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Writer's pictureMarc Bentin

Bill Dudley Suggests the Fed to Cut in July...

Updated: Jul 30

BentinPartner Weekly



US stocks started to rally on Monday after President Biden endorsed VP K. Harris to take the baton from him for the runup to the President elections. However, on Wednesday, stocks hit a brick wall on disappointing earnings from Tesla and to a lesser extent GOOG. Tesla announced missed its earnings for the 4th time in a row and said it was also postponing its RoboTaxi announcement from August to October which drove the stock down -12.3%. GOOG also dropped 5% with results that were not that bad but reported a decline in the growth rate of its advertisement revenues. These two MAG7 continued to drag the Nasdaq down while pressuring the SP500 but did not prevent small Cap stocks to continue to benefit from a rotation out of tech into value and small caps.

The overall decline is risk appetite was also evident from the strong JPY performance which gained +2.8% last week, forcing more carry trades unwind in both currencies and stocks (with traders often funding leveraged positions out of JPY to to reduce their cost of carry). This led to a swift decline in CFT futures long JPY positioning last week but not anywhere near enough to make aggregate positioning balanced.  

 

The BoJ and Fed will meet on Wednesday (the BoE on Thursday) while China’s PMI and AUD CPI will also be released on Wednesday.

 

The market is pricing 70% odds that BoJ will tighten this week but the new BoJ Governor repeatedly disappointed earlier expectations this year despite higher inflation readings.

The Fed is expected to wait until September (and November and December) to cut rates but it could still move earlier, even this week, to appease market concerns and follow B. Dudley’s recommendation which suggested no less last week, citing progress on inflation and evidence of a slowing economy as the new facts that made him change his mind.

 

A fly in the ointment for justifying a Fed rate cut earlier than September was last week’s advanced Q2 GDP which came at 2.8% (from 1.4% for Q1), well above the 14-year average GDP growth rate, suggesting a reacceleration in the economy which helped stocks to recover. That said, more evidence of a slowing economy also came from US existing and new home sales which both were weaker than expected. VISA (and previously Starbucks and several retail chains) reported slowing spending from lower income consumers.

 

 Below is the Sectorial Allocation of our (non leveraged) Trend -following US Equity Model at the close of the week.

 

 

Over the past week, the S&P500 dropped -0,8% (14,5% YTD) while the Nasdaq100 sold off by -2,6% (13,1% YTD). The US small cap index rallied 3,4% (11,7% YTD). AAPL sold off by -2,8% (13,2%).

The Equally Weighed SP500 gained 0,8% (7,6% YTD), outperforming the S&P500 by 1,6%. The median SP500 YTD return closed the week at 6,7%.

Cboe Volatility Index dropped -0,8% (31,6% YTD) to 16,39.

The Eurostoxx50 gained 0,9% (10,4%), outperforming the S&P500 by 1,7%.

Diversified EM equities (VWO) dropped -0,5% (6,4%), underperforming the S&P500 by0,4%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies was flat on the week (6,4%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (-0,9%).

 

10Y US Treasuries rallied -5bps (31bps) to 4,19%. 10Y Bunds dropped -6bps (38bps) to 2,41%. 10Y Italian BTPs dropped -2bps (6bps) to 3,76%, underperforming Bunds by 4bps.

US High Yield (HY) Average Spread over Treasuries climbed 3bps (-17bps) to 3,06%. US Investment Grade Average OAS climbed 2bps (-4bps) to 1,01%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 1bps (-5bps) to 0,62%.

 

Gold dropped -0,6% (15,7%) while Silver sold off by -4,4% (17,4%, Z-score -2,0). Major Gold Mines (GDX) sold off by -2,4% (17,6%).

 

Goldman Sachs Commodity Index dropped -1,5% (0,9%). WTI Crude sold off by -3,7% (7,7%).

 

 

 Overnight in Asia…


  • S&P500 +23 points; Nikkei +2%; CSI300 -0.4%

  • Asia is opening stronger with animal spirits revived by Friday’s strong recovery and with investors looking forward to a Fed more dovish outlook to be expressed on Wednesday after recent softer data and B. Dudley’s call for a rate cut at this July meeting already.

  • Israel hit Hezbollah on Sunday threatening further retaliation after a rocket strike that killed 12 youngsters on a soccer field while at the same time signalling openness for a truce in Gaza, Bloomberg reported.

 

  • On Saturday, the Olympics celebration in Paris tried to be inclusive by insulting 97% of the population with a blasphemous and satanic woke agenda parodying the Last Supper. After first saying, they were assuming the political message of the show, Olympic organizers issued an apology which followed the condemnation of the Conference of French Bishops that was no apology, just a denial of intent, saying “there was never an intention to show disrespect to a religious group”. “If people have taken any offense, we are of course really sorry”. Wokism is an ideology of death, which is also profoundly anticlerical, imposed by a minority to a tacit majority that may not be religious but still sharing a kernel of virtues and values. It is causing political and social unrest in the West while the rest of the world is portraying us as a society that is waning, decadent and increasingly despicable. Thanks (God) for Celine Dion’s superb performance and act of courage and resilience (and to many other artists).

 

 

Leaders & Laggards Report


Our Trend-following US Equity Sector Allocation

 

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