BentinPartner Weekly
US stocks recovered most of what they had lost the previous week, taking in stride a tepid reception of Nvidia results and the sudden escalation of geopolitical tensions on the Ukrainian front as favorable economic numbers, the perspective of a pro (US) business administration, FOMO and seasonality effects all took precedence on the war mongering tactics of the exiting US administration.
If this year’s performance was to end here, it will be the second consecutive year of a 20%+ gain for the SP500 which only happened four times over the past 150 years, BofA's Michael Hartnett noted.
While this could be an invitation for caution (especially with a US valuation at 26 times earnings which is the 4th highest in 125 years), investments heading tor US markets remained impressive with ytd flows into US stocks reaching USD448bn, overtaking the previous record of USD400bn seen in 2021 and similar exceptionalism observed on US IG bonds (USD425bn) overtaking the record witnessed in 2019. As regards what could happen “after” such exceptional twin years, history suggests it will be another “big” double digits performance, either up or down… Michael Hartnett also noted.
Considering what is in store with the upcoming Trump administration (tax and rate cuts), these two policy levers have generally been the “secret sauce to avoid sharp reversals”, assuming that lower rates would automatically lead to lower yields, which is far from certain when coupled with higher deficits and possibly still…higher inflation. That said, the view is increasingly being discussed is that the Fed will restart QE sometimes next year (if bond yields head the wrong way following rate cuts).
This makes the continuation of the stock market rally perhaps more likely and this is also the view of Morgan Stanley of which the Chief US strategist upon returning from his Bank’s most global Asia Pacific Summit said that if Musk is successful in streamlining government, it would “broaden earnings growth and stock market performance”.
Perhaps the strategist also listened in awe to Argentinian President Milei who has followed the same endeavor over the past year using his chainsaw with some success it seems since last year and he is of the opinion that E. Musk new friendship with the Argentinian President will help him streamline the US government as well.
“Despite the S&P 500’s near-record-high valuations, the consensus view remains that they are justified by the also-high ROE and better growth profile – the definition of high quality”, he reflected, also noting that Chinese shares might be cheap in comparison but still exposed to the threat of large tariffs and debt deflation (which seems to keep investors “skeptical and uninterest”).
US economic data published last week were also supportive, likely fueled by a powerful wealth effect and optimism surrounding the “America first” doctrine …and what it might mean for the rest of the world.
The S&P Global Services PMI Index was up two to a stronger-than-expected 57, the highest reading since March 2022 and while the Manufacturing PMI was little changed at 48.8, the Composite PMI also rose to the highest level since May 2022. The number of Americans filing new applications for unemployment benefits dropped to a seven-month low last week (by 6,000), suggesting that job growth improved in November after dropping sharply last month amid hurricanes and strikes. According to most recent surveys, Americans also plan to spend more on holiday shopping this year than they did last year, according to pretty much every consumer survey conducted over the past several weeks. Lastly, confidence among US homebuilders advanced to a seven-month high in November on a jump in sales expectations and optimism about Trump likely to ease regulatory burdens.
All of the above being said, consumers were also reported to have had a tougher time accessing credit this year, with applications for auto loans and mortgage refinancing being turned down at the highest rates in more than a decade (as more Americans are falling behind on their car payments) which is consistent with economic improvements being primarily caused by the wealth effects on those positively impacted by roaring financial markets. In that context, it is interesting to note that sales of bonds backed by the riskiest auto loans to subprime borrowers hit nearly $40 billion this year through October, up 17% from all of 2023…according to the WSJ which also reported intermediaries talking about “deals almost 20 times oversubscribed”.
Half-jokingly, the CEO of JPMorgan, referring to hedge funds and private equity firms that were piling into the lending business as banks like JPM faced higher capital requirements, said ‘They’re dancing in the streets’. When Donald Trump won a return to the White House, it was the financiers’ turn to boogie… “Scant oversight gives shadow financial intermediaries free reign to build leverage and juice returns”, J. Dimon said.
Elsewhere, in particular on the geopolitical side, there was no reason to boogie. Ever since its full-scale invasion of Ukraine in February 2022, Russia tried to deter the west from supplying Kyiv with ever more potent weaponry by threatening retaliation and escalation of the war. On each occasion, whether for the supply of short-range missiles, tanks, F-16 fighter jets and longer-range missiles, Moscow’s bluff has been called. Some 72 hours after the US gave permission to Kyiv to use long-range US, UK missiles, Moscow hit back with a strike on Ukraine of the likes never seen before with the first combat use of a nuclear-capable intercontinental ballistic missile. Vladimir Putin also formally lowered the threshold for using nuclear weapons, opening the door to a potential nuclear response by Moscow to even a conventional attack by any nation supported by a nuclear power.
Despite these grave developments, stocks did not look back, unlike bonds and precious metals perhaps which both rallied last week.
Gold rallied 6% and German bund yields dropped 11bps to a five-week low of 2.24%. However, Bunds were followed unevenly across Europe with French spreads climbing back near the widest level in 12 years because there is something specific about Europe to worry about with its economy showing more signs of stalling while traders keep in mind a sense geography with the proximity of the conflict and at a moment when the current US administration remains eager to poke the bear before the incoming administration takes over which promised to do the opposite and to entrust Europe with more of the burden of financing a war that is already lost (in most respects).
The ECB warned in its annual policy review that “the Eurozone risks another debt crisis if the bloc cannot boost growth, lower public debt and fix ‘policy uncertainty’. The report pointed to ‘elevated debt levels and high budget deficits’ as well as tepid growth and uncertainties caused by recent ‘election outcomes at the European and national levels, notably in France’. Politics remained treacherous in France after French far-right leader Marine Le Pen threatened to seek to topple Prime Minister Michel Barnier's fragile coalition government.
Fed speeches remained on the cautious side as regards easing with Barkin, president of the Richmond Fed, telling the FT that he expected inflation to continue dropping across the world’s largest economy, even though progress has plateaued… cautioning ‘We’re somewhat more vulnerable to cost shocks on the inflation side, whether they be wage-[related] or otherwise, than we might have been five years ago,’ said Barkin…” Federal Reserve Governor Michelle Bowman also expressed discomfort with the Fed cutting interest rates while inflation continues to run above the Fed's 2% goal.
Over the past week, the S&P500 gained 1,7% (25,3% YTD) while the Nasdaq100 gained 1,9% (23,5% YTD). The US small cap index rallied 4,5% (19,0% YTD). AAPL rallied 2,2% (19,4%).
The Equally Weighed SP500 rallied 2,5% (17,6% YTD), outperforming the S&P500 by 0,9%. The median SP500 YTD return closed the week at 17,0%.
Cboe Volatility Index sold off by -5,6% (22,4% YTD) to 15,24.
The Eurostoxx50 dropped 0,0% (9,0%), underperforming the S&P500 by-1,7%.
Diversified EM equities (VWO) gained 0,6% (10,5%), underperforming the S&P500 by-1,0%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,8% (12,0%, Z-score 2,0) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (0,3% ).
10Y US Treasuries rallied -4bps (52bps) to 4,40%. 10Y Bunds dropped -11bps (22bps, Z-score -2,6) to 2,24%. 10Y Italian BTPs dropped -5bps (-20bps) to 3,50%, underperforming Bunds by 6bps.
US High Yield (HY) Average Spread over Treasuries dropped -8bps (-65bps) to 2,58%. US Investment Grade Average OAS was unchanged (-19bps) to 0,86%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 2bps (-4bps) to 0,64%.
Gold rallied 6,0% (31,7%) while Silver rallied 3,6% (31,7%). Major Gold Mines (GDX) rallied 7,8% (23,4%).
Goldman Sachs Commodity Index rallied 3,4% (2,4%). WTI Crude rallied 6,3% (-0,6%).
Overnight in Asia…
S&P future +27 points; Hong Kong -0.3%; Nikkei 1.5%; China -0.5%
Like in the good old days, somebody bombed gold overnight in a low liquidity overnight session, erasing some of Friday’s strong gains at the same time as EURUSD rebounded. I could not see anything that might have justified this move (economic or geopolitical) beyond forcing some technical stops in an empty market. So, it will most likely end like all others with structural buyers seizing the opportunity to buy the dip.
Over the week end, D. Trump appointed S. Bessent, a billionaire (short seller) hedge fund manager for Treasury secretary (formerly associated to G. Soros). He is known for defending a tough stance on China as regards tariffs and for wanting to hold a shadow chair for the Federal Reserve.
As a late follower to the US and UK stance, France made clear (to the BBC) over the week end (and in contrast with the German opposition), that it would authorize Ukraine to use SCALP long range missiles on targets on the Russian territory “in the logic of self-defense”. Russia responded swiftly that Foreign Minister Barrot’s comments are “not support for Ukraine but rather death knell for Ukraine”.
Romania’s presidential election was upended by a nationalist who has voiced admiration for Russia’s Vladimir Putin, setting up a likely runoff with an establishment candidate in one of the country’s biggest upsets since the end of communism, Bloomberg reported.
Left-wing politician Yamandú Orsi is poised to become the next president of Uruguay after his main challenger in the runoff conceded defeat Sunday, Bloomberg reported. He promised a renewal of the left by favoring dialogue with everyone, and he insisted during the campaign that he’s not planning any dramatic changing in the country of 3.5 million people. Although he says it’s important to promote social welfare, Orsi used a friendly tone toward the market and private sector, Bloomberg also reported.
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