BentinPartner Weekly
Dear Reader,
Four million (of mostly call) options were traded in Apple shares, ahead of the Iphone 12 announcement, contributing to squeeze US stocks last Monday in a move that was reminiscent of frenzied developments of late summer.
Then suddenly, the mood changed on Tuesday and Wednesday, as pharma giants working on treatments and vaccines suffered a clinical setback.
Not helping matters were declarations from Treasury Secretary Mnuchin on Wednesday that chances of Congress passing a pre-election stimulus were all but gone.
US economic data came on the weak side on Thursday with 898,000 new claims for jobless benefits. The total for the week ended Oct. 10 was the highest since Aug. 22 and another sign that the job market keeps struggling as cases rise and worries increase over what is now clearly a second wave.
In the list of worries for the week, were countries across Europe reintroducing restrictions on public life following a surge in coronavirus infections. France slapped a 9 p.m. curfew on many of its biggest cities. The Czech Republic, Belgium, the Netherlands, Spain, France and Britain are among the countries causing particular concern, specialists said.
The IMF warned that the pandemic will significantly impact the global economy with job losses, bankruptcies and whole sectors of the economy to be left unviable. It was a noteworthy development to hear the apostle of fiscal orthodoxy inviting and urging public spending to complete the economic recovery from coronavirus as it joined central bankers and finance leaders urging governments to set aside fears about mounting debt for now.
The IMF also said that Climate change poses a serious threat to global growth. ‘Even while we are in the midst of the COVID crisis, we should mobilize to prevent the climate crisis,’ Georgieva told a meeting of finance ministers from 52 countries working to integrate climate change into their economic policies. We face a Bretton Woods moment she also said.
According to a Bank of America survey published last week, 61% believe the US vote’s outcome will be challenged, causing maximum volatility in the final months of the year. The survey took place at a time when… Biden led by 9 points nationally over Trump …but nobody could be blamed for not trusting the polls.
What was interesting was the flattening in the volatility curve going over the election period, in a sign that investors do not feel any urge for hedges, three weeks ahead of the US elections. A global financial crisis was narrowly escaped in March as it was met with a massive Central Banks response and short circuit. A crisis could hardly ensue now with central banks at their maximum level of vigilance. However, we are not so sure about their ability to avoiding inflation at the end of this monetary experiment.
It could take several expressions with a further melt up in equity and commodity prices, punctuated by a currency crisis (our view remains that the dollar will face a severe correction in the next 18 months).
The most obvious geopolitical risk remained the fast-deteriorating relationship between China and Taiwan as the Trump administration ramped up pressure on China with as many as seven major weapons systems making their way through the US export process.
All of the above being said, Bank results came mostly better than expected last week, although with a cleavage between Wall Street (doing well) and Main Street (doing poorly) banks.
Economic data from China also surprised on the upside. For September, China’s imports surged 13.2%, far above the 0.3% predicted. Exports rose 9.9% from a year ago. China auto sales marked a sixth straight month of gain, rebounding a solid 12.8% in September. China’s GDP data are due out today. Amidst market worries last month over the state of China’s largest property developer, one source of comfort for some investors was the sheer size of the Evergrande group (which slumped 17% last Wednesday). Evergrande is a heavily indebted behemoth with total borrowings of about $120bn which to many China analysts, makes the group too big to fail and so intertwined with the country’s banks and financial system that it would be too much of a broader danger to the economy if it defaulted on its debts. That being said, it does not mean that bondholders will not be treated badly…as China knows how to restructure and deal aggressively with bondholders.
If you can spare 15 minutes, we highly recommend this fascinating research note (especially section 5. And 6.) explaining the milestone that China has just crossed with its official digital currency launch.
The PBOC digital currency (DC/EP) will be held on the PBOC balance sheet (as a liability like all existing CNY in circulation). It will work in conjunction with the two Chinese digital payment behemoths (digital payment is much more widespread in China than in the US and dominated by two platforms; “wechatpay” and “alipay“(controlled by Alibaba and Tencent respectively).
The significance of this official digital currency launch cannot be overestimated:
-It showed the technological advance achieved by China independently from the Western technology.
-It will serve as a springboard for China to widen the CNY internationalisation in the global reserves system, in all independence from the SWIFT payment system which, from the Chinese standpoint, suffers from the weakness of being de facto controlled by the US, enabling a US sanction based international policy regime.
-The Chinese digital currency will offer (along with all future official digital currencies) a way to trace money payments and transfers, allowing fiscal tracing, preventing money laundering and terrorist financing and to perfect social control (by monitoring how money is spent).
-This digital currency will de facto further curtail individual freedom, ultimately scrapping the anonymous nature of cash payments (it will remain anonymous to all third parties … but the PBOC). This will be a common feature of all future digital currency initiatives.
In this context and as an aside, Bitcoins (of which the intrinsic value is zero and actually negative, accounting for its huge carbon footprint) might continue to offer some level of anonymity. Besides their potential as an object of speculation, or means of payment for ransoming cyberspace criminals, they won’t ever achieve the status of official digital currencies.
Last week’s wrap up…
Over the past week, the S&P500 gained 0,1% (7,9% YTD) while the Nasdaq100 gained 1,0% (35,7% YTD). The US small cap index dropped -0,2% (-2,0% YTD).
Cboe Volatility Index rallied 4,0% (98,9% YTD) to 27,41.
The Eurostoxx50 dropped -0,8% (-11,2%), underperforming the S&P500 by-0,9%.
Diversified EM equities (VWO) dropped -0,3% (0,6%), underperforming the S&P500 by-0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,6% (-2,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (-0,7%).
10Y US Treasuries rallied -3bps (-117bps) to 0,75%. 10Y Bunds dropped -10bps (-44bps, Z-score -2,6) to -0,62%. 10Y Italian BTPs rallied -7bps (-76bps) to 0,65%, lagging Bunds by -4bps.
US High Yield (HY) Average Spread over Treasuries climbed 2bps (135bps) to 4,71%. US Investment Grade Average OAS dropped -1bps (33bps) to 1,34%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (20bps) to 0,72%.
Gold dropped -1,6% (25,2%) while Silver sold off by -4,0% (35,3%). Major Gold Mines (GDX) sold off by -2,3% (36,0%).
Goldman Sachs Commodity Index gained 0,4% (-27,2%). WTI Crude gained 0,7% (-33,0%).
Over the week end…
Ø Asian stocks rose with US futures this morning amid optimism about some progress on stimulus talks in Washington (N. Pelosi called for a Tuesday deadline to make progress).
Ø China’s GDP are due out this morning.
Ø Brexit trade talks are likely to continue at least into next week if the U.K. and EU fail to reach an agreement.
Ø The final presidential debate before the U.S. election, between D. Trump and Joe Biden, will take place on Thursday.
Ø Oil is steady at $41 before an on line OPEC+ meeting takes place today to assess demand coming under pressure again from a resurgent coronavirus.
Have a nice week ahead and stay safe.
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Marc Bentin, BentinPartner GmbH
Founder, Chief Investment Officer
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