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A From QT to QE Rally?

BentinPartner Daily

Morgan Stanley wrote over the week end that “From these (clients) conversations, the primary takeaway is that there’s not much conviction about how this year will play out and/or how to position one’s portfolio. After one of the biggest rallies in history in both bonds and stocks to finish the year, there’s a sense that markets may need to take a breather before the next theme emerges. From our perspective, not much has changed fundamentally from three months ago other than the price of most assets.”


Towards the latter part of the week at least, and judging from the performance of NVDA, AMD and the Mag7, it however seemed clear that the focus returned towards Tech and AI in a move that was triggered by two corporate events; the BoA upgrade on APPL on Thursday which re-instilled some optimism in its share price and the good outlook given by Taiwan Semiconductor TSMC which boosted the semi sector as a whole.


There were concerns early last week after comments from an FOMC voter that the Fed would likely cut rates this year but only three times as opposed to the six currently expected by the CME Fed watch tool. ECB President C. Lagarde and other ECB officials also pushed back on rates cuts for March, saying those were more likely to occur around June. This along with the strong economic data weighed on bonds which saw US 10-year yield rise 15bps on the week.


US retail sales (+0.6% mom) showed consumer spending remained heathy while jobless claims dropped sharply to 187k (from 203k). The Michigan consumer Confidence data also came in much stronger than expected (78.8 vs. 70.1 expected and 69.7 last), mostly on lower inflation expectations from consumers.


However, those concerns quickly faded as regards the stock market and US stocks returned to their habit of outperforming, leaving behind European equity markets, not to speak about Chinese stocks (already down 10% ytd).


What matters is the direction of travel, less than the timing of the first rate cut.


Even more importantly perhaps, the Fed also started signalling that it might start winding down QT and QuickStart QE again. That is bullish for stocks (If anything).


The reason is mostly technical at this stage because reverse repos held at the Fed (liquidity going from money markets back to the Fed where the cash is invested at an advantageous rate) is declining more rapidly than expected and that if the Fed does not slow down QT, liquidity problems might resurface in the Treasury market, just like they did in 2019, with some marginal pressure already appearing in the overnight market. (For more details on these technical considerations, see the WSJ article attached). Reverse repos are in many ways offsetting the tightening effects of the Fed’s QT. If reverse repos drop below a certain level (which seems more an art than a science to define), then the effects of QT are going to start biting, making it necessary to reduce it.


The more fundamental reason why QE might be next as well is the avalanche of upcoming supplies for which there will be no guaranteed buyer (hence no natural cap on yields) and the fact that rates, even at the current 4.5%, are barely sustainable or affordable considering the long-term fiscal outlook.


It is early days as the Fed is still busy with QT, but in our view, when everything is said and done, the US might very well go Japanese and resort to a hard cap on long term yields (de facto potentially infinite QE).


The second reason why QE might be necessary is that even if the US economy is resilient from housing, retail sales and the job market, mostly as a result of artificial fiscal stimulus (inflation reduction and CHIP Act most lately), some indicators (beyond the yield curve inversion) are suggesting the economy is not doing that well…


One of these factors are the declining fiscal receipts. Normally when the economy is doing well, receipts are going higher. They are trending down currently.


In this context and at the risk of repeating ourselves, we have rarely been as bullish on gold and the (heavily) manipulated silver price as we are for this year. The current price discouragement will be like all others, vindicated. But trading them might remain a loss of time and money.


All of the above being said, this is no reason to be bearish on US stocks. Quite to the contrary, in our view. When the worst comes to worst and government debt gets inflated away, reneged upon or with yields financially repressed, with potentially very adverse implications for currencies and inflation, an investment in blue chips producing strong and predictable cash flows in an oligopolistic situation (which applies to all mag7), is a safe haven bet along with gold and precious metals.


Even if the ownership of physical gold can be outlawed, such a ban could not be enforced globally nor the gold seized if stored securely in disparate and safe jurisdictions. That is why central banks have never been buying as much physical gold as they did last year in a polarized international context where the precedent of defaulting on targeted central banks reserves is being established.


The other big uncertainty remains the geopolitical “mess”.


The time is ripe for de-escalation in Ukraine which can only come with negotiation and peace talks with concessions on both parts, hopefully.


The situation in the Red Sea (not to speak about the broader Middle East situation) took a turn for the worse last week as well and there clearly, Iran and Yemen may have all interest to play the card of aggravation as well.


Over the past week, the S&P500 gained 1,3% (1,5% YTD, Z-score 2,3) while the Nasdaq100 rallied 2,9% (2,8% YTD, Z-score 2,4). The US small cap index dropped -0,6% (-4,1% YTD). AAPL rallied 3,2% (-0,5%).

The Equally Weighed SP500 dropped -0,4% (-1,3% YTD), underperforming the S&P500 by-1,6%. The median SP500 YTD return closed the week at 9,2%.

CBOE Volatility Index rallied 6,9% (6,8% YTD) to 13,3.

The Eurostoxx50 dropped -0,6% (-1,5%), underperforming the S&P500 by-1,9%.

Diversified EM equities (VWO) dropped -1,5% (-3,6%), underperforming the S&P500 by-2,7%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,0% (2,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,7% (-1,3%).


10Y US Treasuries underperformed with yields rising 18bps (24bps) to 4,12%. 10Y Bunds climbed 16bps (32bps) to 2,34%. 10Y Italian BTPs underperformed rising 15bps (18bps) to 3,88%, outperforming Bunds by -1bps.

US High Yield (HY) Average Spread over Treasuries climbed 0bps (15bps) to 3,38%. US Investment Grade Average OAS dropped -1bps (-4bps) to 1,01%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (2bps) to 0,70%.


Gold dropped -1,0% (-1,6%) while Silver sold off by -2,5% (-4,9%). Major Gold Mines (GDX) sold off by -4,2% (-10,7%).


Goldman Sachs Commodity Index dropped -0,2% (-0,5%). WTI Crude gained 1,9% (2,5%).



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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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