TotalEnergies considers foray into copper trading
The French firm is considering a move to expand its oil trading operations into metals to capitalize on the global energy transition.
Holders of precious metals may do well if the debt negotiations fail or succeed, but industrial metals could falter if the U.S. doesn’t raise its debt limit.
Republicans, who control the House of Representatives in congress, refuse to raise the debt limit, that is adding $2 trillion to the current $14.3 trillion, without passing their version of spending control. President Barack Obama is pushing for comprehensive debt control with a mix of spending cuts and tax hikes. The Republicans are resisting the tax hikes and just want spending cuts.
The deadline for reaching a settlement is Aug. 2. If a deal is not struck, the U.S. would default on its debt and lose its Triple A credit rating and start shutting down parts of government.
As reviewed by “Kevin Drum, a government shutdown would be calamitous. After the government spends money on programs and benefits it is required to make, that is off-limits spending, like social security, defence and medicare, Drum says there is simply no money left for anything else:
There’s not a single dollar left for any other function of government. Not defense spending, not the FBI, not foreign embassies, not the court system, not prisons, not disaster relief, not unemployment insurance, not the border patrol, not TSA or the FAA, not roadbuilding, not maintenance of any kind, not national parks, and not pensions for retired federal workers. Not anything. And aside from military personnel, every single employee of the federal government will have to be furloughed.
That may explain why the yield on treasury bonds hasn’t moved, even though the deadline is two weeks away and no solid progress has been made yet. The yield on a 30-year treasury bond rose 0.05 to 4.30 percent on Monday, but still trades at some of the lowest levels seen all year.
The markets just can’t countenance failure.
Debt-limit negotiations fail
Failure to raise the debt limit on time will rattle the stock markets, increase borrowing costs for businesses and harm the nascent economic recovery.
Economic recovery is built on confidence, and failure to resolve debt issue will remove that confidence.
Expect precious metals to do well, all the fear trades like gold, silver and other investment vehicles enjoy a flock of investors seeking safe harbour. Industrial metals, however, may suffer as industrial demand will be set back.
Economists argue that the shock could be as great as the 2008 crash when copper prices fell all the way from about $4/lb to less than $1.5/lb. America is the largest economy in the world. Pull away that lynchpin, and world economy will suffer.
Interestingly, Canada’s resource heavy economy may do well. David Frum, writing for the FrumForum, states that Canada will be short-term beneficiary if the U.S. fails to raise the debt limit. Investors will leave the U.S. and park their money in Canada, a country with a relatively secure financial system. Long-term, however, Canada will get dragged down by any problems dogging its biggest trading partner.
Since the debt crisis took serious form last month, the Canadian dollar has gained against the U.S. dollar, more than three cents since mid-June. (And no, it’s not about energy prices. Switzerland is not an energy producer, and the Swiss franc has gained even more against the U.S. dollar.)
While America’s triple-A bond rating has been called into question, Canada’s triple-A rating remains secure — meaning that Canada’s borrowing costs could dip below those of the United States.
In short, look for a rally in the TSX but a long-term rout.
Debt-limit negotiations are settled
If debt limits are settled successfully, the outlook for all commodities should be good. Confidence will return to the markets. The grinding recovery should pick up steam in the fall. Corporate profits continue to abound in the U.S.
Money Morning, writing for the Market Oracle, writes that the inherent problems in the U.S., and its debt-led problems, will hold it back:
The prospect that the country will be able to add $2 trillion to its tab over the next 18 months is unlikely to make potential lenders (i.e., buyers of Treasury securities) jump with joy.
Just ask your credit card companies for a 13.98% increase in your borrowing limits – assuring them you’ll use every bit of it – and see what it does to your credit score.
This means a debt ceiling increase is likely to lead to a downgrade of the U.S. credit rating, which will cause investors to demand higher rates to compensate for the increased risk.
