BentinPartner Daily
After a quiet start of the week, markets received a disappointing CPI print which laid bare the disconnect between a relentless US stock market rally (still betting on heavy rate cuts in 2024) and the absence of progress made towards the 2% Fed inflation objective. CPI rose in March by 0.4% (3.5% yoy) higher than the 0.3% expected while the core CPI rose 0.4% (3.8% yoy), also higher than expected by 0.1%. While the miss was not that large, this absence of inflation progress was also noted in the Fed minutes published on Wednesday which showed policy makers now eager to wait before cutting rates.
With rate cuts possibly pushed back until after the election (former Treasury Secretary L. Summers opined that the next Fed rate move could also be …a hike), this will place the burden of the proof more squarely on the just started earnings season to sustain bullish momentum and prevent a correction at a moment when retail confidence remains extremely high and technical indicators turning more cautious.
Just as traders tried to adjust to this new reality, Thursday delivered a better than expected PPI report and a violent mag7 big tech rally ensued, wrong footing the cautious that had been selling these names before the inflation report already.
This was without counting Friday’s warning from Iran that it would soon launch retaliation against the assassination of three Generals in the bombing of diplomatic facilities in Damascus. Sentiment soured further on Friday after the beginning of bank earnings reports did not live up to expectations. The flat outlook delivered by J. Dimon sent JPM shares 6% down on Friday (with analysts noting however that the guidance was ultra conservative).
The combination of these three elements conjured to produce a risk off session on Friday with no sector showing a gain. This brought stocks closer to a broader “sell” signal. In sympathy with lower stocks and higher rates, HY spreads climbed 16bps last week.
Precious metals rallied, finishing the week with a wild high/low $100 range on Friday. While Gold may need to consolidate its gains after the recent run-up to a fresh all time high of $2432 and the 100$ round trip seen on Friday, the overall context (debt overhang+ inflation+ de-dollarisation related central bank accumulation) has never been brighter for Gold and too much so to be ignored by Wall Street banks (generally disdainful of gold) which are all revising their gold forecast higher. BofA, UBS and Goldman raised their gold forecast to respectively $3’000, $4’000 and $2’700 last week. China’s central bank (which is not reporting all its purchases) reportedly purchased more gold for its reserves for the 17th consecutive month.
Commodities continued their march higher, propelled by oil which also braced for the Iranian attack going into the week end. Copper rallied to a 14-month high with silver showing a rising volatility as well and a break out higher.
The dollar rallied 1.6%, its best run in 18 months, on the revised Fed outlook which contrasted with solidifying expectations of a near term rate cut by the ECB.
The yen weakened further with the BoJ flexing its muscles about not wanting the yen to weaken further, warning it will consider “all options to combat yen weakness” (except raising rates perhaps). In the meantime, speculators further built up their speculative bets against JPY.
Elsewhere in China, concerns intensified over state backed Vanke which saw its stocks drop -13% and bonds stumble (to 40 cents for a 2027 bond) last week after a third (US) rating agency downgraded the Chinese property developer to junk. Chinese exports dropped -7.5% yoy (vs. -2.5% expected) and imports for March also came out weaker than expected last week, highlighting more justification for Chinese authorities to support the domestic economy. Treasury Secretary Yellen travelled to China last week to ask authorities not to double down on its exports of EV, solar panels, batteries and renewable energy urging the country to reign in its industrial capacity…and to stop supporting Russia, insisting it is important to keep talking.
Over the past week, the S&P500 dropped -1,5% (7,5% YTD) while the Nasdaq100 dropped -0,5% (7,0% YTD). The US small cap index sold off by -2,8% (-1,0% YTD, Z-score -2,1). AAPL rallied 4,1% (-8,3%).
The Equally Weighed SP500 sold off by -2,7% (2,6% YTD, Z-score -2,5), underperforming the S&P500 by-1,2%. The median SP500 YTD return closed the week at 4,0%.
Cboe Volatility Index rallied 8,0% (39,0% YTD, Z-score 2,3) to 17,31.
The Eurostoxx50 dropped -1,0% (10,2%), outperforming the S&P500 by 0,4%.
Diversified EM equities (VWO) dropped -1,2% (1,2%), outperforming the S&P500 by 0,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,8% (6,5%, Z-score 2,5) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,5% (-1,4%).
10Y US Treasuries underperformed with yields rising 12bps (64bps) to 4,52%. 10Y Bunds dropped -4bps (34bps) to 2,36%. 10Y Italian BTPs rallied -6bps (6bps) to 3,76%, outperforming Bunds by -2bps.
US High Yield (HY) Average Spread over Treasuries climbed 7bps (-13bps) to 3,10%. US Investment Grade Average OAS climbed 1bps (-7bps) to 0,98%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (0bps, Z-score 2,2) to 0,67%.
Gold gained 0,6% (13,6%) while Silver gained 1,5% (17,2%). Major Gold Mines (GDX) dropped -0,2% (8,9%).
Goldman Sachs Commodity Index dropped -0,1% (7,6%). WTI Crude dropped -1,4% (19,6%).
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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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