BentinPartner Weekly
Last week delivered another string of extremely volatile trading sessions with stocks dropping for the fifth consecutive week on the twin drama of the UK pension fund situation and the publication of yet again stronger than expected US PPI and CPI data. The IMF also warned last week that colliding pressures from inflation, war-driven energy and food crises and sharply higher interest rates were pushing the world to the brink of recession and threatening financial market stability…
20- and 30-year UK bond yields hit 20-year highs after BoE Governor Bailey told pension funds on Tuesday, that they had three days to fix liquidity problems before emergency BoE bond-buying would end. While extremely difficult to assess, it was awkward to see Governor Bailey, in such market conditions where gilts came under renewed intense pressure with massive systemic consequences, say you have 3 days to sell them… It was seen as self-defeating the purpose of intervention but there were some talks suggesting that this tough BoE stance was actually a way to force the UK Government to change its fiscal program (unfunded tax cuts) …or outright resign. And that is the way things turned out as far as the Chancellor of the Exchequer is concerned who was asked to resign upon his early return from the Washington IMF meeting and following the partial U Turn initiated by the UK Government at the same time as Jeremy Hunt was appointed to replace Kwasi Kwarteng as new Chancellor of the Exchequer.
This did not prevent Gilts from selling off 13bps on Friday (to 4.31% from a high at 4.5%) as the scrapping of GBP18bn corporate tax cut was deemed to be insufficient.
Earlier last week US PPI rose 0.4% mom vs. 0.2% expected, bringing PPI on a 12-month basis to 8.5% (down from 8.7% in August).
US core CPI (ex food ex energy) rose to a 40-year high rose by 6.6% (vs. 6.5% expected and 6.3% last month). sealing the case for the Fed to deliver a large rate hike in November.
Banks kicked off the earnings season late last week with JPMorgan getting away with failing to pass over Fed Funds increases to the bank’s depositors (at the same time as it charges credit card debt some 12% interest, if not more) as a way to improve Net Interest Margin and offset weak mortgage, investment banking and trading activities.
Still, Banks CDS rose last week and not only UK banks which climbed 10bps but US ones climbing between 7 and 10bps as well and Credit Suisse climbing a couple of bps more than peers awaiting a likely capital increase.
“Former Federal Reserve Chair Ben S. Bernanke and two US-based colleagues won the 2022 Nobel Prize in Economics for their research into banking and financial crises. This caused some ironic comments from analysts who said this was a case for an arsonist being presented as a fireman, considering the role B. Bernanke has played in unleashing massive QE programs that have sawn the seeds (prior to the outbreak of the war in Ukraine) of the inflation outbreak that Central banks have much difficulties to contain now as the central bank inflationist doctrine faces a huge crisis of confidence. Former Barron’s roundtable anchor and author of the “Gloom Boom and Doom report”, M. Faber suggested that this could be the prelude to Hunter Biden being nominated for the Chemistry Nobel Prize.
At the same time as credit spreads jumped in the US, Italian 10-year yields rose 9bps to 4.79%, ending the week at the highest yield since 2012. Yields also rose in EM markets between 19 bps and 125bps.
Liquidity concerns also affected the US treasury market last week as traditional investors like central banks and pension funds are shying away from the market. “Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat. From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month.”, Bloomberg commented.
The BoA illliquidity and Bond volatility indices respectively rose to some extreme levels. Investors with classic "60/40" portfolios are facing the worst returns this year for a century, BofA Global Research said in a note on Friday, noting that bond markets continue to see huge outflows.
Elsewhere in China, China’s September growth in Aggregate Financing jumped to a much stronger-than-expected $490 billion, up from August’s $340 billion under the encouragement of the Chinese Government eager to support the ailing Chinese economy.
Among the most aggressive US decision taken against China was the latest US decision to tighten export controls of chip technology. “Under new export controls announced on Friday, semiconductors made with US technology for use in artificial intelligence, high-performance computing and supercomputers can only be sold to China with an export licence — which will be very difficult to obtain.”, the FT reported. "To put it simply, Biden has forced all Americans working in China to pick between quitting their jobs and losing American citizenship," one specialist of the situation wrote, adding "One round of sanctions from Biden did more damage than all four years of performative sanctioning under Trump."
As he took this decision Joe Biden warned that the US faces a ‘decisive decade’ in its rivalry with China, as he unveiled a national security strategy that singled out Beijing as having the intent and capability to reshape the world order… At least the intent is clear.
Biden wrote that his administration was ‘clear-eyed about the scope and seriousness’ of the challenge that China and Russia posed to the international order.
Chinese new home sales dropped 37.7% yoy over the week-long National Day holiday, a private survey showed with two of the world’s top credit rating firms (Fitch Ratings and Moody’s) also exiting the business of assessing Chinese developers, citing inadequate information from the companies.
Confirming the broadening weakness of the Chinese economy, China' Caixin services purchasing managers' index (PMI) fell to 49.3 from 55.0 in August as COVID containment measures disrupted supply and demand and restricted national travel.
Whilst remaining generally benign, China’s September inflation was reported last week to have climbed to 2.8% to a 29-month high, due to higher pork prices (from 2.5% previously).
Amidst further weakness in “paper” precious metals last week, an unusually large discount of 2.7% emerged on gold and silver ETF’s vs. their physical counterparts, possibly reflecting a rising defiance towards paper precious metals and its derivative complex along with supply delivery bottlenecks (amidst continued precious metals migration from the Western to Eastern hemisphere).
On the geopolitical side, President Joe Biden voiced his fury with Saudi Arabia over OPEC+ oil production cuts Tuesday, accusing the kingdom of allying itself with Russia and vowing to engage with US lawmakers clamoring to punish Riyadh, Bloomberg wrote.
Besides the aggravating situation in Ukraine, tensions on the Korean Peninsula also escalated to their highest level in years, with the two countries engaging in tit-for-tat military exercises
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Overnight in Asia,,,
S&P500 +10 points; Nikkei -1.4%; CSI300 -0.4%; Hang Seng -1.3%
In a speech running almost two hours on Sunday, Xi Jinping kicked off China's Communist Party congress by reaffirming the goal of reunification with Taiwan and defending policies including the Hong Kong crackdown and Covid Zero.
Xi let the world know that China wouldn’t change course even as it faces “dangerous storms” in a more hostile world. Xi’s remarks indicated that China is ready to stare down a growing challenge from the US under President Joe Biden, who has moved to hinder Beijing’s ability to access advanced technology and sought to deter any military action against Taiwan -- the biggest flash point between the world’s biggest economies. The Chinese leader hailed the nation’s “fighting spirit” and said the country was “well-positioned for pursuing development and ensuring security.”, Bloomberg wrote.
“Downing Street is facing further market turbulence after Friday’s sell-off when investors warned that Truss’s attempt to reassure them by scrapping an £18bn corporate tax cut was not enough”, the FT reported on Saturday.
Finance ministers and central bankers from the world’s biggest economies were divided on a variety of issues, including Russia’s war in Ukraine and ways to deal with climate change, according to a G20 statement released three days later than usual due to those tensions, Bloomberg reported.
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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