BentinPartner Weekly
Equities traded softer last week on the combination of higher bond yields and commodities while tech darlings also suffered a setback, led by AAPL which suffered from an Iphone crackdown in China following a government employee ban on using Iphones which came within days of Huawei launching its latest smartphone with an advanced and locally produced chip. The US retorted by fanning potential sanctions against SMIC for violating outstanding US sanctions which may suggest that we have entered a new phase in the tit for tat trade war escalation between China and the US.
AAPL shares dropped USD200bn in market cap value in two sessions last week with weakness felt through the tech sector including in the AI and chip sector as NVDA dropped -6% and QCOM about -3%. China also seemed to show some growing antagonism with the US, showing all inclination to now favour Airbus over Boeing.
US economic data in the meantime came stronger than expected, contributing to push bond yields higher and to revive expectations of further Fed tightening (if not for this month then for next month where expectations for a further 25bps hike now stand at 50/50).
On Wednesday, August ISM Services index jumped to 54.5 (from 52.7) while the ISM price services index rose to 58.9 (from 56.8) suggesting prices are creeping back up again in the services sector. The following day, US jobless claims dropped to 216k (from 228 k in July and their weakest level since February while Q2 quarterly unit labour costs increased 2.2%, more than the 1.9% expected (and from 1.6% in Q1). Productivity gains also dropped slightly.
Confronted with these relatively strong data, Goldman revised its recession odds forecast to 15% (from 20%).
Fed speakers gave the impression the Fed has done enough and does not necessarily need to do more…
In contrast, for China, data came on the weak side, with exports showing an -8.8% yoy decline and exports a -7.3% yoy decline in August. The PBOC turned more aggressive in easing policy including with a USD40bn plan to upgrade China’s chips industry while China’s largest banks announced they were lowering rates for first time home buyers. Still, Chinese stocks and CNY added to their recent underperformance.
News that President XI would skip attendance at this past week end G20 gathering in India was likely a “big deal”, a first time ever that a Chinese President skips attendance, and bad news for international cooperation whatever the ultimate reason may (or may not) have been put forward. (Russian president V. Putin also skipped attendance).
The USD continued its march higher, supported by a higher yield differential, better growth prospects (driven by a gaping fiscal deficit that Europe now refuses) and excessive expectations of near-term dollar weakness.
We remain selectively bullish on EM currencies (despite the trending lower of CNY well telegraphed and entrenched) but for now only coupled with an underweight in EUR vs. USD (the return of the carry trade of EM currencies vs. USD topped off for now at the same time as the carry trade within DM remained alive and well, which logically suggests a residual strength of EM vs. non-USD DM currencies).
Considering how strong the dollar has been lately and with the recent increase in bond yields, the resilience of gold is noteworthy, and pointing at continued Central Banks buying. Indeed, while ETF’s suggest private investors sold 580 tons of gold, central banks appetite has been strongest in decades buying 1300 tons last year, on their way to purchase another 1400 tons this year, as central banks from the Global South seemingly prepare for some sort of gold backing for whatever currency they plan to “trade” in the future as a growing substitute to the USD. Silver remains an enigma with all the demand secured for the greenification of the economy and supply running scarcer by the day. That said, and in contrast with everything related to energy prices (which are trending solidly higher), everything related to “clean energy” stocks and raw materials (including rare earth) has been strongly trending solidly lower so far this year…
Bonds dropped last week on strong US economic data but also on an avalanche of corporate issuance following the summer recess (with some additional expected USD30bn to be issued this week before Wednesday’s CPI). There is also a very busy schedule of High Yield issuance (and of private credit) as banks continue to be very shy on additional lending activity.
Over the past week, the S&P500 dropped -1,1% (16,5% YTD) while the Nasdaq100 dropped -1,4% (39,9% YTD). The US small cap index sold off by -2,5% (5,5% YTD). AAPL sold off by -5,2% (37,1%).
CBOE Volatility Index gained 2,0% (-36,1% YTD) to 13,84.
The Eurostoxx50 dropped -1,1% (14,9%), matching the SP500.
Diversified EM equities (VWO) dropped -0,8% (3,1%), underperforming the S&P500 by0,3%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,5% (5,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,8% (0,4%).
10Y US Treasuries underperformed with yields rising 9bps (39bps) to 4,26%. 10Y Bunds climbed 6bps (4bps) to 2,61%. 10Y Italian BTPs underperformed rising 11bps (-37bps) to 4,35%, underperforming Bunds by 5bps.
US High Yield (HY) Average Spread over Treasuries climbed 6bps (-97bps) to 3,72%. US Investment Grade Average OAS was unchanged (-14bps) to 1,29%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 2bps (-17bps) to 0,82%.
Gold dropped -1,1% (5,2%) while Silver shed -5,2% (-4,3%). Major Gold Mines (GDX) sold off by -3,1% (-1,1%).
Goldman Sachs Commodity Index was unchanged (-0,8%). WTI Crude rallied 4,6% (9,0%).
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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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