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China Moves Boldly

BentinPartner Weekly



J. Powell discarded at Jackson Hole the idea that the Fed would consider raising its inflation target. “Two Percent is and will remain our inflation target”, he said, dampening expectations that the sky was clear of the risks of additional Fed rate hikes.

Another Fed speaker (the Richmond Fed President) noted that the institution must be open to the possibility that the economy will accelerate rather than slow, pointing at the stronger than expected US retail sales. That said, it is easy to get confused and other data pointed at a weakening US economic momentum, not least with a 308k downward revision brought to US non-farm payrolls since the beginning of the year. Business activity in the US also weakened in August, according to a PMI report with manufacturing and service PMI dropping to 50.4 (from 52 the previous month). Existing home sales also dropped -2.2% in July from the previous month (and -16.6% from June last year). US mortgage applications dropped to three decades low.

Two-year yields surged 14bps on the week while yields in the long end dropped slightly by 3bps. It was also noted that foreign investors were surprising sellers of short dated securities, according to Bank of Ney York research. Real yields rose to their highest since 2009 to 2%.


Still, stocks regained their composure, posting modest gains after three weeks of losses, perhaps relieved that Jackson Hole did not end with worse surprises. Most short positions on the SP500 futures have been covered and hedge funds reportedly liquidated Chinese shares en masse last week (which bodes better for Chinese stocks). At the same time, the technical outlook for global equities remained fragile with the AI rally sputtering (even if only a little bit).


Besides Jackson Hole, two other major events marked the week with continued strain on Chinese markets and the gathering which brought the expected widening of the BRICS perimeter with invitations to join granted to top US allies in the Middle East like Saudi Arabia and UAE but also Iran, Ethiopia, Egypt, Argentina in a push likely to leave a heavy footprint on the overall structure of the current world order. The door stayed open for a dozen more countries. We highlighted last Friday the fact that the dollar rally should not be misinterpreted as the dollar index is barely an offset for the euro which contains none of the BRICS currencies. Some interesting perspectives were presented (in French) by Alain Juillet on the true meaning of the BRICS enlargement.


China increased its defense of the yuan by pushing funding costs on offshore yuan (the underlying of FX futures are being short squeezed) and by raising the reference rate for CNY.


Back in the US, banks remained pressured by S&P downgrading the outlook for several of them, citing increased costs of funding as a result of a continuing and expected to last decline in bank deposits as investors have learned to prefer higher yielding alternatives of risk-free US Tbills.


Economic data is Europe were rather dismal, opening the prospect for the UK and German economy to suffer a Q3 contraction.

The BoE also warned about higher risks of corporate default posing a threat to investment and unemployment, noting that up to 50% of UK companies may experience debt service stress (from 45% last year) as a result of higher rates with the proportion even higher for medium sized companies, or the highest since the great financial crisis. The UK PMI dropped to 47.9 in August (from 50.8 in July), the worse reading since the UK was in lock down. UK home prices also dropped sharply by -1.9% last month, the biggest monthly decline since 2018.


German business activity contracted at the fastest pace in three years according to the composite German PMI which dropped to 44.7 (from 48.5 in July), the lowest data print since 2020.

Still, ECB President Christine Lagarde vowed to set borrowing costs as high as needed and leave them there until inflation is back to its goal. ECB Council member J. Nagel also said that he was not convinced that inflation is under control enough to halt interest rate hikes. “We should not forget that inflation is still at 5%”, he said.


Elsewhere, pressure remained intense on Japanese bond yields as several measures of inflation hit record highs in July with the BoJ still purchasing record amounts of JGB’s to keep the yield curve anchored albeit at higher levels (65bps in the 10 year). According to Bloomberg, the total amount purchased could reach USD757bn for the year if the pressure does not recede, which would translate into a 12% increase from last year) This provided little comfort to JPY which suffered fresh losses for the week as the BOJ remain caught in the conundrum of preventing either bonds or JPY to melt down, given continued upwards pressure on world bond yields.


Bloomberg wrote this morning that “Emerging-market bonds look poised to underperform developed peers for the first time in three years as real-yield spreads narrow (to their lowest in a decade)”. I am not so sure…

 

Over the past week, the S&P500 gained 0,8% (15,0% YTD) while the Nasdaq100 gained 1,6% (36,7% YTD). The US small cap index dropped -0,4% (5,5% YTD). AAPL rallied 2,4% (37,5%).

Cboe Volatility Index sold off by -9,4% (-27,6% YTD) to 15,68.

The Eurostoxx50 gained 0,5% (15,0%), underperforming the S&P500 by-0,3%.

Diversified EM equities (VWO) gained 1,0% (3,2%), outperforming the S&P500 by 0,2%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,8% (4,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,7% (1,0%).


10Y US Treasuries rallied -9bps (37bps) to 4,25%. 10Y Bunds dropped -6bps (-1bps) to 2,56%. 10Y Italian BTPs rallied -9bps (-47bps) to 4,24%, outperforming Bunds by -3bps.

US High Yield (HY) Average Spread over Treasuries dropped -12bps (-89bps) to 3,80%. US Investment Grade Average OAS dropped -5bps (-14bps) to 1,29%. In European credit markets, EUR 5Y Senior Financial Spread dropped -4bps (-15bps) to 0,85%.


Gold gained 1,1% (5,0%) while Silver rallied 3,7% (0,9%). Major Gold Mines (GDX) rallied 3,5% (-0,9%).


Goldman Sachs Commodity Index gained 1,0% (-1,9%). WTI Crude dropped -0,8% (-0,3%).



 

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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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