BentinPartner Weekly
US stocks posted another week of gains last week, led by the Nasdaq reaching a 13-months high, supported by FOMO dynamics in AI names, fear of a further gap up on any “breakthrough” from the debt ceiling debate and Fed Chair Powel suggesting towards the end of the week that he is likely to support a pause in tightening at the June FOMC meeting.
“So far, the data continue to support the committee’s view that bringing inflation down will take some time,” Fed Chair Jerome Powell said. However, he noted that there is lingering uncertainty on how much demand will be eroded from tighter credit conditions and the lagged effects of rising interest rates.
The investment recipe of speculators and investors alike remained to own GOOG, MSFT, AAPL, META and NVDA, sit and wait for a pullback to buy more of them in what surely looks like the (possibly still early) evidence of another bubble and investment mania this time from the AI “revolution”, that might end like all others…in due course. In the meantime, this mania coupled to momentum buying, share buybacks (and panicked shorts) all contribute to cover up an uglier fundamental story (coming recession, debt ceiling theater, weakening consumers, disappointing Chinese data, stubborn global inflationary pressures).
Last week, both Japan’s major stock market indexes hit a 33-year high which also helped global equities to climb the proverbial “wall of worries”, supported by BoJ Governor K. Ueda striking another dovish tone despite data showing inflation accelerated at the fastest pace in 40 years (4.1% for the domestic demand driven price trend and 3.4% for the core CPI). Japan’s economy also grew an annualised 1.6% in January-March, far exceeding market forecasts for a 0.7%... Nothing that in theory should keep supporting ZIRP… (except if you opted to patiently await the Fed pivot to do nothing). This “laisser faire” policy is also contributing to keep financial conditions extremely loose and supportive of world financial markets via the carry trade.
More discussions were held at the G7 gathering on how to further sanction Russia. The loss of Bakhmut was more or less confirmed by Ukrainian President Zelinski and immediately downplayed by President Biden who said “Well, the truth of the matter is the Russians have suffered over 100,000 casualties in Bakhmut.” The extent of Russian losses is a matter of speculation like other news covering the reality on the battlefield but the dubbed as “Pyrrhic” victory coincided with or led to yet another milestone being breached and red line being crossed, in an ever-escalating war, with several European allies promising to deliver air planes to Ukraine. As he struggled at home amidst a never-ending debt ceiling debate, US President J. Biden unveiled another $375million Ukraine military aid package featuring more ammunition, vehicles, and weapons. Meeting with Japanese PM Kishida, the US President ahead of the G7 meeting, in Hiroshima, promised Japan a nuclear umbrella, promising in a statement to defend Japan with atomic weapons if need be.
While markets have taken the stance that whatever happens, it does not matter to them or the economy, we are way more sanguine about the risks of escalation than any other risks of the political or economic landscape. The war in Ukraine has been a constant source of misjudgement on the part of US and European politicians on the nature and length of the conflict, the efficacy of sanctions, not to speak about th profiling war outcome. This war also served as a powerful catalyst to forge previously inconceivable economic and military alliances between former foes that are now united in their objective to seal the world scission into “multipolar forces” that are fast developing into opposing economic, political and military camps, increasingly unimpressed by the US sanctions policy led regime, and a fast weakening of the post WWII Bretton Woods organisation of world affairs and order.
In hearings that went relatively unnoticed amidst the charged US political climate, former SVB Chief Executive Officer Greg Becker told lawmakers on the Senate Banking Committee refused to commit to giving up any of the $10 million he received annually from the failed lender, arguing that unprecedented events, interest-rate hikes and negative social media coverage rather than mismanagement were the root causes of the firm’s March demise… Becker had also been confirmed selling $3.6mn of company stock, less than two weeks before the firm disclosed extensive losses.
The Fed is expected to unveil a plan to boost capital and liquidity rules applying to banks of …over USD100bn (previously capped at USD250bn). Perhaps, we can remain concerned that banks of less than 100bn will run in trouble, merge and disappear, unless they follow the same sanity principles…
On the economic side, new claims for jobs benefits fell more than expected by 22k (to 242k) last week, suggesting the labour market remains tight and offsetting somehow the message conveyed the week before (when claims rose much more than expected).
Elsewhere, China’s growth momentum disappointed after an initial burst in consumer and business activity early in the year, which prompted more calls for more policy stimulus. Official data showed industrial output, retail sales and fixed investment grew at a much slower pace than expected in April. China’s home price growth slowed in April, rising 0.32% last month from March, when they grew 0.44%, National Bureau of Statistics figures showed.
Over the past week, the S&P500 gained 1,7% (9,5% YTD) while the Nasdaq100 rallied 3,5% (26,4% YTD). The US small cap index gained 2,0% (1,0% YTD). AAPL gained 1,5% (34,8%).
Cboe Volatility Index dropped -1,3% (-22,4% YTD) to 16,81.
The Eurostoxx50 gained 1,9% (18,5%, Z-score 2,5), outperforming the S&P500 by 0,2%.
Diversified EM equities (VWO) gained 0,7% (2,3%), outperforming the S&P500 by -1,0%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,6% (1,7%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,4% (1,2%).
10Y US Treasuries underperformed with yields rising 21bps (-20bps, Z-score 2,2) to 3,67%. 10Y Bunds climbed 15bps (-14bps) to 2,43%. 10Y Italian BTPs underperformed rising 9bps (-44bps) to 4,27%, outperforming Bunds by -6bps.
US High Yield (HY) Average Spread over Treasuries climbed 6bps (8bps) to 4,77%. US Investment Grade Average OAS dropped -2bps (10bps) to 1,53%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -6bps (-4bps) to 0,96%.
Gold dropped -1,6% (8,4%) while Silver dropped -0,5% (-0,4%). Major Gold Mines (GDX) sold off by -4,3% (12,2%).
Goldman Sachs Commodity Index gained 0,8% (-10,9%). WTI Crude rallied 2,2% (-10,9%).
Overnight in Asia…
S&P500 +3 points; Nikkei +x0.4%; CSI300 +0.4%; Hang Seng +1%
In a tit for tat response to the recent escalation, China said it was prohibiting some of Micron’s products over security concerns. As a result, it’s planning to bar operators of key infrastructure, which range from the transportation to finance industries, from buying products from the firm.
Asian shares rose after US President Joe Biden said relations with China are expected to improve “very shortly” (?!)
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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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