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How Long Can Stocks Ignore Bonds …

Updated: Mar 10, 2023

BentinPartner Weekly



Last week delivered a tale of two stories starting with the shock and awe of European inflation coming way stronger than expected causing bond yields and tightening expectations to rise as more Fed officials also expressed their preference for more tightening (and a higher terminal rate) which led global stocks to drop below key technical levels (below their 200dMa) causing an avalanche of selling.


German CPI rose 9.3% yoy, up from 9.2% in January, led by services and food costs which occurred even as Germany moved to support household heating bills. The same nasty surprise came for the French (7.2%) and pan European CPI (8.5%) which both came in stronger than expected, adding more pressure to the ECB to keep tightening well past the expected March 50bps move.


Elsewhere on the data front, the S&P/Case-Shiller index showed that national home prices decelerated for the sixth straight month in December (+ 5.8% YoY, down from an annual gain of 7.6%, meaning prices are now down 4.4% from their June peak).


Then came starting on Thursday afternoon, the “miraculous” recapture of this technical “line in the sand” amidst deeply oversold conditions and depressed investors’ sentiment, as US stocks refused to follow through on the downside causing a recapturing of previously broken key technical levels and a subsequent violent short squeeze reversal as more investors rushed to capture the dip.


It is impossible to explain every short-term market move but the strength of Chinese stocks (on stronger than expected economic data) may have played a role (the idea of Chinese stocks going up while US stocks were going down may have delivered bad optics amidst fast deteriorating Sino-US relations and the threat of more US sanctions, likely playing a role to cancel a wave of inflation/rate related equity selling on Thursday. It would not have taken much to move the S&P500 needle away from danger zone (USD20mn one day call options could likely do the trick if recent history was any guide) thus influencing the price of the S&P, then causing a massive reversal of algo driven flows and another violent short squeeze on trillions of dollars of assets. Such are the market drivers at this stage.

Friday follow-through and across the board buying spelled more good news, leaving far behind any other and perhaps more fundamental preoccupation. It may also have opened the door to additional near-term gains.


What was surprising was the total ignorance of higher bond yields by equity markets. This is a point that was raised by Morgan Stanley last week.


On March 1st, the Bundesbank published its results and said it has suffered a EUR1trillion hit from its bond holdings, warning that future losses could wipe out its remaining financial buffers. Joachim Nagel, Bundesbank President, told a press conference… that the damage was ‘ultimately the result of the extraordinarily expansive monetary policy of the past few years. The Bundesbank has bought €1tn of mostly German government debt since 2015 as part of the ECB bond-buying programmes, which Nagel’s predecessor Jens Weidmann repeatedly voted against.”, the FT reported.


This will shake German public confidence said Markus Kerber, professor of public finance and political economics at the University of Berlin who outlined in this one-hour and wide ranging conversation (in French) (starting in 42’ or 49’ to go to the essence) some of the EU institutions’ upcoming challenges (including those of the ECB).



 

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Over the past week, the S&P500 gained 2,0% (5,7% YTD) while the Nasdaq100 rallied 2,7% (12,5% YTD). The US small cap index rallied 2,1% (9,8% YTD). AAPL rallied 2,9% (16,2%).

Cboe Volatility Index sold off by -14,7% (-14,7% YTD) to 18,49.

The Eurostoxx50 rallied 2,7% (13,6%), outperforming the S&P500 by 0,8%.

Diversified EM equities (VWO) rallied 3,1% (4,4%), outperforming the S&P500 by 1,1%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,6% (1,8%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (0,9%).


10Y US Treasuries dropped 1bps (8bps) to 3,95%. 10Y Bunds climbed 18bps (14bps) to 2,72%. 10Y Italian BTPs outperformed rising 9bps (-19bps) to 4,53%, outperforming Bunds by -9bps.

US High Yield (HY) Average Spread over Treasuries dropped -22bps (-72bps) to 3,97%. US Investment Grade Average OAS dropped -3bps (-9bps) to 1,34%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -4bps (-13bps) to 0,86%.


Gold rallied 2,5% (1,8%) while Silver rallied 2,4% (-11,2%). Major Gold Mines (GDX) rallied 6,1% (-0,1%).


Goldman Sachs Commodity Index rallied 3,2% (-2,4%). WTI Crude rallied 4,4% (-0,7%).


Overnight in Asia,,,


  • S&P500 +8 points; Nikkei +1.2%; CSI300 -0.5%

  • China’s GDP target for 2023, revealed at the annual session of the National People’s Congress Sunday, came in at 5%.

  • J. Powell will testify on Tuesday and Wednesday while ADP and JOLT employment data will be reported on Wednesday before Friday’s payrolls report.


 

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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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