Last week concluded another miserable week, month and quarter for financial markets and another bull run for the dollar.
Global bond: -3.3%
Global stocks: -7.3%
Spot gold: -8.1% (although Gold posted gains for most non-USD-based investors due to the rally in the dollar).
The UK government’s tax cuts and unfunded spending program decided by the new Truss Government caused a near seizure of the UK Gilt market last week, sending yields soaring in a dislocated market that forced the BoE to intervene aggressively to purchase long-dated UK bonds and likely save many UK pension funds from entering in a vicious circle of forced margin call and asset liquidation. As we commented last week, this all related to UK pension funds being strongly incentivized to own long Gilt exposure to match their pension funds liabilities but which took the habit of overlaying these Gilts holdings (for lack of a sufficient yield) pledging them as collateral to borrow additional money and invest in more rewarding assets such as equities during the years and decades when there was only one way for bond yields to go which was down, creating a false sense of security when at the end of the road, pension funds were left holding the bag of 30-year duration bonds (exhibiting super high-interest rate sensitivity) near 0 to 2% historically low yields…
Wednesday’s BoE intervention was successful as UK 30-year yields rose to 5.00% (from 3.5% Mid-September) on Wednesday trading, up 150 bps in a week, before reversing sharply lower (BOE intervention) to close the week at 3.81%. The intervention also enabled GBP to recoup some of its earlier strong losses but overall global markets sentiment remained risk averse, leading to more equity markets losses later in the week.
However, bonds recovered more globally, taken in the aspiration of the artificially supported Gilt market. South Korea also joined a growing list of interventions last Wednesday, buying as much as $2.1bn worth of sovereign debt.
This important intervention occurred a few days after BoJ had intervened in the foreign exchange market to stem yen falls for the first time in more than two decades in amounts that were revealed last Friday to be around USD20bn. The fact that JPY and CNY remained weak and in demand of supporting intervention provided further evidence of mounting stress in the system. Europe’s top financial regulators have issued an unprecedented warning about ‘severe risks to financial stability after concluding Russia’s invasion of Ukraine could create a toxic combination of an economic downturn, falling asset prices, and financial market stress.
On the economic side last week, Eurozone inflation zoomed past forecasts to hit 10.0% in September, a new record high that will reinforce expectations for another jumbo interest rate hike next month. In the US, data were generally supportive with the number of jobless claims dropping further (below 200k) and US consumer confidence rising for a second month in September to the highest since April whilst data from the real estate market showed more the bite of higher interest rates.
The sabotage of Nordstream 1 and 2 was condemned in no uncertain terms by the President of the European Commission. As the Central question remained “who did it”, it is not sure U. von der Leyen was reassured by A. Blinken’s declaration last Friday that the damage and disruption to the pipelines are being seen in Washington as “a tremendous opportunity (repeated three times) to once and for all remove the dependence on Russian energy”, touting that “the United States has now become the leading supplier of LNG [liquefied natural gas] to Europe," stressing too that the Biden administration is helping to enable European leaders to "decrease demand" and "speed up the transition to renewables." Maybe we (Europeans) should say a big thank you rather than bother trying to find out who the perpetrator is.
H. Kissinger reiterated his calls for wisdom in the handling of the Ukraine situation, suggesting it is not a good idea for Ukraine to join Nato, a request that Ukraine reiterated last week before the idea was watered down by both the US and Germany.
Vladimir Putin after annexing four regions in south-eastern Ukraine (following strongly contested referendums) vowed to use ‘all the means at Russia’s disposal to defend the territory in a speech that marked a further escalation in his war against Kyiv and his resentment at its western allies.
Last week, the basis swap for the pound, euro, and yen all tumbled, with drops in the basis signal investors’ suggesting a rush for dollar funds (the existence of a basis constitutes an invalidation of the interest rate parity that should normally incorporate in the price of FX forward the true interest rate differential between two currencies and prevent arbitrages). Currently, FX swaps and forwards are pricing a dearth of dollar in the system which is (can) generally be alleviated by central bank action and the provision of exceptional additional USD liquidity.
Stocks and Credit markets traded lower (including US and Chinese HY) last week.
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Over the past week, the S&P500dropped -2,9% (-24,8% YTD) while the Nasdaq100 sold off by -3,0% (-32,8% YTD). The US small cap index dropped -1,4% (-25,9% YTD). AAPL sold off by -8,1% (-22,2%, Z-score -2,8).
Cboe Volatility Index rallied 5,7% (83,6% YTD) to 31,62.
The Eurostoxx50 dropped -0,8% (-20,6%), outperforming the S&P500 by 2,1%.
Diversified EM equities (VWO) sold off by -2,7% (-26,2%), outperforming the S&P500 by 0,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,6% (17,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,4% (-8,2%).
10Y US Treasuries underperformed with yields rising 14bps (232bps) to 3,83%. 10Y Bunds climbed 8bps (229bps) to 2,11%. 10Y Italian BTPs underperformed rising 18bps (335bps) to 4,52%, outperforming Bunds by -6bps.
US High Yield (HY) Average Spread over Treasuries climbed 40bps (269bps) to 5,52%. US Investment Grade Average OAS climbed 15bps (77bps) to 1,77%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 7bps (94bps) to 1,49%.
Gold gained 1,0% (-9,2%) while Silver gained 0,8% (-18,4%). Major Gold Mines (GDX) rallied 7,5% (-24,7%).
Goldman Sachs Commodity Index gained 0,2% (21,7%). WTI Crude gained 1,0% (5,7%).
Overnight in Asia,,,
S&P500 -11points; Nikkei +0.7%; CSI300 -0.6%; Hang Seng -0.8%
Stocks continued to struggle in Asia on tightening fears, increasing risks of recession, and some bank-related concerns.
UK Prime Minister Liz Truss over the weekend said her government is sticking to a plan to remove the highest income tax rate despite the market upheaval.
Oil surged 3% on indications the OPEC+ alliance is considering slashing production by more than 1 million barrels a day to revive plunging prices when it meets this week.
Eurozone manufacturing PMIs are due out today
US construction spending, ISM Manufacturing, and light vehicle sales are also due out today.
Fed’s Raphael Bostic and John Williams will speak at events today.
Have a nice week ahead and be good to yourself!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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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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