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BentinPartner Weekly



Dear Reader,


Last week brought in a weaker than expected US Q2 GDP growth at 2%, dragged down by supply bottlenecks, declining confidence, and higher inflation expectations. Friday saw, according to the WSJ inflation rise at the fastest pace in 30 years In September while workers saw their biggest compensation boost in at least 20 years”. Similarly, Euro area inflation was reported on Friday to have breached 4% (from 3.7% expected) for only the second time ever, adding to the ECB battle with the markets in reining increasingly aggressive rate hike expectations.

This exposed the vulnerability of investment bubbles with inflation breaking out and with the “temporary” narrative increasingly looking like a walking dead, according to a growing list of analysts, investors, and indeed central bankers outside the European perimeter (which seems to have become an island of some sort).


Bond markets were quite volatile last week, climbing for the most part in a strong flattening manner (with the entire yield curve moving higher except at the very long end) as market participants seemed worried by inflation to the point of bringing rate hike expectations forward whilst the long to very long end seemed more concerned about growth.


Various hedge funds ran in trouble last week including Rokos that suffered an 11% loss (-20% ytd) as more people were forced to capitulate on their believing the Fed’s (and ECB’s) transitory narrative. Late last week, Goldman revised its forecast for the first Fed hike by a full year from July 2023 to July 2022 and another rate hike for November (with two rate hikes per year thereafter) and said it expects the Fed to start tapering USD15bn a month from next week onwards.


The Fed and BoE policy meetings will be the highlights of this week (next to the US job report on Friday) but the BoA meeting taking place earlier on Tuesday will take some particular significance as well, especially considering that the Reserve Bank’s commitment to its yield curve control policy target of 10bps seems to have been either abandoned without confirmation so far or challenged by the market following a rather dramatic increase to 80bps in Australian 2 year note last week. Norway will be meeting on November 4th as well and is fully expected to tighten by 25bps as the economy is doing fine but inflation going higher.

The BoC had also surprised the market by suppressing its bond-buying program abruptly last Monday, pulling forward its expectations for the first rate hike.


Elsewhere in China, Evergrande was urged to make bond payments out of the founder’s pocket but uncertainties remained on the outlook of the real estate market (and more developers such as Kaisa Group). China’s economic growth is expected to also expand by only 5.2% (from 5.6% expected previously).


Late last week, OPEC+ that will officially meet on November 4th, balked after Biden asked for more production after pressure built on the 23 oil-producing nations to increase production. “Many countries and suppliers are calling for more oil and asking the OPEC+ to increase the oil production,” one OPEC oil Minister said “But in my humble opinion the current plan of increasing production by 400,000 barrels a day agreed in July by OPEC+ is working well and there is no need to deviate from it.” If this is the case, oil is more likely to be heading towards USD100 during the course of the winter.


Despite all of the above, over the past week, the S&P500 gained a further 1,4% (22,8% YTD) while the Nasdaq100 rallied 3,2% (23,1% YTD). The US small cap index added 0,3% (16,3% YTD). CBOE Volatility Index rallied 5,4% (-28,5% YTD) to 16,26.


The Eurostoxx50 gained 1,4% (22,8%), outperforming the S&P500 by 0,1%.

Diversified EM equities (VWO) sold off by -2,2% (1,1%), underperforming the S&P500 by-3,5%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,5% (4,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (0,7%).


10Y US Treasuries rallied -6bps (66bps) to 1,57%. 10Y Bunds were unchanged on the week (46bps) to -0,11%. 10Y Italian BTPs underperformed rising 17bps (63bps, Z-score 3,0) to 1,17%, underperforming Bunds by 9bps


US High Yield (HY) Average Spread over Treasuries climbed 2bps (-73bps) to 2,87%. US Investment Grade Average OAS climbed 1bps (-7bps) to 0,95%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 1bps (-1bps) to 0,58%.


Gold dropped -1,4% (-6,1%) while Silver shed -3,0% (-9,7%). Major Gold Mines (GDX) sold off by -3,9% (-12,0%). Bitcoin and cryptos had a good run last week, taking the steam of gold, for now, supported by complacent regulation and rising adoption (Cuba, Ukraine, El Salvador…) which is what is driving cryptos higher (not their intrinsic value which does not exist). Over the weekend, Australia said they would authorize a cash-based ETF (not one based on futures carrying silly backwardation characteristics).


Goldman Sachs Commodity Index dropped -1,4% (47,5%). WTI Crude dropped marginally -0,7% (71,5%). Goldman reiterated its forecast for a 90$ oil price for year-end.


Overnight in Asia,,,


  • S&P500 +7points; Nikkei +2.3%; CSI300 -0.2%

  • Asia was mixed with the exception of Japan supported by the elections (and the Prime Minister keeping his majority) and expectations for fiscal stimulus while concerns on China’s real estate remained. China’s PMI also came weaker than expected overnight while input and output prices jumped. Q4 GDP consensus forecast is at 3.5% but could be heading towards 3%. estimate.


Have a nice week ahead and stay safe.

 

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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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