BentinPartner Weekly
Despite some weakness on Friday, US stocks eked out additional gains last week after the Federal Reserve, succumbing to (peer and) Wall Street pressures, initiated its long-awaited easing cycle with a “go big” decision to cut rates by 50bps.
While stocks gained and credit markets improved (with high yield CDS declining to 309bps or the lowest level since January 2022 when interest rates were at “0”), US govt yields responded with a further steepening of the curve that came from higher long-term yields (which rose by 9bps) and lower short-term yields (that followed short term rates lower). French and UK long term government yields also rose each by 14bps. France which is en route for a 6% fiscal deficit this year, formed a government of center-right last week which reinstated the same coalition of forces which was defeated during the European and local elections, exposing the (potentially early) vulnerability of a government seen by many as having hijacked the results of the elections.
A USD2trn debt increase a year is unlikely to have a different impact whether it comes from Trump or Harris administration and whoever wins in the end could face a L. Truss moment, hence also an incentive for the Fed to accelerate the pace of expected easing now and capitalize on the recent inflation progress even if such a decision could look like “declaring victory too fast”, as Fed Governor Bowman, the sole dissenter of the decision, suggested last week. Despite all the happy talk on inflation related to post Covid easing supply chains and slowing Chinese demand, US service inflation remains sticky and shelter price pressure persistent. Tarriffs, renewed trade wars, “hot” wars, climate change and salary pressures are equally unlikely to ease inflationary pressure going forward, not least a dollar crisis (which remains a distant but ultimately likely outcome).
Japan was seen surfing on the wave of the Fed 50bps rate cut with Boj Governor Ueda pushing on Friday the odds of an October rate hike in October further to the side-lines, pointing at concerns about July’s market meltdown and the recent JPY appreciation.
The dollar did little in the end as both the US Europe and Europe share the same fiscal imbalance and unsustainable debt dynamics. But EM markets and currencies had their week in the sun last week…as investors deemed safer to hold ZAR (which rallied 2% on the week) than either USD or EUR in a context of solidly rising precious metals. Beyond precious metals, commodities continued to recover….including uranium which after suffering from heavy profit taking since July, came back to life posting strong gains after MSFT announced that a reactor at Three Miles Island was going to restart in a couple of years for the sole purpose of meeting future electricity demand of the software giant.
Gold closed at $2,622 on Friday, a fresh all-time high, extending the week’s gains following the decision of the Fed to “go big” and heightened geopolitical tensions as central bank gold buying continued to lift sentiment on precious metals. The hard to fathom post Fed rate cut Gold selloff was taken as a gift with central bank buying (covered or not) remaining persistent with their appetite stronger than they want the world to believe (since 2022 as per the chart here). Commodities also recovered 2% (unch. ytd).
Elsewhere despite the persisting gloom and doom on the Chinese economy, Chinese equities witnessed some revival, led by Alibaba which made some important announcements on the AI front.
After an Israeli strike on a Beirut suburb that followed a Trojan Horse attack last week (pager and talkie walkie explosions), Hezbollah retaliatory attacks were conducted toward vast areas of Israel’s north at the end of the week and over the week end, at the risk of pulling the US into a broader regional conflict.
On the Ukraine front, V. Putin ordered the regular size of the army to increase by 180’000 to 1.5mn active service men, in a move that will make Russia’s army the largest after China’s. In Taiwan, the defence minister warned that China’s growing military activity will make it more difficult to spot harbingers of an attack on his country.
This week, factory activity and consumer confidence readings in Europe are due while Australia and Tokyo are set to release inflation data.
Over the past week, the S&P500 gained 1,1% (19,6% YTD) while the Nasdaq100 gained 1,5% (17,8% YTD). The US small cap index rallied 2,2% (10,4% YTD). AAPL rallied 2,6% (18,5%).
The Equally Weighed SP500 gained 1,4% (12,4% YTD), outperforming the S&P500 by 0,3%. The median SP500 YTD return closed the week at 12,8%.
Cboe Volatility Index sold off by -2,5% (29,7% YTD) to 16,15.
The Eurostoxx50 gained 0,6% (10,6%), underperforming the S&P500 by-0,5%.
Diversified EM equities (VWO) gained 1,9% (10,2%), outperforming the S&P500 by 0,8%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,1% (3,9%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (2,2%).
10Y US Treasuries underperformed with yields rising 9bps (-14bps) to 3,74%. 10Y Bunds climbed 6bps (18bps) to 2,21%. 10Y Italian BTPs climbed 5bps (-15bps) to 3,56%, outperforming Bunds by -1bps.
US High Yield (HY) Average Spread over Treasuries dropped -21bps (-22bps) to 3,01%. US Investment Grade Average OAS dropped -7bps (-7bps) to 0,98%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (-2bps) to 0,65%.
Gold gained 1,7% (27,1%, Z-score 2,4) while Silver gained 1,5% (31,0%). Major Gold Mines (GDX) gained 1,0% (30,6%).
Goldman Sachs Commodity Index rallied 2,6% (0,8%). WTI Crude rallied 3,4% (-0,9%).
Overnight in Asia…
S&P500 + 16points; Nikkei closed; Hong Kong +0.4%; CSI300 +0.3%
PBOC lowered the 14-day reverse repurchase rate to 1.85% (from 1.95%) in a move that was not earth shaking as it followed the 10bps cut made on the 7day repo rate in July. The central bank also injected 74.5 billion yuan ($10.6 billion) of liquidity into the banking system via the tool, it said in a statement.
Japanese stock markets closed for a public holiday.
India reported record gold imports in dollar terms, totalling $10 billion in August. It was over a three-fold increase over the previous month. The World Gold Council estimates the country imported 140 tons of gold, tripling July’s total. So far, in 2024, Indian gold imports are up 30%.
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Trend-following US Equity Sector Allocation
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