BentinPartner Weekly
Short covering, a dovish Fed and a small reduction in the US quarterly refunding enabled US stocks and bonds to post their best week of the year.
US data were mixed with consumer confidence dropping for a third month in September to 102.60 (from 104.3) on higher mortgage rates and higher inflation whilst October ISM Manufacturing dropped further to 46.7 (from 49 previously and expected).
That said, and despite higher mortgage rates, a national gauge of US house prices rose further, reaching a new high in August after seven months of gains, increasing 0.9% in August (+2.2% yoy).
The move lower in yields (and the accompanying rally in risk assets) continued nonetheless on Friday, supported by a weaker US job report (+150k job “assumed” to have been created vs. 180k expected and 297k previously while unemployment rose to 3.9% from 3.8%) that sort of validated the narrative for a more dovish Fed (despite a report published earlier in the week showing an increase in the JOLT US job openings for September and therefore also signs of persistent labour market tightness.
Last week, European inflation eased to its lowest level in more than 2 years (2.9% in October down from 4.3% reported the previous month and better than the 3.1% estimated) as the economy shrank which enabled European bond yields to also drop and spreads from the periphery to narrow further. Whether resulting from the ECB policy transmission mechanism, France’s relative fiscal profligacy, Portugal’s relative fiscal rectitude, enhanced risk appetite or all of the above, the yield differential between 10-year French OAT’s and Portuguese bonds reached an all time low of 6 bps last week.
Geopolitics brought little appeasement but markets have been conditioned for a long time not to care (too much or for too long), of whatever happens on that front. This did not prevent J. Dimon from JPMorgan to refer to the current period as “the most dangerous time, the world has seen in decades” while L. Fink from Blackrock said he was “envisioning a future with less hope and more fear”.
On markets, S. Druckenmiller said he bought “massive amounts of 2-year notes (whilst remaining short the long bond…but did not say if the trade was duration weighed…) and also charged Treasury Secretary J. Yellen for mismanaging the duration of the US debt by not refinancing the US debt when long term rates were at 1% (“like all the caddies” that he knows), going as far as questioning her legitimacy at her post. He may have had a point (after all this what European lenders have done to a much larger extent) but J. Yellen may have thought the Fed would have had to buy these high duration bonds after all. In any case, J. Yellen felt compelled to respond with a technical explanation that many (including me) failed to understand but also by announcing a slightly smaller quarterly refunding which coupled to a more dovish Fed statement enabled a strong movement of short covering in US treasuries as well (without altering in any way the perspective of the coming avalanche of debt issuance nor the unsustainable nature of US debt dynamics).
With 60% of Canadian mortgages coming up for renewal in the next three years, RBC warned that at current levels of interest rates Canadians were potentially facing a 48% increase in interest payments (unless rates head back down).
The BoJ displayed further efforts to signal on Tuesday an intention to dismantle sometimes next year the (very hard to justify) central bank’s ultra-easy monetary policy and strong hold on long term rates (saying the 1% 10-year yield would now be considered as a “reference” rather than a “hard limit”). Soon thereafter, the BoJ had to backtrack with yet another special unscheduled bond buy-back operation…
Last week’s global move lower in yield and improved risk appetite drove the dollar down across the board, in particular vs. EM currencies which resumed their upwards channels. EM spreads on USD denominated debt also narrowed markedly.
Gold and precious metals gained late in the week in lockstep with a lower USD. The World Gold Council reported that Central Banks loaded up more gold than expected this year as Central Banks expanded their reserves by 337 tons in the last three months through September, following 175 tons in Q2, bringing the total for the year to 800 tons, driven mainly by China, Poland and Singapore (+ unreported buying).
Chinese markets were well supported last week as well, despite investors seen further deserting them in October, jolted by more favourable global dynamics and as China vowed to set up a long-term mechanism to resolve debt risks tied to local authorities. Central authorities also signalled a willingness to expand central government borrowing. China’s manufacturing, similarly to the US (of which manufacturing activity dropped to a three-month low), unexpectedly shrank in October (Caixin manufacturing dropped to 49.5 from 50.6 in September).
Over the past week, the S&P500 rallied 5,8% (13,7% YTD) while the Nasdaq100 rallied 6,5% (38,1% YTD). The US small cap index rallied 7,6% (0,1% YTD). AAPL rallied 5,0% (36,0%).
Cboe Volatility Index sold off by -29,9% (-31,2% YTD) to 14,91.
The Eurostoxx50 recouped +4,1% (13,4%), underperforming the S&P500 by-1,7%.
Diversified EM equities (VWO) rallied 4,6% (1,4%).
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,2% (6,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,9% (1,5%).
10Y US Treasuries rallied -26bps (70bps) to 4,57%. 10Y Bunds dropped -19bps (7bps, Z-score -2,3) to 2,65%. 10Y Italian BTPs rallied -29bps (-20bps, Z-score -2,5) to 4,51%, outperforming Bunds by -10bps.
US High Yield (HY) Average Spread over Treasuries dropped -39bps (-74bps) to 3,95%. US Investment Grade Average OAS dropped -4bps (-10bps) to 1,33%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -10bps (-8bps, Z-score -2,2) to 0,92%.
Gold dropped -0,7% (9,2%) while Silver gained 0,4% (-3,1%). Major Gold Mines (GDX) gained 0,9% (2,8%).
Goldman Sachs Commodity Index dropped -1,3% (0,1%). WTI Crude shed -5,9% (0,3%).
Overnight in Asia…
Ø S&P500 -1 point; Nikkei +2.3%; CSI300 +1.3%; Hong Kong +1.8%
Ø Asian stocks are following US stocks higher this morning on further hopes the interest rate cycle has peaked. Most Asian currencies rose further.
Ø While the focus shifted more decisively towards the developing war in the Middle East, two articles received a particularly wide echo in the Economist and Time Magazine covering the Ukrainian situation and projecting an unusually bleak picture regarding the Ukrainian counter offensive. European Commission President Von der Leyen lauded “excellent” progress made by Ukraine on its structural reform, adding it was impressive to see.
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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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