Last week, I spent some days on Magnetic Island — or Maggie Island, as the locals call it.
One of the things that impressed me most about Maggie was its weird rock formations. They seem to defy gravity.
Here is a snap of one:
Source: Selva Freigedo
Sometimes our global economy feels like it is in a precarious balance, much like these boulders.
US Fed Chairman Jerome Powell rocked the rocks in a speech last week after he said he wasn’t convinced inflation had peaked and that the Fed is intent on continuing to raise rates.
Of course, we need to take all this with a grain of salt. After all, it was only a little while back that the Fed was saying inflation was transitory.
Markets didn’t like his comments at all, though.
I won’t get too much into it here since a lot has been said about Powell’s speech and its effect on markets, except to say that the most interesting part to me was where he commented on ‘rational inattention’. As he said:
‘When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere.
‘Of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.
‘We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored.’
Inflation is very much influenced by expectations. If households think things will be more expensive tomorrow, they buy today, which in turn feeds inflation. Hence his comments.
Yet much of today’s inflation is also coming from the supply side, from high energy prices.
Oil prices have dropped in recent months. Yet…
It looks like we could be heading for higher energy prices
Things are still pretty tight in the energy space.
Recession fears, lockdowns in China, demand destruction (i.e. people driving less), and the fact that the US and several other countries have been releasing oil from their strategic reserves have pushed prices down in recent months.
It’s a subtle balance, though.
On the supply side, things are still looking shaky with unrest in Iraq and OPEC+ discussing cutting production. There are also negotiations between the US and Iran on a nuclear deal. If they reach an agreement, we could see Iran’s oil supply coming back into the markets…we’ll see.
And, of course, there’s still Russia, which has a huge impact on oil prices and European gas prices.
In fact, in Europe, gas prices spiked after Russia announced it’s once again shutting Nord Stream 1, a major European pipeline, for three days for maintenance works from today.
The fear is that it won’t come back online as scheduled.
This is all happening as Europe is looking to fill up its gas storage ahead of winter. So energy supply is still looking very shaky, particularly if you are in Europe.
It’s reflected in prices. UK households, for example, expect to pay triple for heating compared to what they paid a year ago…
And it isn’t just affecting consumers. Producers are also getting hit hard by high energy prices. Fertiliser plants, for example, are shutting down — this then creates disruptions in related industries like food manufacturing.
Energy markets are all interconnected, so this could sieve into global energy prices and inflation.
Uranium stocks are having a moment
The energy crisis is pushing Europe to look for alternatives. Ahead of winter, Europe is looking into emergency measures to fight the energy crisis.
It’s been boosting renewable energy, but as we’ve mentioned before, it’s also been looking into nuclear energy. In fact, Europe declared nuclear ‘green’ earlier this year and since several countries have been looking at boosting their nuclear energy production.
Of course, it’s not just Europe.
More than 10 years after the Fukushima disaster, the Japanese government announced they were planning to restart seven nuclear reactors to ramp up their nuclear power generation.
The Sprott Physical Uranium Trust Fund jumped 12% on the news.
It’s now sifting into ASX uranium stocks. For example, yesterday Bannerman Energy [ASX:BMN] was up more than 20%, Deep Yellow [ASX:DYL] jumped more than 14%, and Alligator Energy [ASX:AGE] was up more than 22%.
And this could be just the start for uranium as more countries look to nuclear and renewables for energy security.
Until next week,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.