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All A Question of Rates?

Updated: Jan 21

BentinPartner Daily



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Stocks dropped and bond yields rose again in a broad “risk off” session as rate cut hopes faded (a bit) further and as retail sales beat expectations (jumping 0.6% MoM and 5.6% YoY in December) across the board (whether on credit or not) along with housing builder confidence which mechanically shifted some % of probability for the first cut to occur in May rather than March.

10y Bond yields adding 5 bps (and 2y yields a bit more) was not a big move in light of what happened elsewhere in stocks and currencies.

Risk appetite was tempered by the disappeared year-end bid and some disappointing CPI data that came out last week which several central bankers stated remained too high for them to declare victory.

Still and so far, tech remains resilient and outperforms, including the Mag 7 or rather 6 for now as Apple continues to be upset by slow growth in China.

Flows will remain key drivers and US equity markets weakness may only materialize with MAG7 leading on the downside. Those for now remain resilient, suggesting a lack of distribution (considering that passive funds are invested 30% in those names and that it is consequently those names that will sold when passive index (SPY, VOO, QQQ) flows start to reverse. 

That said, a basket of the most shorted stocks is already now down 10% ytd as some hedge funds are reloading on their shorts. Among those again are primarily green transition stocks, hypersensitive to borrowing rates. Clean energy is -10.5% ytd (right next to Hong Kong), solar energy -20% ytd and Tesla -13% ytd.  European carbon credit is -13.4%.

The VIX so called “fear” index increased a full 1% of implied vol at the beginning of the session yesterday but still closed shedding 2/3d of these gains with late buying also emerging one more time (rather than panicky late day selling). This is likely not what bear market formation are made of.

The same observation could be made about dollar strength which likely overreacted to “one” Fed speech. The Fed is to remain “data” dependent and the most important data of all may very well be the SP500 itself (going into this year’s elections), so that another two days of selling like we had yesterday, would likely bring back rate cut expectations towards March.

That said, bank earnings have been weak so far with regional banks also trading lower) and the geopolitical situation is getting more worrisome by the day (the US conducted more strikes against Houthi targets in Yemen yesterday) but equity investors have been trained not to care about them and if fear is not pressing enough to push  oil prices significantly higher (which would occur if Iran supply is cut off in a broadening conflict), then stocks may not find a compelling reason to keep selling off, at least not in the near term, in our view.

Oil prices did close a bit (1%) higher yesterday but only after OPEC's forecast that global oil demand will continue to increase strongly next year to exceed supply. OPEC pushed its estimates for the year ahead a few months earlier than normal “to offer more transparency and support for both consumers and producers,” its Vienna-based secretariat said, as reported by Bloomberg.

The organization expects global oil demand to increase by 2.25 million barrels a day this year to a record 104.36mn a day, unchanged from the forecasts in last month’s report.

Gold and precious metals sold off on dollar strength (I find it hard to believe that 10-year yields rates going 5bps higher deserves Gold to break the 2000 level on the downside) but there are people who might be tempted to try. Bitcoin dropped as well in a disappointing reaction following the launch of several cash bitcoin ETF’s which likely triggered all sorts of arbitrages (away from some bitcoin related stocks or closed end bitcoin related) that failed to translate into an overall price appreciation despite active media push campaigns.


JPMorgan J Dimon expanded on the difference between blockchain which is a technology with purposes and uses and the two types of coins (those backing smart contracts for example and those only fueling speculation but his heart is obviously still not beating for bitcoin, despite Wall Street surfing on the spot bitcoin ETF’s. 

 

S&P500 dropped -0,6% (-0,6% YTD) while the Nasdaq100 dropped -0,6% (-0,6% YTD). The US small cap index dropped -0,7% (-5,6% YTD, Z-score -2,0).

The equally weighed SP500 Index dropped -0,8% (-2,5% YTD, Z-score -2,6), underperforming the S&P500 by -0,2%.

Cboe Volatility Index climbed 6,9% (18,8% YTD, Z-score 2,7) to 14,79.

The Eurostoxx50 dropped -1,0% (-2,5%, Z-score -2,2), underperforming the S&P500 by -0,4%.

Diversified EM equities (VWO) dropped -1,3% (-5,0%, Z-score -3,5), underperforming the S&P500 by -0,8%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,1% (2,3%, Z-score 2,4YTD) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,4% (-1,6% YTD).

  RUBUSD dropped 0,0% (1,3%). INRUSD dropped -0,3% (0,1%). CNYUSD gained 0,3% (-1,3%). ZARUSD dropped -0,2% (-3,6%, Z-score -2,0). MXNUSD gained 0,2% (-1,4%, Z-score -2,0).

EURUSD gained 0,1% (-1,3%). EURCHF gained 0,4% (1,3%). EURJPY gained 0,8% (3,6%). EURGBP dropped -0,2% (-0,9%).

 

10Y US Treasury yield rose 3bps (21bps) to 4,09%, with the 10/2 spread at -24 bps (-8,9).

10Y Bund yield rose 6bps (29bps) to 2,32%. 10Y Italian BTP yield rose 6bps (22bps) to 3,92%, matching Bunds.

US Investment Grade Average OAS rose 1bps (-2bps) to 1,03%. US High Yield (HY) Average Spread over Treasuries rose 9bps (21bps) to 3,44%. USD Repo Govt GC ON closed at 5,35% while the US Federal Funds Effective Rate stood at 5,33%.

 

XAUUSD dropped -0,9% (-2,5%) while Silver dropped -1,3% (-5,0%). Major Gold Mines (GDX) sold off by -3,1% (-11,3%, Z-score -2,8). Bitcoin dropped -1,9% (0,3%).

Goldman Sachs Commodity Index dropped -0,5% (-0,2%). WTI Crude gained 0,6% (1,6%). COPPER (CPER) dropped -0,6% (-3,6%).

 

 

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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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