BentinPartner Weekly
Last week was marked by mounting geopolitical risks, rising inflation concerns and the beginning of the earnings season leading to flat stocks overall but higher gold, oil and bonds as a flight to safety took hold.
Equities opened the week lower after a week end of horror in Israel but recovered to close sharply higher on Monday with the rally continuing on Tuesday as oil and rates fell.
Inflation data disappointed later on Wednesday with the US PPI climbing 0.5% MoM for September (vs. +0.3% expected) and +2.2% yoy (vs. +1.6% expected). Thursday brought a higher than expected CPI report as well (+3.7% yoy vs. 3.6% expected and a monthly gain of 0.4% (vs. 0.3% expected), mostly as a result of higher energy prices.
Equity markets remained resilient however, as several Fed officials said or hinted that more rate hikes might not be necessary.
Biotech and semis were the laggards, each dropping about -4%.
The clear winning sectors were gold mines recouping 7% on the week, energy adding 4.5%, followed by Utility (+3.6%) and real Estate (+1.8), encouraged by lower yields. Small caps dug deeper in bear trend, shedding -1.7% (-2.3% YTD).
As the Fed talked down the likelihood of more tightening, the dollar and the long bond need to be watched but last week’s response bore no risk for either as geopolitical concerns kept the dollar well bid across the board while bonds were encouraged by the Fed softer tone and safe haven flows.
Friday ended the week with a fairly disorderly session that saw both gold (+2.5%) and silver (+4%) storming higher on a combination of building geopolitical concerns, disappointing inflation data (1-year inflation expectations measured by the Michigan Consumer confidence jumped on Friday as well to 3.8% from 3.2%, a fresh 5 months high.
Gold historic premium between Chinese and London gold prices reached USD112. Oil also gained 5% on concerns about supply (the strait of Ormuz which is critical for world oil and gas transit would become threatened by Iran in case of a widening conflict) at the same time as oil inventories remained extremely tight.
Banks kicked off the earnings season with generally better than expected results (JPMorgan’s profit rose to $13.2bn in Q3, a 35% rise from the same period last year) but accompanied by warnings about things getting rough.
While stocks stayed resilient, both IG and HY credit spreads widened last week.
Over the week end, Israel retained its offensive against Gaza while prospects improved for Egypt to open its border to allow the passage of Palestinian refugees that were given 24 hours on Friday to leave Gaza, a timing that was denounced as way too short by the UN and which could lead to a humanitarian disaster.
Risks of a broadening conflict still loomed large with Iran, heading the so called “axis of resistance” including powerful militant groups such as Hezbollah in Lebanon and some others in Iraq, also warning that should Israel storm Gaza (which still remains the most likely scenario to root out Hamas terrorist organisation), it might intervene directly in the conflict with huge ramifications for an expanding conflict.
So far global markets seemed to be taking the geopolitical backlash in stride but Friday looked different (which followed Israel ultimatum and R. Dalio’ observations published on Thursday on the conflict, which he sees as another step toward international war.
JPM CEO Dimon on Friday sounded a major alarm about the global effects of the conflict in Israel and Gaza. “This may be the most dangerous time the world has seen in decades,” he said in a statement accompanying the bank’s quarterly earnings, warning of “far-reaching impacts on energy and food markets, global trade and geopolitical relationships.”
This week should bring little in terms of earnings at the exception of Tesla on Wednesday and Schwab today.
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Over the past week, the S&P500 gained 0,5% (12,8% YTD) while the Nasdaq100 gained 0,2% (37,2% YTD). The US small cap index dropped -1,6% (-2,3% YTD). AAPL gained 0,8% (37,7%).
Cboe Volatility Index rallied 10,7% (-10,8% YTD) to 19,32.
The Eurostoxx50 dropped -0,1% (12,2%), underperforming the S&P500 by-0,5%.
Diversified EM equities (VWO) dropped -0,2% (0,1%), underperforming the S&P500 by-0,6%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,6% (7,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (0,4%).
10Y US Treasuries rallied -19bps (74bps) to 4,61%. 10Y Bunds dropped -15bps (17bps) to 2,74%. 10Y Italian BTPs rallied -14bps (6bps) to 4,78%, underperforming Bunds by 1bps.
US High Yield (HY) Average Spread over Treasuries dropped -10bps (-57bps) to 4,12%. US Investment Grade Average OAS dropped -2bps (-10bps) to 1,33%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (-2bps) to 0,98%.
Gold rallied 5,4% (6,0%) while Silver rallied 5,2% (-5,2%). Major Gold Mines (GDX) rallied 7,7% (1,0%).
Goldman Sachs Commodity Index rallied 3,9% (0,8%). WTI Crude rallied 5,9% (9,3%).
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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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