BentinPartner Weekly
While nervousness showed up in major equity indices last month (with the SP500 dropping -5% in September), one area that was spared so far was credit markets which faced only a very contained spread widening in the face of rising default rates and rising delinquencies. One reason for this resiliency rests in the emergence of private credit which has essentially doubled in size (to USD1.5trn) over the past 4 years. Similarly, to their private equity counterpart, private debt is not repriced daily and as such inhibit price discovery at the same time as banks retrench, tighten lending standards and more often than not refuse to play their role of lenders, forcing debt to be rolled over in private markets, at nominal yields that look sufficiently high (around 10% now) to attract a lot of institutional and increasingly private capital with very light covenant financing conditions.
Last week offered a different picture as the resilience of credit spreads became more tested with US 10-year Treasury yields rising 14bps but also being accompanied by a 10bps HY credit spreads widening. A similar credit spread widening took place in the European periphery with Italian BTP spreads (to Germany) also widening 12 bps on the week to the widest since the regional bank crisis back in March. The rest of EM debt markets also underperformed, adding a bit less than then combined increase in treasury yield and US high yield spread.
US banks (BoA, JPM) CDS rose by about 5-10 bps last week, sealing a “risk off” attitude. Japanese Government bonds were not spared in the global bond selloff, forcing the BoJ to intervene with an unscheduled bond operation on Thursday despite the central bank reasserting it is not ready yet to unwind monetary easing yet (“Japan’s economy has entered a critical phase in terms of realizing a virtuous cycle between wages and inflation, and what is important at this phase is to carefully nurture the buds of change in the economy”), also dragging the yen down further to nearly 150 on $/JPY, its lowest yen level since 1986).
No favourable developments came from the shaken Chinese real estate market last week, after (defaulted) Evergrande announced it was revisiting its restructuring plans with former executives also said to be detained. CNY was mostly stable, however.
Signs of global de-risking, deleveraging abounded last week with standard strategies like the 60-40 and Risk Parity shedding 2% and the latter losing all its advance for the year.
In commodities, gas rallied 11% last week while oil rose only 1% after shedding some of its strong earlier gains of the week on Friday.
Shenanigans occurred in gold and silver on Friday when silver was slammed in the futures market after rallying as much as 4% intraday in order to inflict technical damage and prevent key levels to be breached on the upside, forcing liquidation. There is no free Comex-led precious metals markets anymore as Gold in China is still exchanged around USD2’000… Gold and silver price manipulation has been customary for decades and leads to token condemnations every now and then but well after the facts (and for the wrong root reasons). Gold is never as vulnerable “short term” as when fundamental reasons abound to accumulate it (here a coming debt and currency crisis), which makes it frustrating to own. But as long as central banks keep accumulating it (this year being no exception), we should probably follow their lead even if in the meantime, gold and silver remain the canaris that need to be silenced on a regular basis as part of a well ordained tape painting exercise. Unfortunately, those trading it “agnostically”, using trading rules as a sole guide, have been sellers as well.
The 25-year anniversary of the Russia/LTCM collapse led the Wall Street Journal to write three articles drawing some parallels with the situation of today.
“Naturally things are completely different today. Back in 1998 there was a massive auto worker strike, Russia was a financial pariah, America's unemployment rate was at a historic low, tech stocks were the only game in town, the Federal Reserve had raised rates for the first time in years the previous March, House Republicans wanted to impeach the president and the New York Yankees were in first place. Today, by contrast, the Yanks couldn’t win to save their lives. In all seriousness, though, there is a fair bit of late 1990s style irrational exuberance present today.” (Heard on the Street, September 22, 2023).
Over the past week, the S&P500 dropped -0,7% (11,8% YTD) while the Nasdaq100 gained 0,1% (34,5% YTD). The US small cap index was unchanged (1,4% YTD). AAPL dropped -2,0% (31,8%).
Cboe Volatility Index gained 1,9% (-19,2% YTD) to 17,52.
The Eurostoxx50 dropped -0,8% (13,2%), underperforming the S&P500 by-0,1%.
Diversified EM equities (VWO) dropped -1,1% (0,6%), outperforming the S&P500 by -0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (6,9%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,3% (0,5%).
10Y US Treasuries underperformed with yields rising 14bps (70bps) to 4,57%. 10Y Bunds climbed 10bps (27bps) to 2,84%. 10Y Italian BTPs underperformed rising 19bps (7bps) to 4,78%, underperforming Bunds by 9bps.
US High Yield (HY) Average Spread over Treasuries climbed 10bps (-75bps ) to 3,94%. US Investment Grade Average OAS climbed 6bps (-12bps) to 1,31%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 3bps (-8bps) to 0,91%.
Gold sold off by -4,0% (1,3%, Z-score -2,8) while Silver sold off by -5,9% (-7,4%, Z-score -2,2). Major Gold Mines (GDX) shed -6,8% (-6,1%).
Goldman Sachs Commodity Index dropped -1,2% (1,3%). WTI Crude gained 0,8% (13,1%).
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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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