Equity Selloff Triggers Dovish Fed Talk and BIS Warns...
- Marc Bentin
- 6 days ago
- 8 min read
BentinPartner Weekly
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Marc Bentin,
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US stocks rallied last week on a healthy dose of Fed put as the probability of the Federal Reserve cutting rates this month rose to 83% (from 25%) on dovish Fed talk. This revived expectations for a Santa Claus rally. Credit spreads also improved. While the Nasdaq surged 5.7% on the week week, outpacing slightly the SP500 and more firmly the equally weighed SP500 (+3%), it confirmed a come back of the MAG7. However, Nvidia and ORCL still closed the week lower as rotation continued out of NVDA (-2% on the week) into GOOG (+10%) with debt related concerns still impairing ORCL (-8%) prospects and leaving open question marks about the sustainability of last week’s swift and powerful rally above the key support levels that had been breached earlier in the month, causing CTA’s to liquidate.
On the data side, US PPI rebounded in September following the energy costs and climbing 0.3% MoM (afte a -0.1% drop in August) and 2.7% YoY.
Schneider Electric warned that the US is facing a short fall of…175 gigawatts by 2033 (or the equivalent of the production of 175 nuclear power stations that won’t be there by then), resulting in outages and blackouts in the US power grid which has been under strain since before the explosion of AI related demand. The implication, is likely to be, given the disdain for renewable energy of the US administration, a surge in future oil demand likely to make peak oil consumption another myth to debunk, that possibly already explains D. Trump’s active pursue of regime change in Venezuela to secure easier access to the country’s vast oil reserves.
The number of jobless claims (government data) declined 6k last week in a sign that overall layoffs remained low, even as several high-profile companies announced job cuts which transpired from ADP (private survey) reporting last week that private companies lost an average of 13’500 jobs a week over the past month.
US retail sales also increased less than expected in September climbing 0.2% in September following a 0.6% gain in August.
Elsewhere In China, Chinese official manufacturing PMI remained in contraction mode at 49.2 (as expected) while Non-manufacturing disappointed at 48.5 (exp at 50).
In Europe, quite ominously illustrating the self-defeating nature of the EU policies, the FT reported that Volkswagen, after investing heavily in its new R&D base in Hefei, was preparing to build an electric vehicle entirely made in China, cutting by half the cost of producing one in Germany.
US and European bonds gained slightly on building easing expectations. US swaps priced almost a full 25bps rate cut since New York Fed President John Williams said he saw room to lower rates again in the near-term amid labor-market softness. D. Trump also confirmed last week that he had made up his mind on the succession of J. Powell as the new head of the Federal Reserve.
While Private debt concerns were toned down last week at the same time as equity markets rebounded, a flood of debt sales from Big Tech companies still risks overwhelming buyers and could weaken the credit markets on both sides of the Atlantic, Bloomberg reported, citing a warning of Morgan Stanley, as these sales capped a record year of global issuance with tech firms expected to turn to debt for as much as USD1.8trn by 2028. In that context, ORCL remained the weakest link among AI plays last week with its share price missing the weekly rebound and its CDS climbing to 122bps. Rating agencies also see defaults poised to rise next year as a growing number of middle market firms are experiencing stress with a growing cohort of them falling into the CCC category, a sign that pressure is building in certain segments of direct lending, KBRA credit rating company said. It was also reported that private credit firms are raising debt to fund payouts to themselves and investors like never before, Bloomberg reported, citing dividend loans reaching USD28.7bn so far this year, en route to breach the 2021 record. In the meantime, private markets are poised to account for more than half of total industry revenues so far this year, according to PWC.
The US dollar dropped -0.7% on building Fed rate cut expectations.
Precious metals stormed higher with Gold recovering 4.3% and silver surging 13% as the market prepares for the Fed to cut rates with stocks at or near all-time highs, stubborn inflation pressures and as regards silver, with severe supply concerns and fast depleting inventories. Copper added 3.5%.
Freshly appointed BIS General Manager Pablo Hernandez de Cos delivered a timely speech to the LSE. He highlighted the importance of Central Bank independence in an age of fiscal dominance, especially when combined with the growing importance of Non-Bank and levered financial institutions (so called NBFI’s) as dominant holders of Western government debt offsetting the dwindling ownership from the official sector (Central Banks). This situation is leading to a significant increase of their use of repo financing and (increasingly shorter dated) FX swaps for the financing and whenever necessary, the FX hedging of these operations which imbed heightened stability (leverage) risks for the Global financial system. This requires heightened attention and a coordinated policy response to handle and reduce them in the future, de Cos warned (see chart here and here). He also issued a broader warning that “a significant risk for debt sustainability is that bond yields could rise further, especially if inflation were to flare up again or if governments delay tackling large deficits”.
All other things remaining equal, there is little hope to revive official ownership of Western government bonds, considering that the USD (but also EUR and GBP) have become more subject to risks of freeze and seizure after being weaponized with an active sanction regime that is crystalizing fears and defiance of the opposite camp, towards what was previously considered as the degree “0” of market and credit risk, at the same time as it reduces their need to hold reserves…
As a conveyor of hope (for the industry) and on the subject of the increased complexification of US Treasuries trading (hedge funds…), the FT published an article stating that more than 50% of all trades on US treasuries are now conducted manually (through text and phones), the lowest such proportion in 8 years due to transactions being too large or complex not to be handled by humans.
Over the past week, the S&P500 rallied 4,7% (16,6% YTD) while the Nasdaq100 rallied 5,7% (21,1% YTD). The US small cap index rallied 8,6% (12,6% YTD). AAPL rallied 4,7% (11,4%, Z-score 2,4).
The Equally Weighed SP500 rallied 5,1% (9,3% YTD, Z-score 2,2), outperforming the S&P500 by 0,4%. The median SP500 YTD return closed the week at 6,9%.
Cboe Volatility Index sold off by -38,1% (-5,8% YTD) to 16,35.
The Eurostoxx50 rallied 2,9% (19,0%), underperforming the S&P500 by-1,8%.
Diversified EM equities (VWO) gained 1,9% (23,3%), underperforming the S&P500 by -2,8%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,7% (-4,1%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (6,2%).
10Y US Treasuries rallied -5bps (-56bps) to 4,01%. 10Y Bunds dropped -1bps (32bps) to 2,69%. 10Y Italian BTPs rallied -6bps (-12bps) to 3,40%, outperforming Bunds by -5bps.
10Y French OAT’s rallied -6bps (21bps) to 3,41%, outperforming Bunds by -5bps.
US High Yield (HY) Average Spread over Treasuries dropped -32bps (-18bps, Z-score -2,4) to 2,69%. US Investment Grade Average OAS dropped -5bps (0bps) to 0,87%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (-7bps) to 0,57%.
Gold rallied 4,3% (61,5%) while Silver rallied 13,0% (95,5%, Z-score 2,6). Major Gold Mines (GDX) rallied 14,1% (145,4%, Z-score 2,6).
Goldman Sachs Commodity Index gained 1,7% (7,9%). WTI Crude dropped -1,0% (-18,4%).
Overnight in Asia…
S&P future -48 points; Hong Kong +0.6%; Nikkei-1.9%; China +0.7%
US stocks futures start the week on the wrong foot with the Nikkei also dropping -2% after 2-year yields rose to the highest since 2008 and with bitcoin relapsing into weakness, shedding -5.5% overnight (below 86k). US Treasuries are also lower (+2bps) after White House economic adviser K. Hassett said “the markets were ready for the announcement of the new Fed Chair (himself as a dove?).
Gold and silver remained volatile with silver gaining further (+0.5%) and gold largely flat with the dollar also stable.
After posting a fourth consecutive monthly drop in November, oil rose 2% this morning after OPEC+ confirmed it will stick with plans to pause production hikes in Q1, while traders weighed the fallout from President Donald Trump on Venezuela as he called Venezuela air space …closed.
US and Ukrainian negotiators said they had productive discussions about a framework for a peace deal, but there was no final breakthrough as President Donald Trump kept pushing for a truce with Russia. Rubio said the aim of the negotiations wasn’t just about ending the fighting but also about helping Ukraine “enter an age of true prosperity.” Rubio also issued a firm rebuke of the EU intervention in the peace process, saying it should mind its own business, arguing the EU has no right to define “international law” and that it should not dictate the way the US insures its security. (President Zelensky will meet with President E. Macron again in Paris this Monday following the week end’s negotiation in Miami).
President Trump was said to be working behind the scenes on fallback options if the Supreme Court strikes down one of his major tariffs’ authorities.
CME Group, one of the world’s largest derivatives exchanges, said it has bolstered its backup cooling capacity after overheating sparked a catastrophic 10-hour outage that roiled futures markets on Friday, Bloomberg reported.
President Donald Trump’s proposed Nov. 27 deadline to secure Ukraine’s support for a US-backed peace plan isn’t set in stone and could drift into the following week, US Secretary of State Marco Rubio said, suggesting that plenty of work remains.
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