Summary:

Rising interest rates around the world are again causing problems for financial institutions. In Japan the increase in rates to record highs has pushed insurance companies and banks to take massive mark to market losses and stock prices have been hit hard. In the US rates have stayed near yearly highs with the 10-year US Treasury today at 4.48% (4.82% year high – low in April 3.86%) and the 30-year is at 4.98% (yearly high 5.15% – low in April 4.33% ). If these are breached then another bank crisis like we saw in 1H/23 could occur again. Starting in June the impact of US tariffs should be felt in stores (Walmart and Target have made price increase announcements) and would reverse the benign inflation data to worrisome levels for the Federal Reserve. This would be a repeat blow to the US stock market. Some banks would face forced mergers and others would be taken over by the FDIC and liquidated.

Stocks in general have 10-15% downside with the tech area being the most vulnerable. WTI should decline below US$60/b in the coming days as global inventories build during this shoulder season. A retest of the April lows in the mid-US$50’s is expected. Another great buy window as we saw in early April should be seen in the coming weeks, likely the end of June. Get ready to add to favourite energy ideas.

This week’s Eye On Energy Details:

Current Challenges:

Challenges for President Trump and his administration over the second 100 days will be tough: He needs success on these issues before the end of this 100-day timeline:

• Get an extension of the debt ceiling and raise it by US$4T.

• Be able to fund the current deficit and renew maturing Treasury issues when foreign investors worry about US trade policy and support of NATO. China and Japan have been selling some of their substantial Treasury issues.

• Get his tax cuts permanently approved. The Senate now has the “Big Beautiful Bill” and they may not acquiesce to the House version and get a final bill to President Trump before July 4th (Independence Day).

• Show that he can cut wasteful government spending. The current deficit looks to be US$2.2T for this fiscal year and could go higher in coming years if the growth forecast assumed by the bill does not occur. The current deal looks to add US$30T to the deficit over the next 10 years. The Moody’s rating downgrade from ‘Triple A’ was a blow but so far has not raised interest rates to get required funds. Markets are watching to see how upcoming Treasury offerings do.

• Get Congressional approval to close down government departments, regulations and staffing. So far they have been halted by Judge rulings.

• Get peace deals signed between Russia and Ukraine, get Iran to end its nuclear weapons program or the US will attack and destroy their nuclear facilities, end Houthi attacks on Red Sea commercial and military shipping and reopen the waterway permanently.

• President Trump’s volatile moves on tariffs have had a strong impact on stock markets. The latest on-off of 50% for the EU is just one such market mover. The delay to July 9th means that 27 EU countries need to agree to harsh trade changes. For Germany that means for autos and for France food and wine. We are skeptical that this can be done. So far no tariff deal has been made and signed. The one that has initial agreement is with the UK but no papering of the deal has occurred yet. His threat against Apple of 25% tariffs on imported cell phones to force them to move manufacturing to the US awaits Apple’s response. Other cell phone manufacturers may face the same increase in tariff rates.

I remain concerned that a Geopolitical Challenge will take place and be the ‘Black Swan’ to take the general stock markets to our downside targets.

Our expected downside targets are:

• Dow Jones Industrials Index 35,000 (now 42,428)

• S&P 500 4,800 now (now 5,936)

• NASDAQ 13,000 (now 19,257)

• S&P/TSX Energy Index <225 (now 258)

• WTI <US$56-58/b (now US$61.90/b)

As this decline progresses in the coming weeks we should see more capitulation from leveraged investors who get nasty margin calls. Intermarket pressure should take energy stocks down as well as the overvalued tech sector (AI and semiconductor stocks the most overvalued still) and provide energy investors with the next low risk BUY window. This should trigger a Table Pounding BUY signal during the coming weeks into late June and we will send out to SER subscribers another Action Alert with new BUY ideas when that signal is triggered.

The Trump tariffs have still not been seen by customers as inventories of current stock need to be sold and then new imported items will carry the tariffs and become relatively expensive. This is now expected to hit stores during June. Both Walmart and Target have warned of the cost of new inventory. President Trump has jawboned both to eat the higher tariffs and not pass the cost increases to consumers. Some economists see tariff prices impacting households by US$2,800 by year end.

Into the year end we see much higher crude prices. If we are right that by year end Iran will lose production of >1.5 Mb/d and Venezuela > 500 Kb/d then there will be a significant shortage of crude production and prices will lift over US$75/b. Remember global inventories are low historically so even a 1 Mb/d shortfall can drive prices up materially.

For long term investors, find the ideas you want to own for this energy (and most commodities) super cycle and put your BUY orders below the market on plunging days to get great bargains for significant appreciation into the end of this decade.

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