Compressed Volatility...
- Marc Bentin
- Mar 16
- 7 min read
BentinPartner Weekly
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Please find below our latest Weekly Trend Report.
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Marc Bentin,
Bentinpartner GmbH
Stocks dropped further last week across sectors and geography, in breakdown mode (despite artificially low volatility) approaching long term support with banks faring worst on the week as the Iran crisis accelerated the private credit downturn despite President D. Trump clamoring on Monday “I think the war is very complete, pretty much” which took the look of an aborted TACO moment as he failed to signal when the war would end and as he failed to keep oil prices down that he said went higher “because of this excursion”.
The dollar continued to rally last week (now +3.2% on DXY YTD), in break out mode on a combination of risk aversion, rising yield and the realization that besides the cost of war (which is very steep and clearly understated) and not going to be shared by anyone this time, the US stands to win in relative terms compared to the rest of the world including and especially Asia and Europe due US energy independence. Deleveraging and position squaring from the bearish dollar story also played a role in propping up the dollar last week. Historically, it has been a general feature (it was certainly the case during the 2008 crisis) that whenever global financial crises erupted, the dollar has generally rallied. The US administration is also unlikely to keep talking the dollar down amidst a globalizing military conflict of which one consequence will still be a further depolarization of world trade. Last but not least, the negative dollar trend is now clearly broken… which was a good enough reason to jump back on the fence.
It was also a difficult week for treasuries (+13bps to 4.15%) and other government bonds, mortgage rates (+27bps on 30Y mortgage rates to 6.41%, following a +14bps move the week before) and credit markets (HY spread rose 15bps) which all dropped in a synchronized move that had to integrate the prospective effects of higher energy prices, the Fed favored core PCE index coming out last week at 3.1%, worst in 2 years vs. a target of 2%, increased (credit) risk premia and the bulging cost of the war (a state secret of which the official estimate of USD9bn is ludicrous, considering the extent of the damage/destruction inflicted on countless US military bases, embassies, military planes…and war consumables so far) not to be shared by anyone (except the hope of getting hold of Iranian oil). It was interesting (for lack of a better word), considering the rapidly deteriorating global security context, to hear Linsey Graham say “When this regime goes down, we’re going to make a ton of money”…
One week after saying he needed no help, and one year after starting to threaten, insult and alienate a network of allies, President D. Trump begged for help, hurried that he is to force others to engage and rapidly expand the regional conflict that he started without consultation (of his allies but one) and that he is now rapidly breaking his teeth on, into a more global one. “It should always have been a team effort (his illegal war) and now it will be”, he said.
From what I read and heard over the week end, investors and speculators are more worried about the perspective of missing the reflex rally (and taking the proverbial saloon door) that should follow the next TACO moment than they are about facing the consequence of the more likely scenario of a spreading and intensifying conflict that will compound the effects of a brewing credit and AI bubble implosion that are anything but rooted in the war and that might carry more weight, even if the war stops tomorrow and oil returns to USD50, in my view. It does not mean we cannot try to collect pennies in front of a steam roller. But it might be a full-time tick watching job…because any rally might be sold at this stage until we get a 10-20% correction, in my view. D. Trump is a tick watcher as well and if the market stops rallying (now only 4% away from all- time highs), he is sure to lose the Midterm elections. If/when he loses (unless he cancels) them, most likely he will get impeached as well. So, he will try to prop it up …for sure. The problem is that the other side knows this as well and are unlikely to play ball.
From a market structure point of view, I am less concerned about Goldman repeating they are “amazed” at how much hedge funds hedging selling they have seen (which did not transpire in lousy hedge funds performance so far this month) than I am about realized “inter-day” volatility on the SP500 lying around 10% compared to a VIX at 27%. This only means that market volatility is compressed “inter-day” one way or another already like a coiled spring.
The Fed and the ECB will meet this week and are unlikely to throw a cut …the Fed because it needs to look at the core PCE deterioration (and teach a lesson to Trump who has been begging for a rate cut last week as well). The Fed meeting will also take place amidst a legal battle between J. Powel and Trump’s surrogates who are appealing a federal judge’s decision to reject subpoenas delivered to the J. Powell in January. A retiring GOP senator is still blocking Kevin Warsh’s otherwise assured confirmation as well, seemingly until J. Powell is cleared of any wrong doing about the cost of the Fed’s Ecles building renovation, which could keep him at the helm of the Fed past his May term.
The ECB will likely refrain from cutting as well because it does not want to fall into the “temporary inflation” fallacy trap one more time…
Precious metals dropped last week, especially silver shedding -6.6% (and silver and gold mines dropping even more) amidst broad based liquidation in other markets, as investors were forced to take profits where they hold them (possibly also to fund war reconstruction and rearming) and as the dollar rallied (with yields climbing as well). Those who are not afraid to have to buy back later higher can try some temporary hedges as well. Deleveraging sometimes take no prisoner.
Over the past week, the S&P500 dropped -1,5% (-2,9% YTD, Z-score -2,5) while the Nasdaq100 dropped -1,0% (-3,4% YTD, Z-score -2,3). The US small cap index dropped -1,7% (0,2% YTD, Z-score -2,1). AAPL sold off by -2,9% (-8,0%, Z-score -2,2).
The Equally Weighed SP500 sold off by -2,3% (1,0% YTD, Z-score -2,2), underperforming the S&P500 by-0,8%. The median SP500 YTD return closed the week at -1,0%.
Cboe Volatility Index sold off by -7,8% (81,9% YTD) to 27,19.
The Eurostoxx50 dropped -0,1% (-1,4%), outperforming the S&P500 by 1,4%.
Diversified EM equities (VWO) dropped -0,8% (0,5%), outperforming the S&P500 by 0,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,5% (3,2%, Z-score 2,3) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (-0,5%).
10Y US Treasuries underperformed with yields rising 16bps (8bps) to 4,25%. 10Y Bunds climbed 12bps (13bps, Z-score 2,2) to 2,98%. 10Y Italian BTPs underperformed rising17bps (24bps, Z-score 2,2) to 3,79%, underperforming Bunds by 5bps.
10Y French OAT's underperformed rising 16bps (11bps, Z-score 2,2) to 3,67%, underperforming Bunds by 4bps.
US High Yield (HY) Average Spread over Treasuries climbed 15bps (45bps , Z-score 2,3) to 3,11%. US Investment Grade Average OAS climbed 9bps (15bps Z-score 2,5) to 0,99%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (15bps, Z-score 2,1) to 0,69%.
Gold sold off by -2,2% (16,4%) while Silver sold off by -6,6% (13,3%). Major Gold Mines (GDX) sold off by -8,0% (8,7%, Z-score -2,1).
Goldman Sachs Commodity Index rallied 4,4% (28,4%). WTI Crude rallied 3,2% (70,3%).
Overnight in Asia…
Ø S&P future +29 points; Hong Kong +1.6%; Nikkei -1.2%; China -0.7%
Ø Stocks gained slightly (futures) while Asia dropped amidst a stable oil price that erased an earlier 3% oil price gain. The stock futures gains (and premarket opening damage control) occurred as President D. Trump said that the US was talking with Iran (after the US strike on Kharg Island on Friday night that he said “obliterated all military targets on the island), although the Islamic Republic said it hadn’t asked for talks or a ceasefire.
Ø Two tankers carrying liquefied petroleum gas to India sailed through the strait. At the same time, Dubai International Airport temporarily suspends flights after a drone incident caused a fuel tank to catch fire.
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