BentinPartner Weekly
Dear Reader,
Last week delivered some brutal trading sessions yet again, ending the period with a storm and sharp losses across asset classes after the release on Thursday and Friday’s toxic US economic data and in particular a sharp decline in consumer confidence (University of Michigan sentiment survey dropped to 50.2 from 58.4 (and 58.1 expected) accompanied by a much stronger than expected US inflation report as CPI YoY rose 8.6% from 8.3% (and 8.3% expected) with core inflation also increasing by a larger than expected 0.6% monthly increase (from 0.5% expected). This followed similar upside surprises from European inflation data the week before.
On Thursday, the ECB delivered some hawkish post Council meeting remarks, as doves had to capitulate on months of denial and justification. The ECB delivered an upward revision to its inflation forecast and downward revision to its 2022 and 2023 growth forecast. Bonds sold off (further), accompanied by a sharply weaker euro, and an even weaker Yen (now taking the heat from a yield anchoring policy that has outlived its usefulness and raised concerns that it might spark a turmoil on the scale of the 1997 Asian Financial crisis according to J. O Neill) and in actual fact an across-the-board “risk off” USD rally.
Most data last week pointed in the direction of a more stagflationary environment with growth stalling and inflation soaring. Of particular note was the swift reversal of US real estate dynamics which combined with soaring consumer debt provided more evidence of a developing recessionary pattern (and not necessarily of a soft nature).
The European periphery suffered a sharp selloff with Greek yields rising 67 bps (and double that amount in 10 days). Yields also rose more than 30bps in Italy, Spain and Portugal as the ECB readies to turn off the liquidity spigot (at least a little bit) after 11 years of staying put.
Bank shares were slammed nearly -8% last week despite rising yields with bank CDS climbing 8bps as US high-yield CDS surged 59 last week to 532 bps, the biggest weekly increase since June 2020.
Hedge funds are struggling as well with Tiger reporting last week that its hedge fund managing USD23bn was down -52% so far this year.
Liquidity across US markets stood at its worst level since the early days of the pandemic in 2020, according to investors and big US banks.
Investors resumed selling bond ETF’s (9.4bn after buying 7.2bn the previous week. One of the challenge this year is that so called “conservative” mandates are losing as much as “growth” ones due to the terrible bond markets performance, that is generally preferred in more conservatively managed portfolios.
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Over the past week, the S&P500 sold off by -5,1% (-17,9% YTD) while the Nasdaq100 sold off by -5,7% (-27,4% YTD). The US small cap index sold off by -4,5% (-19,7% YTD).
Cboe Volatility Index rallied 11,9% (61,1% YTD) to 27,75.
Interestingly risk reversals on the S&P500 suggested that at -5.1, option traders are absolutely not geared for a further selloff, with calls trading a full 3% of implied vol above their 3-year average vs. puts (typically in a selloff the risk reversal trades should trade around -10 (see bottom right chart on the Confidometer).
The Eurostoxx50 sold off by -4,9% (-14,3%), outperforming the S&P500 by 0,2%.
Diversified EM equities (VWO) dropped -1,5% (-13,5%), outperforming the S&P500 by 3,5%.
Over the week, Semis, Financials and Tech led the losses with a -7% drop with only China posting gains of 1.4% in our investment universe and gold mines ending flat. Energy was the best resisting sector posting a -0.9% loss.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,9% (8,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -1,1% (-2,9%).
10Y US Treasuries underperformed with yields rising 14bps (167bps, Z-score 2,1) to 3,18%. 10Y Bunds climbed 24bps (169bps, Z-score 2,2) to 1,52%. 10Y Italian BTPs underperformed rising 36bps (259bps, Z-score 2,4) to 3,76%, underperforming Bunds by 7bps.
US High Yield (HY) Average Spread over Treasuries climbed 30bps (155bps) to 4,38%. US Investment Grade Average OAS climbed 7bps (48bps) to 1,48%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 11bps (53bps) to 1,08%.
Gold gained 1,4% (2,1%) while Silver dropped -1,8% (-7,0%). Major Gold Mines (GDX) was unchanged on the week (1,7%).
Goldman Sachs Commodity Index gained 0,3% (54,1%). WTI Crude gained 0,3% (58,1%).
Overnight in Asia,,,
S&P500 +; Nikkei -2.7%; CSI300 -1.2%; Hang Seng -2.6%
Asian stocks dropped and bond yields rose further after US inflation added pressure on the Fed to intensify monetary tightening. Fed Funds expectations for 2022 are now at fresh highs of 318bps and 358bps for end 2023.
Cryptos selling gathered steam overnight with bitcoin shedding 6.5% after Celsius Network paused withdrawals, swaps and transfers on its platform, fuelling a broader market selloff as traders continued to question the sustainability of high-yielding tokens in the wake of the Terra blockchain collapse, Bloomberg wrote.
JPY weakened past the psychological level of 135 vs. USD, a 24-year low, as Japan’s policy stands at odds with developed-market peers hiking rates.
Oil retreated to about $119 a barrel.
Goldman wrote it expects the S&P to hit 3500 when recession hits while Morgan Stanley is of the view that the bottom will be closer to 3400 (from 3850 currently). The risk that is not priced according to them in is that the recession will start to hit earnings.
Kremlin responded after Polish EU official said West should give Ukraine nukes. It is probably a way to say that the war may not be over but soon have fulfilled its objectives.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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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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