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Another Debt Ceiling Theater...

Updated: May 17, 2023

BentinPartner Weekly




Last week turned out to be relatively quiet, ending with little changes and the VIX index dropping further, leading some investors to wonder if this gauge of risk is not “dead” and to be replaced by 0day volatility or the VVIX index (volatility of volatility) as fewer investors seem ready to commit to buy relatively long dated (>3mths) options.

US bank deposits dropped another USD76.2bn last week, suggesting a continued eagerness of investors to get paid their fair share of yield while the Federal Home Loan Bank system continues to plug the hole (after issuing an unprecedented USD495bn in March alone, bringing their total assets to USD1’667bn). In a move unlikely to improve the situation, Apple and Goldman (Goldman earnings dropped 19% this quarter on weaker trading and corporate finance) teamed up announcing the launch of a savings account paying up to 4.15% for the year.

Interestingly, one of the reasons why Libra failed was because of the unfair competition it would lead to for banks (with the technological advantage of a platform like Apple) to be ideally positioned to a suck in deposits in a privately managed “diversified currency basket”. The only difference is that here it will only be dollars…


Endless politicking about the US debt ceiling, increased the cost of insuring US debt by 10bps, the highest in 10 years as JPMorgan warned about a “non-trivial” risk of a technical default on US treasuries (Goldman also warned about the X-date occurring earlier than expected in the first half of June due to weak tax income).


The situation in commercial real estate remained tense with life insurance companies, so far a reliable source of financing, turning their back on home offices and banks in a strenuous position to pick up the slack for the coming refunding wave.

China GDP reported a stronger than expected 4.5% Q1 GDP while retail sales also came in stronger than expected, jumping 10.6% yoy in March. However, this did not help local equity markets which dropped towards the end of the week with the tech Chinext index dropping 3.6% on the week. CNY also traded lower as did most EM currencies last week on profit taking and dimming risk appetite….and Chilli’s very bad example at showing it willingness to nationalize the country’s lithium industry, causing local producers to crater.


In particular Chinese developer’s bonds under-performed (led by Wanda properties bonds which dropped -20% last week). It is becoming somewhat difficult to reconcile the weakness in Chinese stocks with the government about face to reopen the liquidity spigot. But maybe it ties in well with Beijing working overtime to build alliances around the world and further isolate the US and Europe…

In the meantime, Brazil keep transforming itself into the world’s agriculture powerhouse with a soaring trade surplus suggesting BRL remains strongly undervalued (with President Lula also vocally joining the chorus of those advocating taking their distances from the USD in trade exchanges)




While US stocks held relatively better, the weakening rally has remained extremely narrow with 3 stocks seemingly accounting for some 60% of the major index performance while 10 stocks account for 90% of it (the equal weighted SP500 is only +2.5% ytd vs. +7.6% for the market cap based SP500). The narrower the rally gets, the more dangerous it becomes (and vice versa) with today’s environment starting to bear some troubling resemblance with the second half of 2021 of which the narrow large cap tech rally preceded a very poor and broad-based performance in 2022.


St Louis Federal Reserve President J. Bullard said the US central bank should continue to tighten on the back of recent data showing inflation remained persistent while the broad seemed poised to keep growing. Fed President of Cleveland was more cautious wanting to gauge the impact of tightening lending standards, noting that even before the stress in the banking industry in March, banks had begun to tighten their credit standards.


On Friday, data showed that US banking activity accelerated with the US composite PMI output index increasing to 53.5 its highest level since last May. Other data remained more mixed with foreclosures filings jumping 22% in Q1 and for the 23d consecutive month.


Commodities were broadly lower last week with some exceptions for ag commodities (such as rice which suffers from the largest deficit in two decades).


 

Over the past week, the S&P500 dropped -0,1% (7,8% YTD) while the Nasdaq100 dropped -0,6% (18,9% YTD). The US small cap index gained 0,6% (1,8% YTD). AAPL dropped -0,1% (27,0%).

Cboe Volatility Index dropped -1,8% (-22,6% YTD) to 16,77.

The Eurostoxx50 gained 0,4% (17,0%), outperforming the S&P500 by 0,4%.

Diversified EM equities (VWO) dropped -1,7% (2,5%), underperforming the S&P500 by-1,7%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,3% (-0,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,3% (1,7%).


10Y US Treasuries rallied -4bps (-32bps) to 3,56%. 10Y Bunds climbed 4bps (-9bps) to 2,48%. 10Y Italian BTPs underperformed rising 6bps (-36bps) to 4,35%, underperforming Bunds by 2bps.

US High Yield (HY) Average Spread over Treasuries climbed 9bps (-21bps) to 4,48%. US Investment Grade Average OAS dropped -1bps (-1bps) to 1,42%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 2bps (-3bps) to 0,96%.


Gold dropped -0,7% (8,6%) while Silver dropped -0,1% (4,4%). Major Gold Mines (GDX) sold off by -4,2% (17,3%). Bitcoin dropped 9% on the week.


Goldman Sachs Commodity Index sold off by -3,0% (-5,8%). WTI Crude sold off by -4,4% (-3,7%).



Overnight in Asia…


  • S&P500 -11points; Nikkei +0.2%; CSI300 -0,4%; Hang Seng -0.6%

  • MSCI Asia Pacific Index was on course for the lowest close in more than three weeks.

  • New Bank of Japan Governor Kazuo Ueda will hold his first policy meeting later this week, planning to review and inspect policies taken over the past decades, Bloomberg reported.

  • Pierre Wunsch, Governor of the BNB and ECB board member, said the ECB will only agree to halt interest rate rises once wage growth starts to fall, the Financial Times reported.

  • Iron ore slumped to its lowest since early December (-3%) , as persistently weak demand continued to weigh on overall market sentiment.

 

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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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