BentinPartner Weekly
Over the past week, US stocks completed their turnaround from the beginning of August scare, supported by Fed easing expectations.
There was a bit of a pause on Tuesday after K. Harris announced her plans for a 28% corporate tax, price controls, a 44.6% capital gains taxes and also a tax on unrealized gains (which if it comes will create a problem to the market!).
At the same time as economic data kept coming soft (with the US economic surprise index trading firmly in negative territory), the two main drivers last week were the downward BLS job report revisions which were as large as feared, with real employment growth announced to have been 818’000 lower than previously reported over the past 12 months (the largest revision since 2019). After a brief hesitation, this bad economic data was quickly taken as good news for the potential it offered for accelerated interest rate cuts and for influencing J. Powell’s signalling later in the week at the Central bankers Jackson Hole Symposium.
All sectors of the SP500 ended last week in the green with real estate as the best performing, supported by stronger than expected new home sales and home prices. Also playing a large influence was the strong bond market performance as 10-year US yield dropped to 3.8% (-8bps).
I am not chasing the bond market rally because I do not share the advertised optimism on inflation. Commodities have been dropping, led by oil but this could turn on a dime on adverse geopolitical developments in the Middle East (or if China recovers) and in some ways it already has started if one looks at copper or a few other metals including silver.
Wage agreements, at least in Europe, are also taking the elevator (between 8 and 10% in Germany) and are likely to prevent further progress towards the ECB inflation line in the sand. Similarly, all we see on trade restrictions and barriers, present or upcoming, whether in the US or Europe and whoever occupies the White House after November will add to structural inflation going forward, in our view.
I am also not chasing bonds in any way (either with duration or credit exposure beyond US tbills to park liquidity) because the supply/demand is so unfavourable and unsustainable whatever the outcome of the US election.
The economy is also not strong or healthy enough to prevent more fiscal slippage (being supported by fiscal spending…and perhaps the wealth effect). Data also showed a deterioration in credit cards balances of which 11% now run three months behind, which has most often in the past, coincided with a recessionary episode.
It does not mean bond yields may not drop for a year from here as central banks start to cut rates in unison and possibly restart QE but I still prefer owning gold, especially in a context of protracted dollar weakness, which I see happening over the same time horizon of one year.
Few people talked about dollar weakness last week (perhaps because the USD index is still up on the year) but the momentum on the downside was rather…momentous in part because of the move higher in JPY (which climbed back above the so-called crash of the carry trade level dating from the beginning of August) and also because the euro is breaking higher (and AUD and CAD as well).
There was some “noise” on the EM currency front with MXN witnessing a near Woody Woodpecker moment as inflation came a little bit better than expected, leading investors to anticipate another 25bps rate cut in September by Banxico on top of the 25bps cut already enacted in August (even as rates are still 10.75% over there…). COT data did show a termination of speculative FX positioning in the long “carry trade” MXN/JPY as well but that does not mean EM currencies weakened vs. USD…MXN may also be weighed down by the hot political potato of illegal immigration but just as the dollar index broke down (signalling strength of DM currencies vs. USD), the EM currency index also broke out on the upside (implying EM currency weakness vs. USD as well).
Dollar weakness is also what fuelled the US stock market rally last week but the second and, in the end, primary driver was on Friday J. Powell delivering the expected dovish remarks where he said “the time has come for policy to adjust” to cut rates noting the cooling in labour markets that is “ unmistakable” and won’t be a source of inflation “anytime soon”, promising to do everything to support a strong job market.
This broadened the rally in risk assets across the board at the same time as it precipitated more dollar weakness.
The next “key” catalyst for the market will be Wednesday’s Nvidia earnings report which is expected to slow down the rate of growth …but is still expected to be >100%.
Over the past week, the S&P500 gained 1,4% (18,3% YTD) while the Nasdaq100 gained 1,0% (17,2% YTD). The US small cap index rallied 3,7% (9,8% YTD). AAPL gained 0,3% (17,8%).
The Equally Weighed SP500 rallied 2,1% (10,5% YTD), outperforming the S&P500 by 0,7%. The median SP500 YTD return closed the week at 9,3%.
Cboe Volatility Index rose 7,2% (27,4% YTD) to 15,86.
The Eurostoxx50 gained 1,4% (11,4%), matching the S&P500.
Diversified EM equities (VWO) gained 0,8% (9,7%), underperforming the S&P500 by-0,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,6% (3,2%, Z-score -2,4) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,7% (1,2%).
10Y US Treasuries rallied -8bps (-8bps) to 3,80%. 10Y Bunds dropped -2bps (20bps) to 2,23%. 10Y Italian BTPs rallied -7bps (-13bps) to 3,57%, outperforming Bunds by -5bps.
US High Yield (HY) Average Spread over Treasuries dropped -7bps (-11bps) to 3,12%. US Investment Grade Average OAS dropped -1bps (-3bps) to 1,02%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (-8bps) to 0,60%.
Gold rose 0,2% (21,8%) while Silver rallied 2,9% (25,3%). Major Gold Mines (GDX) rallied 2,2% (26,9%).
Goldman Sachs Commodity Index gained 0,2% (1,0%). WTI Crude sold off by -2,4% (4,4%).
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