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Central Banks Week Ahead...

BentinPartner Weekly



Over the past week, US stocks rose modestly further, supported by Fed pivot expectations and later in the week, by a slightly better than expected job number which saw the unemployment rate drop. Previously reported signs of a weakening US job market painted a less rosy picture such as the “jobs hard to get” that were recently reported at the toughest level since 3/21 and “job openings” that also came out at the lowest since 3/21.

 

 

In Europe, the downturn eased a little but the composite November PMI (47.6 from 46.5 previously) still pointed at the eurozone business activity contracting again this quarter. Industrial production for October in Germany, France, Spain and Italy was also reported to have declined in October which likely fuelled more dovish print in market expectations and the sentiment by several ECB officials last week. The market now expects the ECB to lead the rate cutting cycle, starting in Q1, with rates expected to drop by 150bps next year. ECB officials were not seen pushing back to hard either with ECB Francois de Galhau saying, that “The ECB has finished raising interest rates unless there are major surprises and may look at cuts at some point…”, adding that “Our decision to increase interest rates are fully playing their role as a remedy against the disease that is inflation”. That is of course a more dubious conclusion given that the decline in inflation witnessed so far has most, if not all, to do with the decline in energy prices which itself had very little to do with Central banks’ actions, especially in Europe hardest (and now structurally) hit by the spiralling energy prices of which the decline may only be temporary…But optimism is always welcome and inflation being a confidence game, self-congratulation is part of the recipe.

 

Europe is and will remain the hardest hit victim (after Ukraine itself) of the war in Ukraine as its dependency on more expensive energy sources has been sealed to the benefit of other players, mostly the US. Europe is also facing a geopolitical influence crisis, a governance crisis and the risk of more far right and left political radicalisation as demonstrated by the fast-evolving political climate (the recent election in the Netherlands being the latest example) as discussed by “moderate right” former French Prime Minister E. Balladur and former Foreign Minister Hubert Vedrine in a recent interview (in French, starting on min ’12) to Le Figaro where he noted inter alia that the three largest EU countries now only have 3 commissioners along with …the three smallest countries with more smaller countries ambitioning to join, which would only further dilute  the influence of the most populous and economically  important EU countries, and concluded  that Europe is now facing the hard choice of either exploding…or reforming.

 

As the BoJ seemed to convey the message of an approaching policy normalisation (which drove JPY higher last week), inflation in Tokyo cooled to the slowest pace in over a year (to 2.4% from 2.7% the month before), weakening the case for BoJ to deliver on this intention. At the same time, sentiment at big Japanese manufacturers surged as the auto sector continued to recover but Japanese GDP was reported 2 days later to have declined at a 2.9% annualized rate in the three months ending in September, making things even more confusing.

Besides its recent appreciation, the time may still be ripe to wonder what is next for JPY. The fact that most central banks have now completed their tightening cycle while Japan managing to escape most of it, likely means that the fuel for further JPY depreciation may have disappeared, all the more so that fair valuation (including the big mac index) points at a 40% undervaluation of JPY vs. USD. Positioning on JPY likely also remains very short.

 

China’s services activity expanded at a quicker pace in November (CAIXIN/S&P Global services PMI rose to 51.5 from 50.4 in October) while China’s Evergrande said it was granted an adjournment of a court hearing into a liquidation petition which gave the developer some time to finalize its restructuring plan. The country also faced a more bearish credit outlook from Moody’s which cut its outlook on China’s sovereign bond rating to negative (asking its staff to now stay at home…).

 

Elsewhere, the Bank of Canada kept policy unchanged at 5%, still leaving the door open for another hike, saying it was still concerned about inflation while acknowledging an economic slowdown.

 

Geopolitics continued to be the least of any markets concerns but the number of hot spots is not declining;

-      Venezuelan President Maduro “called and won” a dubious referendum seemingly backing the annexation of a region in Guyana and subsequently authorized oil exploration in an area subject to a dispute, exposing the risk of some military escalation in the region. Still, this would imply that the behaviour of Venezuela become exposed to a wider international condemnation…which at this stage is unlikely (and likely the reason why Maduro called the referendum at the first place).

-      Tensions intensified over the past couple of weeks in the Red sea (ending with the Suez Canal) after several Hutis (most likely Iran-backed) attacks, targeting commercial (including last week French military) vessels. These attacks are currently downplayed but still heighten transportation risks in the region, along with risks of a possible broadening of the Middle East conflict, should Iran’s responsibility start to be called more directly. The tensions only added to those disturbing the flow of passage at Panama Canal (connecting the Atlantic and Pacific Ocean) resulting from the drought season.

 


 

Over the past week, the S&P500 gained 0,2% (20,3% YTD) while the Nasdaq100 gained 0,6% (47,3% YTD). The US small cap index gained 1,0% (7,1% YTD). AAPL rallied 2,3% (50,6%, Z-score 2,2).

The Equally Weighed SP500 gained 0,0% (6,6% YTD), underperforming the S&P500 by-0,2%. The median SP500 YTD return closed the week at 3,3%.

Cboe Volatility Index sold off by -2,2% (-43,0% YTD) to 12,35.

The Eurostoxx50 rallied 2,5% (23,1%, Z-score 2,2), outperforming the S&P500 by 2,2%.

Diversified EM equities (VWO) dropped -1,4% (3,2%), underperforming the S&P500 by-1,7%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,9% (5,9%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped 0,0% (3,2%).

 

10Y US Treasuries dropped 3bps (35bps) to 4,23%. 10Y Bunds dropped -9bps (-30bps) to 2,28%. 10Y Italian BTPs dropped -3bps (-64bps) to 4,07%, underperforming Bunds by 6bps.

US High Yield (HY) Average Spread over Treasuries dropped -14bps (-109bps) to 3,60%. US Investment Grade Average OAS was unchnaged (-33bps) to 1,10%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-23bps) to 0,76%.

 

Gold sold off by -3,3% (9,9%) while Silver sold shed -9,8% (-4,0%). Major Gold Mines (GDX) sold off by -6,7% (3,6%).

 

Goldman Sachs Commodity Index sold off by -3,4% (-6,7%). WTI Crude sold off by -3,8% (-11,3%).

 

 

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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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