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"All Roads Lead To Inflation" (Tudor Jones)

BentinPartner Weekly



Over the past week, stocks consolidated their recent gains with tech stocks taking the leadership again as safe haven while small cap suffered a setback as a result of bond yields continued to creep higher. Treasury prices have tumbled sharply over the past month as the continued strength of the economy casts doubt on how deeply the Fed will cut interest rates in the coming months. 

The IMF in its latest Outlook lowered its global growth forecast (to 3.2% from 3.3%) and warned about increasing risks ranging from wars to trade protectionism while recognizing the progress made by central banks in taming inflation which it expects will fall to 4.3% next year (from 5.8% this year).

While it was cautious on the global outlook, the IMF raised its 2025 growth forecast for the US (from 1.9% to 2.2%) and dropped its growth forecast for Europe (and in particular for Germany) from 1.5% to 1.2%. The IMF also expects a bigger share of growth over the next five years to come from powerhouse BRICS economies like China, India, Russia and Brazil, according to forecasts published last week.

 

While a D. Trump election (which polls and betting odds see as increasingly likely) would set the world on course for a 60% US tariff on Chinese imports and 10% US tariff for those from the rest of the world, these tariffs coupled to a decline in the corporate rate may still translate into brighter prospects for the US economy than for Europe.

 

This likely explained the further rally of the dollar last week and the continued outperformance of US stocks vs. their international counterparts.

 

The issue of the ballooning global debt levels remained front and center and especially in the US if one considers the fiscal drift alone and its trajectory with interviews of P. Tudor Jones, and S. Druckenmiller (former Quantum Fund and Sorros partner) explaining why they remain wary of US bonds. Still, the quality of the debt being raised in the US remains better than elsewhere as the country remains focussed on innovation and growth (that will be coupled to protectionism, tariffs and tax cuts should D. Trump go through).

In other words, 1USD of additional US debt is likely to be more productive in accruing to the US economy than 1EUR of debt raised in Europe.

 

Europe has a fundamental problem of productivity which makes the burden of its debt an even greater concern. It is actually “negative” as a result of higher energy costs, resulting from the war in Ukraine and sanctions applied to Russia of which Europe is the only casualty at this stage, and overregulation in the field of energy transition coupled to an assault on free speech with the DSA (a recent Speech of the President of the Commission was particularly enlightening in that respect and made Orwell 1984 prognostication look pale).

In the meantime, US productivity gains remain solid at +3% thanks to a focus on growth, innovation and deregulation. 

 

Solutions exist and were recently laid out in the Draghi report but, as S. Ermotti noted in a Bloomberg interview last week, (“There  a desire to change in Europe, citing the Draghi report but you need 27 countries to agree, with some of them perhaps losing over the short term for the benefit of the long term and in this environment, you cannot get the voters to accept any sacrifice and so it is likely that you will see the US continue to outperform the US, and possibly other parts of the world.”), they will be difficult to implement. Perhaps it will be easier when Europe is at 30 or 35… Rather than extend and pretend, perhaps Europe should focus on kick-starting the major European engines that have now clearly stalled (Germany and France). The INSEE report of France published last week was very weak with confidence falling back to the level following the outbreak of Covid and then the war in Ukraine (and plenty of companies warning).

The ECB will need more data to decide on the speed of future rate cuts and will be vigilant to other considerations but more cuts are in dire need and fast. At the same time, it needs the help of a Commission that has got a job to do in shifting its focus from a repressing ideology and over-regulation towards more economic pragmatism and activism.

 

A. Einstein gave the definition of insanity as doing the same thing over and over and expecting a different outcome.  Events of the weekend in Georgia where the ruling party won the election, letting Georgia and Europe drift further apart, was only met by European officials questioning and rejecting the outcome of the vote in no uncertain terms (which they did not do one week ago when Moldavia was announced to have voted against a referendum on joining the EU with a comfortable 3% lead, only for the result to be turned upside down 3 hours later with the thinnest of all margins). Where the insanity lies is to not understand that Georgia has no interest in following the same path as Ukraine, the demise of which started by stirring unrest and toppling a democratically elected Prime Minister who was unfavourable to Western (US in that case) interests.

 

This week is the biggest of the Q3 earnings season accompanied by the last batch of economic data (that will end with Friday’s NFP job report) before the Federal Reserve's November meeting.


 

 

Over the past week, the S&P500 dropped -0,9% (21,8% YTD) while the Nasdaq100 gained 0,2% (21,0% YTD). The US small cap index sold off by -3,0% (9,1% YTD). AAPL dropped -1,5% (20,2%).

The Equally Weighed SP500 shed -2,1% (12,9% YTD), underperforming the S&P500 by-1,1%. The median SP500 YTD return closed the week at 13,8%.

Cboe Volatility Index rallied 12,8% (63,3% YTD) to 20,33.

The Eurostoxx50 dropped -0,8% (12,3%), outperforming the S&P500 by 0,2%.

Diversified EM equities (VWO) dropped -1,7% (14,5%), outperforming the S&P500 by -0,7%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,9% (8,1%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (1,3%).

 

10Y US Treasuries underperformed with yields rising 16bps (36bps) to 4,24%. 10Y Bunds climbed 11bps (27bps) to 2,29%. 10Y Italian BTPs underperformed rising 15bps (-19bps) to 3,51%, underperforming Bunds by 4bps.

US High Yield (HY) Average Spread over Treasuries dropped -1bps (-38bps) to 2,85%. US Investment Grade Average OAS climbed 2bps (-14bps) to 0,91%.

In European credit markets, EUR 5Y Senior Financial Spread was unchanged (-4bps) to 0,63%.

 

Gold gained 0,6% (32,7%) while Silver dropped -0,5% (41,3%). Major Gold Mines (GDX) sold off by -3,7% (34,0%).

 

Goldman Sachs Commodity Index rallied 2,1% (3,5%). WTI Crude sold off by -2,5% (-4,0%).


 

Overnight in Asia…

 

  • S&P500 +28 points; Nikkei +1.5%; Hong Kong -0.2%; CSI300 -0.2%

  • US futures gained after crude dropped -4% after Iran said no oil facilities were damaged and that its oil industry was operating normally after Israel struck military targets across the country.

  • Asian shares are mixed.

  • JPY dropped 1% this morning after Japan’s ruling coalition failed to win a majority in parliament, stoking speculation the political uncertainty would impact the central bank’s rate-hike policy, Bloomberg reported. 

  • The Georgian Prime Minister gave an interview to the BBC yesterday following the outcome of the Georgian vote and rejected vote-rigging claims.


 

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