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Fed Dovishness Next?

BentinPartner Weekly



Last week, Eurozone economic activity took a surprise turn for the worse as demand fell in a broad-based downturn across the region while German activity also contracted for a fourth straight month in October, matched by a decline in services which suggested a recession is well under way in Germany, according to Reuters.

This set European stocks into a further correction that culminated on Friday with Sanofi suffering its largest fall ever (nearly 20%) as the company reduced its outlook and operational margin.

ECB President C. Lagarde indicated last Thursday that another hike isn’t currently required and that markets and economists expect borrowing costs to stay at this level well into 2024.


US tech darling Alphabet also disappointed last week suffering a -10% drop (+39% YTD) while Tesla dropped -2.2% (+68.3%) as E. Musk conveyed his mostly negative (global geopolitical) outlook whilst also warning that lower financing rates are now needed to build new factories.


From Big Tech, only Microsoft was able to eke out a gain of 1% last week (+37.5% ytd) after azure’s 29% growth rate was shown outpacing the competition last quarter.


Banks dug themselves further into the hole for the year with regional banks relapsing into weakness, and J. Dimon announcing a decision to dispose of 12% of his family holdings in JPM shares (worth USD140mn), for the first sale in 16 years.


The usage of the Fed’s emergency funding rose to record last week as total bank deposits declined by USD83bn with investors remaining attracted by the safety and remuneration of US t-bills.


On the more positive side, 77% of the SP500 companies that reported so far managed to beat expectations but stocks could not really benefit, given the bond markets unrest and tech leaders started to lead the market lower while headlines remaining dominated by a worsening in the geopolitical situation and mounting risks of a widening conflict in the Middle East (which Iran and Russia are now officially warning about).


FX markets were calm last week with both JPY and CNY stable.


BoJ announced another unscheduled bond purchase program ahead of a policy meeting this week (to prevent bond yields from creeping higher) managing to keep USDJPY around 150 while CNY also remained locked around 7.32, supported by China’s announcement of additional fiscal support.


On Friday and over the week end, Israel conducted more ground operations with the country’s PM saying troops were still preparing for a full invasion while the US and other countries urged to delay it by fear of globalizing hostilities in the Middle East.


The two major events next week will be the FOMC meeting on Wednesday and Apple’s results on Thursday.


No tightening decision is expected, likely accompanied by a more dovish statement.


Apple which dropped -3% last week (+29.5% ytd) will be the last Magnificient 7 to report and from a position of relative technical weakness, trading below its medium and long-term moving averages, and with a high negative momentum and bearish option sentiment. Fundamentally, the company is facing a slump in smart phones sales with one of its main suppliers under investigation in China (Foxconn which dropped 10% on the news last week).


The US bond market traded lower until mid-week before staging a come-back ending the period with yields slightly lower.


Ken Griffin (Citadel) argued that his company’s basis trade (and the accompanying huge leverage resulting from buying large amounts US treasuries and short sale 10-year futures to capture a small spread) comes to the taxpayers benefit by reducing the yield on Treasuries by a few bps. Leveraged speculation resulting from this basis trade is a danger that the BIS has been warning about repeatedly, and that could backfire severely (as it did in March 2020, forcing the Fed to intervene in the Treasury market as well).


Griffin also addressed his market making activities, saying that the largest risk it faces is when pricing correlations between assets go “off the rails”. This is the same problem facing every “diversified” and “optimized” portfolio and all the more so, when the portfolio is as leveraged as Citadel’s which has all interest to position itself as a “too big fail” and indispensable operator. Perhaps the disproportionally high importance of Citadel as market maker for US equities and options is a major systemic risk all by itself. They are hiring the best and brightest but my 50cents on the liquidity they provide is that it is huge when things are doing fine and little to none in periods of market stress.


Speculative short positions in the SP500 were reduced further (to less than 0.1mn contracts), after a summer long period of short covering.


Gold and precious metals rallied towards the second half of the week on geopolitical concerns with Gold breaking above USD2000. Encouragingly, this move occurred as investors threw up the glove on their holdings with ETF gold holdings recently dropping by 600 tons in contrast with Central Banks that have been snapping up these sales and much more (1300 tons last year and more this year), in good knowledge of the present situation which is replete with mounting inflation, currency and geopolitical risks. The situation in the highly manipulated silver price remains tense with silver inventories falling to dangerously low levels and large traders seen preferring to short sale more shares of SLV rather than deliver silver inventories that do not exist, promising some fireworks down the road (in our view).




Over the past week, the S&P500 sold off by -2,5% (7,4% YTD, Z-score -2,1) while the Nasdaq100 sold off by -2,6% (29,7% YTD). The US small cap index sold off by -2,5% (-7,0% YTD). AAPL shed -2,7% (29,5%).

Cboe Volatility Index sold off by -2,0% (-1,8% YTD) to 21,27.

The Eurostoxx50 dropped -0,4% (8,9%), outperforming the S&P500 by 2,1%.

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


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (7,8%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (0,6%).


10Y US Treasuries rallied -8bps (96bps) to 4,83%. 10Y Bunds dropped -6bps (26bps) to 2,83%. 10Y Italian BTPs rallied -12bps (9bps) to 4,80%, outperforming Bunds by -6bps.

US High Yield (HY) Average Spread over Treasuries dropped -1bps (-35bps) to 4,34%. US Investment Grade Average OAS dropped -3bps (-6bps) to 1,37%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (2bps) to 1,02%.


Gold gained 1,3% (10,0%) while Silver dropped -1,1% (-3,5%). Major Gold Mines (GDX) dropped -0,9% (1,9%).


Goldman Sachs Commodity Index dropped -0,5% (1,4%). WTI Crude sold off by -3,6% (6,6%).



Overnight in Asia,,,


  • S&P500 +15 points; Nikkei -1.2%; CSI300 +0.7%; Hang Seng -0.3%

  • Chinese markets rallied further this morning following

  • US futures rallied in the last minutes on Friday on the news of the ground invasion with more gains seen this Monday morning (as they did during all of the previous six Monday morning sessions).

  • A good summary of the tense geopolitical situation was presented here.

 

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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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