The US witnessed another (holiday shortened) week of stock market gains, pursuing one of the strongest equity squeezes of the last 100 years, supported by stronger than expected Nvidia earnings and confidence numbers falling to their weakest levels since May 2020 which added to a string of economic news, mostly on the inflation front, that have recently solidified expectations the Fed will stay pat for a few months and then start easing next year.
Quantitative hedge funds continued to lag, reportedly losing USD44bn over the last few days, wrong footed on the short equity exposure held in companies particularly vulnerable to higher rates (such as green shares which exploded higher last week) but also by some recovery in bond markets and wrong bets on future Fed actions after the Fed left interest rates unchanged earlier this month. Expectation is now well established that the Fed is likely done tightening and ready to cut rates next year, a view that was further reinforced by recent US inflation data coming in slightly better than expected (due to lower oil and energy prices for the most part).
Goldman also noted the high concentration of hedge funds in a handful of high momentum stocks (so called magnificent 7’s) where many investors have recently built positions to shield themselves from the uneven performance seen in other sectors.
The dollar weakened for a second week as well on the same expectation that the Fed will soon start to reduce the interest rate differential of the USD (vs. other DM currencies). CNY participated to the improving mood of EM currencies, also jolted by Chinese officials readying a forceful attempt to help banks plug an estimated $446 billion shortfall in funding needed to stabilize the property sector.
“The People’s Bank of China and the Saudi Central Bank signed a local currency swap agreement worth 50 billion yuan ($6.93bn) or 26 billion Saudi riyals, both banks said… as bilateral relations continued to gather momentum. The swap agreement, which will be valid for three years and can be extended by mutual agreement, ‘will help strengthen financial cooperation… expand the use of local currencies… and promote trade and investment,’ between Riyadh and Beijing, the statement from China’s central bank said.”, according to a Reuters report.
Gold notched a second week of gains, recapturing the 2000 level with silver outperforming and platinum also recovering.
The auction cycle will be watched this week, starting this Monday with the 2-year and 5-year notes).
On the geopolitical side, Israel and Hamas agreed on Wednesday to a ceasefire in Gaza for at least four days, to let in aid and free at least 50 hostages held by militants in the Palestinian enclave in exchange for at least 150 Palestinians jailed in Israel. Some hostages were freed over the week end before the process was interrupted but expected to continue early this week during the announced truce.,
That said, the global political agitation remained tense on the dynamics surrounding Middle East developments, exacerbated by immigration related problems that are increasingly polarizing politics in Europe with a multiplication of racist two-way violence and also exemplified by the Dutch election results that saw the party of extreme right winning the election and readying to form (or try to form) a new government. I found the following two videos (in French) particularly enlightening on the current state of affairs, one interview on LCI of former French Prime Minister D. de Villepin and another one on Sud Radio from French Philosopher A. Finkielkraut.
Just as the US support from both the US public and Congress towards more financial aid to Ukraine seems to be crumbling, Europe is “being called” (by the Economist inter alia) to pick up the baton which may be forthcoming but not without leading to even more polarization. Just as Germany tries to kick start its ailing economy and ensure additional funding for the green transition, the German constitutional court deemed as unconstitutional the allocation of unused pandemic funds for this purpose, leaving a hole of EUR60bn in Chancellor O. Scholtz budget negotiations for next year and making the necessary channelling of even more money towards Ukraine all the more challenging.
The decision from a Colorado judge to turn away a challenge looking to disqualify former President D. Trump from running for President and the difficult international context penalizing US President J. Biden also mean the US and the world ought to ready for the increased probability of another Trump Presidency which sank in the Economist “World Ahead 2024” annual predictive guide. In a nutshell, what is likely to occur in that case (according to the Economist prognose) is an assault on the department of Justice(…), a 10% Universal tariff tax (double of the current one), a brake applied to energy renewal efforts back in favour of oil, a return to protectionism (worse than IRA), a possible massive tax cut, a forced ending to Ukraine war, a possible de-escalation in Taiwan and (in our view) large(r) interest rate cuts (and cuts to central bank independence) which could put the dollar at risk and darken the inflation outlook, not to speak about a daily Presidential focus on the SP500 closing and intraday price action which would likely support further out-performance of US stocks in the years to come.
Over the past week, the S&P500 gained 1,1% (19,1% YTD) while the Nasdaq100 gained 0,9% (46,3% YTD). The US small cap index gained 2,0% (2,9% YTD). AAPL gained 0,1% (46,2%).
The Equally Weighed SP500 gained 1,5% (4,0% YTD), outperforming the S&P500 by 0,3%. The median SP500 YTD return closed the week at 2,3%.
CBOE Volatility Index dropped sharply by -13,0% (-42,5% YTD) to 12,46.
The Eurostoxx50 gained 0,9% (19,0%), underperforming the S&P500 by-0,3%.
Diversified EM equities (VWO) gained 0,9% (4,2%), underperforming the S&P500 by-0,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,8% (5,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (3,0%).
10Y US Treasuries saw yields rise 8bps (62bps) to 4,50%. 10Y Bunds climbed 6bps (7bps) to 2,64%. 10Y Italian BTPs climbed 4bps (-32bps) to 4,40%, outperforming Bunds by -2bps.
US High Yield (HY) Average Spread over Treasuries dropped -14bps (-94bps) to 3,75%. US Investment Grade Average OAS dropped -6bps (-29bps) to 1,14%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-21bps) to 0,79%.
Gold gained 1,6% (10,1%) while Silver rallied 4,9% (2,6%, Z-score 2,2). Major Gold Mines (GDX) rallied 2,5% (2,3%).
Goldman Sachs Commodity Index gained 1,7% (-2,6%). WTI Crude dropped -0,8% (-6,2%).
Overnight in Asia…
S&P500 -10 points; Nikkei -0.6%; CSI300 -1.2%
Asian shares are mostly lower and the SP500 dropped slightly despite soaring Black Friday sales as 10 y yields rose 3 bps. JPY strengthened slightly while Gold rose USD10 (2013).
US President Joe Biden backed prolonging the war pause, saying it’s allowing for the delivery of “critically needed” aid to Gaza and the recovery of hostages, after another 17 were released by Hamas on Sunday.
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