Sep 11, 20227 min read

More Technically Driven Buying...

BentinPartner Weekly

Dear Reader,

Bulls took charge of the market last week, essentially looking past Central Banks’ signalling of tighter monetary policy coming forward. This was mostly technically driven buying based on Macd’s and moving averages triggering buy signals although the fundamental story remained weak with signs of economic weakness still abounding. Last week’s rally indeed took place despite serial Central Banks tightening (the ECB and BoC rose by 75bps, Chili unexpectedly by 100bps) and extreme bearishness from retail investors judging from the AAI weekly investors sentiment survey showing only 20% of investors holding a bullish outlook on stocks. In terms of investment flows, continued selling was observed on European shares, over the past month, all going (about USD100bn) to the US “safe haven” ahead of difficult few months expected for the European economy as it tries to grapple with a severe energy crisis.

The technical outlook improved last week, opening the possibility for more gains, perhaps helped by continued expectations of a Fed pivot, even as it accelerated tightening (with QT and jacking up or talking rates up).

It was the theme of this week end L. Summer’s Bloomberg Week interview to highlight everything that the dollar has got for itself. We are more of the view that the USD has now priced most of the good (or bad) news and that the ECB pivot (towards more tightening) last week will help proving him wrong on timing, even if there may be better candidates than EUR to express a “topping off” dollar story, starting with the currency of energy producing countries (beyond those now deemed uninvestable and that are performing strongly as well) which stand to win from a split between “haves and have not” on the energy front, but also from large and widening carry advantages (7-9%) vs. the USD and now a now favourable technical configuration.

The short-term consequences of the war in Ukraine are dollar positive but, in all likelihood, the de-dollarisation of the world economy that will result from it will be detrimental to the USD (as there will be less need to hold USD reserves) over the medium and long term. The never answered question is what currency will take the place of the USD as this situation unfolds. The euro weakness and JPY “benign neglect” Central Bank policy are both strategic wins for the US in that respect as the EUR and even more so the JPY (The BOJ said again last week that it would buy 550 billion yen ($3.8bn) of five-10year bonds at its regular operations, up from 500 billion yen scheduled to protect its yield cap in the face of coordinated CB’s tightening), have now lost as much if not more credibility as reserve currencies as the USD. Less reserves will likely be needed to accommodate the needs of a de globalising world economy (the point of holding reserves is often to cover the needs of energy imports in foreign currencies) and currencies likely to win over the long term could be AUD, CAD, MXN, BRL, CNY, INR, IDR, ZAR. Short term, CNY is a hold rather than a buy due to the US-PBOC monetary policy divergence (inverting differential), the unravelling of the Chinese real estate bubble and the consequences of a strict(er) covid policy but CNY weakness will be temporary, we believe. Investment flows into CNY bonds (typically reserves investments) are not declining from what we can judge despite the recent bout of CNY weakness but clearly more CNY weakness over the present troubled times would be a US win as well.

Elsewhere in China, China’s foreign exchange reserves declined for a second straight month to the lowest since October 2018, down 50bn as China’s trade surplus declined. China also sent clear messages of its discomfort with the yuan’s weakness by setting its reference rate with a strong upwards bias despite also deciding to reduce foreign currency reserve requirements (a form of easing). China’s biggest four banks were reportedly hit by a more than 50% increase in overdue loans from the property sector over the past year, with five of China's biggest state-owned banks posting modest gains in profits in the second quarter. the FT reported.

On the geopolitical fronts, the US said it was planning to sell Taiwan $1.1bn in weapons, including 60 Harpoon anti-ship missiles, as Washington steps up efforts to bolster the country’s defences as it comes under increasing military pressure from China.

Turkish President Tayyip Erdogan said… Russia is cutting natural gas flows to Europe in retaliation for sanctions, adding that Europe is ‘reaping what it sowed’… ‘I think Europe will experience serious problems this winter, noting that his country does not face such challenges. As the country faces pressures to adopt the Western posture, “India's finance minister said… importing Russian oil was part of the country's inflation-management strategy and that other countries were doing something similar.

According to a WSJ article that caught investors’ attention, the Fed could tighten next week (at the Sep 21th meeting) by 75bps as well. Last week, the US service sector expanded in August at the fastest pace in four months amid a pickup in business activity and new orders, while price pressures continued to ease. The ISM services index edged up to 56.9 from 56.7, pointing at resilient and robust consumer demand for services despite high inflation, rising interest rates and general uncertainty about the economic outlook, Bloomberg reported.

The IMF published an interesting study suggesting that the US unemployment rate may need to reach as high as 7.5%, double its current level, to end the country's outbreak of high inflation.

Over the past week, the S&P500 rallied 2,6% (-14,4% YTD) while the Nasdaq100 rallied 2,6% (-22,8% YTD). The US small cap index rallied 3,3% (-15,8% YTD). AAPL dropped -0,4% (-11,4%).

CBOE Volatility Index declined by -10,8% (32,3% YTD) to 22,79.

The Eurostoxx50 gained 0,7% (-14,8%), underperforming the S&P500 by-1,9%.

Diversified EM equities (VWO) gained 0,2% (-17,1%), underperforming the S&P500 by-2,4%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,6% (13,9%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (-5,9%).

10Y US Treasuries underperformed with yields rising 12bps (180bps) to 3,31%. 10Y Bunds climbed 17bps (188bps) to 1,70%. 10Y Italian BTPs underperformed rising 18bps (285bps) to 4,02%, underperforming Bunds by 6bps.

US High Yield (HY) Average Spread over Treasuries dropped -44bps (166bps) to 4,49%. US Investment Grade Average OAS dropped -5bps (55bps) to 1,55%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -10bps (62bps) to 1,17%.

Gold gained 0,3% (-6,1%) while Silver rallied 4,5% (-19,1%). Major Gold Mines (GDX) rallied 8,8% (-21,6%).

Goldman Sachs Commodity Index rose 0,4% (29,5%). WTI Crude gained 0,2% (15,4%).

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