FOMO Remains in Charge...
Last week delivered another strong performance for risk assets with FOMO taking precedence over a hawkish Fed “skip” and an ECB rate hike, with sentiment remaining supported by the BoJ passing (as usual) and the PBOC delivering a rate cut which enabled Chinese stocks to recover last week. The US economic calendar failed to deliver hard evidence of a slowing economy but confirmed the improving inflation outlook. The relentless equity rally was only interrupted by Friday’s quadruple witching which led to a minor correction.
Tuesday delivered the expected improvement on the inflation front with the CPI dropping YoY to 4% (from 4.9% last month) while the MoM print came at 0.1% in line with expectations (from 0.4% last month). The following MoM PPI contracted more than expected by -0.3% (vs. 0.2% last month) with the YoY number dropping to 1.1% (vs. +1.5% expected).
Last week saw additional technical improvement with the equity rally broadening beyond the 7 tech names that drove major US markets so far this year. There was also some reduction in the speculative short position in S&P futures as reported by the CME on Friday but nothing meaningful to the point that it could embolden fresh hedging or short selling all by itself, in our view.
The AAII survey showed a larger percentage of investors turning bullish on stocks (still below 50% at 45%) but there was also some noticeable dichotomy observed between what investors said (more bullish on stocks) and what they did as some USD8.7bn left equity ETF’s migrating to bonds.
All of the above being said, the fact that the market rallied 20% from the lows should not be confused with a new bull market.
Inflation remains at 4% with base effects likely to fade away, making further improvement more difficult to achieve from current levels. The debt/fiscal situation remains near catastrophic as well in the Western hemisphere which supports the case for precautionary further diversification in terms of currencies, bonds and stocks. However, and in terms of positioning, that situation remains known to investors who hold historically high “short” exposure on US Treasuries and across the curve.
At some point the Fed will have to chose between fighting inflation and saving banks and government debt and for this reason we continue to believe, as the curve inversion suggests, that the Fed will have to cut earlier than it is ready to concede today.
Commodities got out of their half year flunk, rallying 4.1% with oil recouping 2.3% and Natural Gas rallying 16.8% (still down 41% ytd). Copper jumped 2.9% on China’s monetary easing action while Wheat surged 9.2% (down 13%) as shipments by Ukraine from the Black Sea corridor slowed with Russia also unlikely to approve an extension of the so-called grain deal when it expires in mid-July (the US spring wheat belt is also getting impacted by dryness and high heat). Corn also rallied 6.0% (down 6%).
Over the past week, the S&P500 rallied 2,2% (14,9% YTD) while the Nasdaq100 rallied 3,8% (38,2% YTD). The US small cap index gained 0,5% (6,6% YTD). AAPL rallied 2,2% (42,3%).
Cboe Volatility Index sold off by -2,1% (-37,5% YTD) to 13,54.
The Eurostoxx50 rallied 2,5% (18,9), outperforming the S&P500 by 0,3%.
Diversified EM equities (VWO) rallied 2,6% (7,6%), outperforming the S&P500 by 0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,2% (1,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,6% (2,3%).
10Y US Treasuries dropped 3bps (-11bps) to 3,76% but 2Y Treasuries rose 12 bps to 4.71%, not too far away from prior to the beginning of regional banking woes back in March with bond seeing a 72% probability of a 25-bps hike in July and peak Fed funds at 5.30% in September.
10Y Bunds climbed 10bps (-10bps) to 2,47%. 10Y Italian BTPs rallied -8bps (-68bps) to 4,04%, outperforming Bunds by -18bps.
US High Yield (HY) Average Spread over Treasuries dropped -15bps (-68bps) to 4,01%. US Investment Grade Average OAS dropped -7bps (-3bps, Z-score -2,3) to 1,40%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-12bps) to 0,88%.
Gold gained 0,0% (7,4%) while Silver gained 0,3% (0,7%). Major Gold Mines (GDX) gained 1,0% (9,5%). Bitcoin gained +2.4% (+58.6%).
Goldman Sachs Commodity Index rallied 3,9% (-7,3%, Z-score 2,6). WTI Crude rallied 6,2% (-11,2%).
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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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