BentinPartner Weekly
Over the past week, risk assets sold off as the mood was soured for the most part after the FOMC meeting which despite keeping rates unchanged as expected, saw J. Powell signal during press conference that another rate hike could still be forthcoming while the dot plots rejected current expectations of 4 rate cuts for next year (trimming those down to two according to the Fed dot plots).
After a bloody week, most equity sectors were left in bear trending mode, suffering -2 to -3 sigma moves with the hardest hit sectors being banks (-5.2% on the week) as credit spreads widened, consumer discretionary (--6.3%) and US real estate and Reits (-5.3%), all sectors penalized by the 15bps gap up
in US yields and some deteriorating data signalled by US home builders.
The magnificent 7 were not spared last week with AMZN shedding -8% (+53.7% YTD), TSLA -10% (+98.8%), GOOG -5% (+47.9%) with the same loss inflicted on NVDA (+184%) and MSFT (+32.2%).
The US government legal authority to spend on many of its operations will run out at the end of the month, which would lead to a government shutdown shortly thereafter without a last-minute agreement which, if it does not come, might further test investors’ nerves, already stretched by evidence of economic slowdown (exacerbated by the ending of the student loan debt relief which should further dent consumption in Q4). Some analysts expected over the week end that a government shutdown could help bonds (and revive risk appetite), by dragging down inflation but there are so many other considerations driving bond yields at the moment that this could be wishful thinking as well.
The “higher for longer” new mantra could be a problem on all fronts, starting with the US government debt load and the associated ballooning debt service costs, to similar issues for corporate and private borrowers not to speak about “held to maturity” bond portfolios plaguing US banks.
Global debt hit USD307trn according to the IIF in Q2, following a 10trn addition in H1 (which followed the USD100trn increase witnessed over the whole of the past 10 years) that brought the aggregate debt/GDP ratio to 336%.
Pressure on CNY continued last week, dropping 0.3% with pressure also remaining on JPY as the BoJ failed to alter policy, leaving the door open to more JPY losses and the 150 handle last seen in 1990, which if broken could lead to more dislocation according to some analysts, barely moved by the perspective of more toothless verbal interventions. The CDS of China Development Bank rose 9bps to 92bps, amidst a global selloff in HY debt as well and as the consequences of the property slump continued to linger.
In its quarterly report, the BIS warned about the basis trade risks involving hedge funds shorting Treasury futures (whose aggregate short positioning is at all time high) and buying equivalents cash bonds with a leverage of 50 to 70 times.
”While this channel was well recognised in the March 2020 "dash-for-cash" episode, other factors garnered more attention in the context of the September 2019 repo market stress. Yet the margin deleveraging in August 2019 may have presaged the funding market disruptions that followed a month later. Margin deleveraging, if disorderly, has the potential to dislocate core fixed income markets.”, the report wrote.
Last week’s coordinated cross asset selloff sent Risk Parity portfolios (RPAR) in losses for the year after suffering their largest loss for the year as well which suggests more deleveraging could be in the offing.
The oil rally continued last week posing new challenges to Central banks in their fight against inflation. The only winners were Saudi Arabia and Russia which are managing to keep oil prices elevated (+30% since June) by restricting supplies until the end of the year despite some record levels in oil demand, leading to shrinking stockpiles. The situation was made worse after Russia banned exports of diesel fuel last week with some analysts expecting the halt to be temporary while others see it lasting for longer as Russia leverages its position of strength and de facto weaponizes the price of oil as the war in Ukraine drags on.
Over the past week, the S&P500 sold off by -2,9% (12,5% YTD, Z-score -2,5) while the Nasdaq100 sold off by -3,5% (34,4% YTD, Z-score -2,2). The US small cap index sold off by -3,8% (1,3% YTD, Z-score -2,1). AAPL dropped -0,1% (34,5%).
CBOE Volatility Index rallied 24,7% (-20,6% YTD, Z-score 2,5) to 17,2.
The Eurostoxx50 sold off by -2,0% (14,1%), outperforming the S&P500 by 0,9%.
Diversified EM equities (VWO) sold off by -2,2% (1,7%), underperforming the S&P500 by0,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (6,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (0,8%).
10Y US Treasuries underperformed with yields rising 15bps (58bps) to 4,46%. 10Y Bunds climbed 6bps (17bps) to 2,74%. 10Y Italian BTPs underperformed rising 13bps (-12bps) to 4,59%, underperforming Bunds by 7bps.
US High Yield (HY) Average Spread over Treasuries climbed 10bps (-85bps, Z-score 2,6) to 3,84%. US Investment Grade Average OAS dropped -3bps (-18bps, Z-score -2,3) to 1,25%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 8bps (-11bps, Z-score 2,3) to 0,88%.
Gold dropped -0,6% (5,4%) while Silver gained 1,1% (-1,9%). Major Gold Mines (GDX) sold off by -2,9% (0,7%).
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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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