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A Golden and Lunatic Week

BentinPartner Weekly

Dear Reader,

Last week was chaotic and weird.

It started with D. Trump being diagnosed with Covid-19 and flown to Walter reed Medical center over the week end only to see him return with much fanfare on Monday to the White House declaring that he was feeling better than 20 years ago and later, referring to his infection as a “blessing from God”.

On Tuesday, D. Trump abruptly called off stimulus negotiations “until after the elections”, blaming the Democrats for not negotiating “in good faith”. This did not go without equity markets cratering on the news, and the following morning on Wednesday, he was back pursuing piecemeal negotiations.

On Thursday he called for a skinny stimulus package (the original bone of contention is that Republicans called for a smaller additional stimulus than the Democrats).

Then on Friday morning, he said he was open for something bigger and on Friday afternoon, that he “would like to see a bigger stimulus package, frankly, than either the Democrats or the Republicans are offering”.

In between we were treated with a civilized VP debate and J. Biden subsequently extending his lead in the polls, suggesting the possibility for a “blue wave” (whereby Democrats would take the Presidency, the Senate and the House).

We’ll trust the polls like we would any Covid vaccine between now and election day. What was interesting was the (moving) opinion that a sweep vote would be supportive to risky assets with a planned corporate tax cut unwind and redistribution policies expected to be more than compensated by the perspective of an eye-popping fiscal stimulus (USD2trn to USD3trn).

Fed Chair Powell added his voice to Corona virus relief talks, urging Congress on Tuesday to pass “more policy intervention, both fiscal and monetary”, and warning that “too little stimulus is worse than too much”.

On the health front, the WHO reported a one-day record of 350’766 new Covid infections with the rate of new cases doubling in a week in the UK and Germany or Italy also reporting their highest increase since March, and Madrid going back into an emergency lockdown. This all pointed at a troubling trend going into the winter months. The only positive is the fact that the lethality of the virus seems to be only 1/10th of what it was in March and that hospitals are much better prepared.

The net outcome for the week were strong equity markets coupled to a resumption in dollar weakness and mirror like rallies in commodities and precious metals.

Last Week's recap...

Over the past week, the S&P500 rallied 3,9% (7,8% YTD) while the Nasdaq100 rallied 4,2% (34,4% YTD). The US small cap index rallied 6,4% (-1,8% YTD).

CBOE Volatility Index sold off by -9,5% (81,4% YTD) to 25.

The Eurostoxx50 rallied 2,5% (-10,5%), underperforming the S&P500 by-1,4%.

Diversified EM equities (VWO) rallied 4,0% (0,9%), matching the S&P500.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,9% (-3,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 1,2% (-0,6%).

We continue to think (along with S. Roach and JPMorgan analysts over the week end) that the dollar is going to suffer a further setback this year and next (in the order of 20% devaluation), based on hemorrhaging finances, the persistence of super low interest rates, deteriorating twin deficits dynamics combined and a sharp decline in domestic savings (which the FT estimated dropped to -1.2% in Q2, a 4.1% decline from the previous quarter).

It will not question the status and even the dominance of the USD for a few more years but it should be part of a long-term secular trend that will lead to a transition towards a more multipolar anchoring of the monetary system and a fast-growing CNY accumulation into the world reserves mix that will occur primarily to the detriment of the USD.

The dollar decline that is in the cards will be all but a straight line because it will be fought (it will not be possible in my mind to cap both interest rates and the dollar decline over time) but as a harbinger of things to come perhaps, USDCNY which dropped -6.1% over the past 1 year, dropped another 1.4% on Friday upon returning from the Chinese Golden week and also took the bottom of Friday’s Z-score report.

10Y US Treasuries underperformed with yields adding 7bps (-114bps) to 0,77%. 10Y Bunds climbed 1bp (-34bps) to -0,53%. 10Y Italian BTPs rallied -6bps (-69bps) to 0,72%, outperforming Bunds by -4bps.

Bond yields rose slightly as the Congressional Budget Office released the unofficial 2020 number for the just completed fiscal year, saying the deficit equaled 15% of the US economy, the largest fiscal gap since WWII. A similar deficit is highly likely for 2021 and a 10% deficit for a few more years after that, most of which will be monetized.

US High Yield (HY) Average Spread over Treasuries dropped -41bps (133bps) to 4,69%. US Investment Grade Average OAS dropped -9bps (34bps) to 1,35%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -8bps (17bps) to 0,68%. S&P reported that “the covid shock will double company default rates over the next 9 months to 12.5% (from 6.2%) in the US and to 8.5% (from 3.8%) in Europe.

Gold rose 1,6% (27,2%) while Silver rallied 6,0% (40,9%). Major Gold Mines (GDX) rallied 4,6% (39,3%).

Goldman Sachs Commodity Index rallied 6,1% (-27,3%). WTI Crude rallied 9,6% (-33,5%).

Have a nice week ahead and stay safe.


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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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