithium story in depth, we need to first dive into the geopolitical impacts on the market and their effects on not just price but future developments. Let us review the impact the Inflation Reduction Act (IRA) is having on the lithium Supply Chain The IRA is attempting to reduce dependence on China for electric vehicle (EV) battery production by incentivising the sourcing of critical minerals, such as lithium, from Free Trade Agreement (FTA) countries and non-Foreign Entities of Concern (non-FEoC) supply chains.

Here are some of the additional parts of the IRA that are augmenting the market EV Tax Credit: tax credit of up to $7,500 for EVs, with half of this ($3,750) contingent on sourcing critical minerals (like lithium) from countries with which the U.S. has a Free Trade Agreement (FTA), - Australia, South Korea, and Chile. 45X Tax Credit: Lithium chemical producers benefit from a 10% production tax credit applied to all operating expenses (opex), significantly supporting their operations and potentially lowering costs. The thing is – China has shown it is still the most efficient player in developing, manufacturing and producing EVs’. That however hasn’t stopped the Biden Administration ploughing on with the IRA.

China currently dominates the downstream EV battery production market, controlling around 80% of gigafactory production. However, China’s upstream control of raw minerals is limited to about 17% of the global supply. By incentivising the sourcing of lithium and other critical minerals from FTA countries, the IRA aims to diversify and secure the supply chain away from Chinese dominance.

However, this immediately puts a price premium in ex-China sources as it incentivises and realistically forces firms to seek FTA and non-FEOC so they comply with the IRA. There is also an argument that Independence Group (IGO) for example used the IRA as rationale for the Kwinana downstream project as the pricing of the project was partially based on ex-China price premiums. A price premium of $3,000 per ton for lithium hydroxide (LiOH) could make projects with higher capex but lower internal rates of return (IRR) financially viable.

The flip side. The strict IRA rules E for the tax credit may result in fewer EVs meeting the criteria, as they must source a significant portion of their battery components from specified countries. This could reduce the number of qualifying EVs in the market, influencing manufacturers to adapt their supply chains to meet the new standards.

In short, the ex-China price premium is likely to increase, reflecting the growing demand for compliant minerals. This strategic move is expected to have significant implications for the global EV market and the positioning of the United States within it.