BentinPartner Weekly
Stocks climbed the proverbial wall of worries last week, as mostly disappointing earnings from the tech sector were offset by slightly better than expected US economic data (GDP grew by a larger than expected 2.6% year over year), whispering talks that of Fed could be soft pivoting soon, favourable seasonality and the end of the blackout period for share buybacks.
Some 1trn in buybacks were announced so far this year (see this chart for the principal component analysis of S&P500 return between multiple expansion, earnings, dividends and share buybacks over the past 10 years suggesting those accounted for 40% of the total and in other words that without buybacks, the S&P500 would be trading around 2700 instead of 3800 currently.
Some furious short covering action in the most shorted sector of the tape along with the upcoming mid-term elections that are likely to lead to a change in control of the US Senate and House of representatives (which is generally positive for stocks especially this time as it could reduce geopolitical risks) were also cited as supporting risk appetite.
Amazon shed 10% on Friday on news that its cloud business (subsidizing most other breakeven or loss-making activities) was slowing and its margin declining. As this came on the heels of a week that saw meta being pummelled, Google and Microsoft dropping sharply, Apple saved the day on Frida, closing 6.5% higher as it appeared that only sales of its cheapest iphones have been dropping (not those costing now as much USD 950) with the company still generating USD20bn in quarterly profits and W. Buffet having recently increased his stake in the company to USD100bn.
At the same time as tech underperformed with several tech generals getting hammered, value stocks outperformed meaningfully last week as the Dow headed for its best month since 1976. The Dow climbed for a fourth week and breached its 200dma on Friday, fuelling more purchases despite generally dismal FANG earnings.
While the US GDP came unexpectedly strong (and suspiciously so for some including UBS Chief Economist), the newsflow remained decisively negative for US real estate. Home prices posted their biggest month-on-month decline in more than a decade dropping 1.1% Mom in August… Mortgage demand fell last week to nearly half what it was a year ago, according to the Mortgage Bankers Association, as rates hit their highest level in 21 years (around 7%) in the week prior to last. New home sales decreased 10.9% to a seasonally adjusted annual rate of 603,000 units last month. National Association of Realtors’ index of contract signings to purchase previously owned homes also decreased 10.2% in September.
US business activity (46.6 in the month, marking the second-worst reading since May 2020) also contracted in October for a fourth-straight month as concerns about inflation and sluggish demand weighed on the outlook.
Elsewhere in Europe, the ECB delivered another 75bps tightening while the Bank of Canada tightened by a smaller than expected 50bps (to 3.75%), accompanied by a statement of the Governor saying the central bank is approaching the end of its monetary tightening cycle. More is needed judging from CPI rising in Germany 11.6% from a year earlier – well above expectations. Comparable rates were last recorded in the early 1950s in West Germany, Bloomberg reported.
In FX markets, some extraordinary interventions by the BoJ (probably its largest ever) and a couple of days later PBOC in support of their respective currency led the dollar into a pause but these interventions while keeping traders on their toes were far from delivering a peremptory outcome leaving JPY and CNY as the weakest links of dangerous FX dynamics.
JPY remained weighed down by an “impossible” policy mix (of super easy monetary policy now fuelling inflation that is being fought with more fiscal largesse and an extra budget of 29.1 trillion yen), similarly to the one which was recently rejected with fracas in the UK by “bond vigilantes” while CNY stayed pressured by more equity market selling related to a weakening economy, stiffening political situation and some hard questioning by investors.
In China, “the sight of Hu Jintao, the former president of China, being ushered forcibly from the front row of the Communist party congress in Beijing was a piece of political theatre that sent a message of utter ruthlessness and total control by Xi Jinping”, the FT reported. Chinese stocks sank by the most since 2008 in Hong Kong (Alibaba, JD.com as well as Baidu crashed between 14% and 17%...) and the yuan fell to a 14-year-low last Monday.
Oil gained last week as Saudi Arabia distanced itself further from the US as Saudi Arabia's energy minister… blasted the release of emergency oil stocks as an attempt to “manipulate markets”. “It is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come.”, he said.
This week’s focus will be on the Fed FOMC meeting where the Fed is expected to tighten by 75bps on Wednesday and possibly signal it will move by only 50bps next time).
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Over the past week, the S&P500 rallied 3,9% (-18,1% YTD) while the Nasdaq100 rallied 2,1% (-29,3% YTD). The US small cap index rallied 6,1% (-17,7% YTD, Z-score 2,3). AAPL rallied 5,8% (-12,3%, Z-score 2,5).
Cboe Volatility Index sold off by -13,3% (49,5% YTD, Z-score -2,2) to 25,75.
The Eurostoxx50 rallied 3,9% (-13,7%), matching the S&P500.
Diversified EM equities (VWO) sold off by -3,2% (-28,1%), underperforming the S&P500 by-7,1%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,1% (16,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (-8,8%).
10Y US Treasuries rallied -20bps (250bps) to 4,01%. 10Y Bunds dropped -31bps (228bps) to 2,10%. 10Y Italian BTPs rallied -57bps (300bps) to 4,18%, underperforming Bunds by 3bps.
US High Yield (HY) Average Spread over Treasuries dropped -52bps (172bps, Z-score -2,3) to 4,55%. US Investment Grade Average OAS dropped -9bps (70bps) to 1,70%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -14bps (67bps) to 1,22%.
Gold dropped -0,8% (-10,1%) while Silver dropped -0,8% (-17,4%). Major Gold Mines (GDX) gained 1,6% (-22,8%).
Goldman Sachs Commodity Index gained 1,8% (29,0%). WTI Crude rallied 3,4% (16,9%).
Overnight in Asia,,,
S&P500 -10 points; Nikkei +1.7%; CSI300 -0.1%; Hang Seng +0.9%
China October manufacturing PMI came out at 49.2, lower than the 49.8 expected which may lead to an RRR cut and more PBOC easing action.
Lula won a narrow 50.9% election overnight in Brazil (still awaiting the concession from President Bolsonaro).
Lloyds Bank Plc’s business barometer dropped to its lowest since March 2021 when the country was struggling with a coronavirus lockdown (confidence fell 1 point to 15% in its October survey).
Goldman wrote late last week that it expects the Fed to lift its benchmark rate to a range of 4.75% to 5% in March, 25bps more than earlier expected (75bps this week, 50 bps in December and 25 bps in February and March).
Have a nice week ahead!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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