BentinPartner Weekly
Dear Reader,
US indices rose to fresh all-time highs last week, propelled by short covering as the recent correction showed little inclination of wanting to stick.
There were more signs including from the Fed that central banks are slowly moving away from the narrative of temporary inflation but, as M. El Erian opined on Bloomberg TV, that they remain far away (especially the Fed and the ECB) from the completion of the needed pivot and that the bond market has started to signal that the Fed might not be able to “sequence” the tapering and the rate hike, as much as it wants, forcing an acceleration of the policy adjustment. Reinforcing the point about inflation Unilever CEO A. Jope cautioned (after announcing a string of price increases) that “We are in a once in two decades inflationary environment”. Oil and energy prices rose further as OPEC+ failed to pump enough oil to meet their targets, exacerbating the supply deficits by cutting its production 15% deeper than planned in September. Stockpiles at the biggest US crude depot also quickly approached critically low levels, which the last time it happened saw crude reach USD100. US Propane prices (and backwardation) run so high that IHS Markit analysts opined they suggest market players are preparing for a propane Armageddon during the depth of winter.
That being said, Goldman did not see the need for hedging (the cost of which has been a bottomless pit for many investors) just yet, favoring another melt up scenario for the rest of the year, arguing that China property bust, China slowing, Covid, tapering, corporate margin fears, blocked supply chains, energy prices, rate hikes, global growth slowing, declining vaccine efficacy (plus risks of new variant appearing in the UK), higher interest rates, etc, would not suffice to prevent a melt up for a few simple reasons including a flood of buybacks and equity fund inflows, collectively amounting to roughly $8bn per day, bearish buyside sentiment and favorable seasonality.
The resignation of Bundesbank President Weidman, after 10 years at the helm of the German Central Bank, was a surprise. Chances are he probably does not want to witness from the first row, the consequences of what he has restlessly but with limited success, fought against namely the total unknitting of fiscal and monetary restraint and the foundation of stable money attached to the initial European project. The ECB will meet on Thursday and with no new forecast or policy announcement will likely repeat the same mantra of inflation being temporary. The Pandemic Emergency Purchase Program will finish at the end of Q1 22 but the fight has already started over QE after that. The ECB wants a facility that is more “flexible” in terms of eligible assets and time of purchases.
Over the past week, the S&P500 gained 1,6% (21,2% YTD) while the Nasdaq100 rose 1,4% (19,2% YTD). The US small cap index gained 1,0% (16,0% YTD).
Cboe Volatility Index sold off by -5,3% (-32,2% YTD) to 15,43.
The Eurostoxx50 gained 0,3% (21,1%), underperforming the S&P500 by-1,3%.
Diversified EM equities (VWO) dropped 0,0% (3,3%), underperforming the S&P500 by-1,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,3% (3,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (0,7%).
Despite all the doom and gloom conveyed about China’s slowing economy (towards 5% in Q3) and unravelling real estate dynamics (Evergrande), CNY kept appreciating last week, reaching its highest level in nearly 6 years, supported by foreign-currency inflows ($27 billion) in September and a record 12 months average of CNY159bn. According to Citigroup, the FTSE WGBI index include Chinese bonds by the end of this month will likely attract an additional $3bn monthly inflows. China’s fine tuning of its housing policy that encourages banks to increase mortgages must certainly also have played a role in luring some investors back into Chinese equities and the “high yielding” status of CNY (vs. EUR and USD).
10Y US Treasuries dropped 4bps (73bps) to 1,64%. 10Y Bunds climbed 6bps (46bps) to -0,11%. US inflation expectations rose last week with the August 2022 Fed funds future contract now yielding 32 bp, nearly completely discounting a 25 bp rate hike as of July 2022 FOMC meeting.
10Y Italian BTPs underperformed rising 13bps (46bps, Z-score 2,4) to 1,00%, underperforming Bunds by 6bps.
US High Yield (HY) Average Spread over Treasuries dropped -4bps (-75bps) to 2,85%. US Investment Grade Average OAS climbed 1bps (-8bps) to 0,94%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-2bps) to 0,57%.
Gold gained 1,7% (-5,4%) while Silver rallied 5,2% (-7,6%). Major Gold Mines (GDX) gained 1,4% (-8,4%).
Goldman Sachs Commodity Index gained 0,3% (47,9%). WTI Crude rallied 2,0% (73,3%).
Overnight in Asia...and next week’s agenda
S&P500 -3 points+; Nikkei -0.9%; CSI300 -0.3%
Most Asian stocks dipped Monday as traders weighed inflation risks, a Covid-19 outbreak in China and earnings prospects for major technology firms. Turkey’s lira slid to a record low amid a diplomatic spat after Turkey said 10 Ambassadors were no longer needed…
Several key Central Banks meetings are lined up for this week with the BoJ, ECB and BoC set to hold policy meetings.
Prior to that, preliminary estimates for Q3 GDP for the US and the EU are due, including their respective inflation reports. The US sees the September PCE deflator, which the Fed targets, while the EU will release its October CPI first estimate.
Have a nice week ahead and stay safe.
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Marc Bentin, BentinPartner GmbH
Founder, Chief Investment Officer
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