Marc Bentin
Sep 5, 20227 min
BentinPartner Weekly
Dear Reader,
Last week delivered another string of “risk off” sessions as Euro area inflation accelerated to another all-time high of 9.1%. bolstering the case for the ECB to deliver a jumbo rate hike of 75bps when it meets this Thursday. “We need a strong rise in interest rates in September”, Bundesbank Chief J. Nagel said, adding that “further interest rate steps are to be expected in the following months”.
These comments came as the message from the world’s top finance chiefs remained loud and clear that rampant inflation is here to stay and that taming it will take an extraordinary effort and most likely a recession and more market turbulences.
Another cold shower early last week was served by famed investor J. Grantham (who correctly called several of the major market crashes) saying that the US stock market remains in an unprecedented “superbubble” that will cause financial “tragedy” for investors when it bursts. He also said that a “recent bear market rally that saw the S&P500 recoup 58% of its losses from a June low follows the pattern of past stock market crashes in 1929, 1973 and 2000… The litany was deplorables was described here.
Another prophet of doom (S. Roach) opined that it would take a miracle for the US to avoid a recession as the lagged impacts of a major tightening start to kick in. “They have not kicked in at all right now”, he said. “Go back to the type of pain Paul Volcker had to impose on the US economy to ring out inflation. He had to take unemployment above 10%. The only way we are going to get there… is if the Fed gets that real Fed Fund rate into restrictive zone. And the restrictive zone is a long way away.”
Adding to these considerations the fact that September is from a seasonality point of view, the weakest month of the year, the fact that the Buffet indicator (ratio between US GDP and market cap) points at a strong overvaluation, the fact that the Fed is now not only in a rapid rate hike cycle and busy enacting USD90bn/month of QT (see note distributed at Jackson Hole on the topic of QT) , or about two times as much as it did with the previous QT experiment that led to a quick resumption of QE or the fact that Rule of 20 also suggests extreme overvaluation (a rule that posits that the sum of the PE and inflation should not exceed 20 at the border of fair value compared to the current 35), all point at risks going forward that are tilted to the downside for risky assets.
Still on Friday, the US job report showed that the economy added 315’000 jobs for the month, just below estimates while unemployment ticked higher to 3.7%, higher than expect due to a rising labour force participation with weaker than expected average hourly earnings which brought back some hopes of a Goldilocks scenario but those hopes were dashed by news that the energy crisis in Europe took a turn for the worse with the unexpected announcement that Nordtsream1 would remain shut “indefinitely”.
The news of the “oil leak” that would completely shut down Nord Stream 1 followed Friday’s G7 decision to impose a price cap on purchases of Russian oil and oil products. The idea, according to the Economist (I have stopped trying to think how this could possibly work….) is “to allow Russian oil to continue to flow, keeping global markets supplied, but to cut the revenues the Kremlin earns from its oil sales, thereby weakening its economy and war effort”. Ok...
The novelty was perhaps that by claiming that the “oil leak” was the reason for cutting off Nordstream1, the Russian government is now ostensibly mocking Western Governments for trying to apply measures that did not work and keep backfiring, remaining hopeful that they will ultimately produce a different outcome…
Elsewhere in currencies, China kept up its resistance against yuan weakness by setting a stronger than expected fixing for 7 consecutive days. JPY weakened further over 140.00, on continued pressure from the rising US/Japan yield differential.
Tensions continued to build in Taiwan after the country shot down a drone over one of its islands for the first time in a sign that it intends to respond more forcefully to the sustained Chinese military pressure in the region.
In its Sunday report, Morgan Stanley wrote that “While the June low for stocks and bonds was dramatic, we’ve consistently been in the camp that it wasn’t THE low for the S&P 500 in this bear market.” “With the Fed emphatically dashing hopes for a dovish pivot, we think that asset markets may be entering fire and ice part deux. In contrast with part one, this time the decline in stocks will come mostly via a higher ERP and lower earnings rather than higher rates.”, Morgan Stanley wrote.
Over the week end, French Finance Minister B. Lemaire who notoriously prognosticated that European sanctions would bring Russia to its knees (instead of completely backfiring and sending millions of Europeans into extreme precarity) opined yesterday that Russia cutting the gas off completely on Friday was to be expected and that “we must be prepared to be cut off from Russian gas completely”... Judging from the price action of the Dax which closed +1.7% on Friday before losing it all “after hours” (and then some) on the news that Nordstream 1 would be indefinitely closed, suggested otherwise. Extend and pretend with a stiff ideological posture remains the order the day in certain European circles.
Click on the Picture below for our latest Leaders & Laggards Report:
Over the past week, the S&P500 sold off by -3,2% (-17,4% YTD, Z-score -2,1) while the Nasdaq100 sold off by -4,0% (-25,8% YTD, Z-score -2,1). The US small cap index sold off by -4,7% (-19,0% YTD, Z-score -2,3). AAPL sold off by -4,8% (-12,3%, Z-score -2,2). The only sectors remaining in bull trend are …energy and utilities. Everything else is now firmly sitting in the grips of a market trending lower in high momentum. Semis and metals & mining were the worst performers of the week with an 8%+ weekly loss.
CBOE Volatility Index dropped -0,4% (47,9% YTD) to 25,47.
The Eurostoxx50 dropped -1,5% (-15,4%), outperforming the S&P500 by 1,7%.
Diversified EM equities (VWO) sold off by -2,8% (-17,9%, Z-score -2,4), underperforming the S&P500 by 0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,9% (14,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,8% (-5,7%).
10Y US Treasuries underperformed with yields rising 15bps (168bps) to 3,19%. 10Y Bunds climbed 14bps (170bps) to 1,53%. 10Y Italian BTPs underperformed rising 14bps (267bps) to 3,84%, outperforming Bunds by -5bps.
Credit markets underperformed notably with US High Yield (HY) Average Spread over Treasuries climbing 48bps (211bps, Z-score 2,2) to 4,94%. US Investment Grade Average OAS climbed 13bps (60bps, Z-score 2,2) to 1,60%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 6bps (72bps) to 1,27%.
Gold dropped -1,5% (-6,4%) while Silver sold off by -4,5% (-22,6%). Major Gold Mines (GDX) sold off by -4,5% (-25,7%).
Commodities remained in the grips of a corrective phase as Goldman Sachs Commodity Index shed -5,5% (29,4%). WTI Crude sold off by -6,7% (15,5%).
Overnight in Asia,,,
S&P500 +3points; Nikkei -0.1%; CSI300 -0.6%
US markets will be closed today for Labor day.
The euro dropped another -0.3% overnight (0.9915) on follow through selling from the Russian gas cut off (while major European futures markets remained -3%). Markets also face more uncertainty from US-China tension as the Biden administration considers moves to curb US investment in Chinese tech firms.
European Union governments are considering unorthodox measures to rein in soaring power and gas prices... Sell them short?!
Liz Truss is due to be confirmed as Conservative party leader, clearing her way to become Prime Minister. Expect more turbulence…
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.
BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.
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