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Preparing For The Fourth Turn ?

BentinPartner Weekly



Stocks dropped for another week on more Chinese woes after Zhongzhi, a giant Chinese shadow bank, halted payments to thousands of clients in their investment products, one week after Country Garden found itself filing for bankruptcy in New York. The Chinese Central Bank reaction on Tuesday to cut rates and inject liquidity received a tepid reaction, as the government so far resisted to deliver a more forceful fiscal response. Chinese stocks dropped further into bear market conditions as Chinese retail sales also showed weak consumer demand along with rising unemployment (the decision of the government to stop publishing youth unemployment did not go unnoticed). The currency intervention became more assertive with stronger fixings leading to a stabilisation. The CDS of Chinese four largest banks widened by 22 bps to 86bps (with a similar move seen in US HY). The Hang Seng Index dropped 5.6% and Chinese mainland stocks by 2.6% but weakness was barely contained to Chinese stocks and most international equity indices also shed 2-3% on the week despite the USD4bn inflows witnessed into the largest Chinese stocks ETF’s (despite massive Hedge Funds selling) suggesting large state affiliated institutions intervention.


US Bonds weakened further with US 10-year yields adding 10bps on the week which hurt growth stocks more than others, including the fantastic 7 that based on their current technical posture have been narrowed to the magnificent 2 or 3. US credit spreads widened on the week with Fannie Mae benchmark yielding climbing 17bps, forcing mortgage rates higher, handicapped by the long end underperformance and credit spread widening, Freddie Mac 30-year mortgage rates rose to 7.58%, likely explaining why home purchase applications slipped for a fifth straight week. Saudi Arabia reported that its stock of US Treasuries dropped for a third consecutive month, this time by USD3bn in June to the lowest level in 6 years (currently USD108bn). UAE reportedly sold USD4bn in June.


US Credit markets were also weaker as a result of Fitch warning that the US banking industry is facing the risk of sweeping credit downgrades, including for some of the largest banks.


European equity markets remained vulnerable to a further technical correction, leaving the Dax in a precarious situation.


Elsewhere, an emergency rate hike of 350bps by the Central Bank of Russia accompanied by an obligation of Russian exporters to convert 80% of their foreign currency revenues also took the pressure off RUB which rallied (from a peak at 100 to 94).


Oil market dynamics remained tense following a drop in US shale oil production which raised question marks on the ability of US producers to keep up with the increased supply of the past 10 years (the depletion rate of shale oil is way faster than for traditional oil wells requiring constant new discoveries).


On the inflation front last week, UK data showed that despite recent BoE rate hikes, core inflation (ex food ex energy) remained at 6.9%, unchanged from the previous month despite an improvement noted on the headline number (which dropped to 6.8% from 7.9%) which left traders with the perspective of additional rate hikes.


Sentiment on equity markets remained buoyant judging from a BoA survey showing positioning being the least underweighted since 4/2022 and the positioning of CTA’s that have been lagging so far this year, having increased to their largest net long on major world indices since the beginning of the pandemic, according to Deutsche Bank.


On the US data front, US factory production jumped 1%, the most since the beginning of the year, led by a surge in car production to its highest level since 2018.


Emerging markets weakness was palpable for most of the past week, kickstarted by Argentina’s 20% devaluation on Monday, and as “risk off” sentiment took hold but major EM currencies recovered on Friday and the case for investing in emerging markets (despite the usual pundits claiming otherwise) remained compelling in our view, not for the week of poor month of August but for years to come as political, economic and currency developments favour a rebalancing of power towards the global South. If China makes a 4% growth, it will still be twice the growth expected in the US/Europe when the dust settles. As for L. Summers saying that having Americans learning Chinese was a sign that China was topping off, I doubt he will prove very prescient... That is not to say that Chinese stocks are already a “buy” but what the Chinese slowdown shows is in large part, the efficacy of the US attrition policy towards China (and of everybody else questioning a subordination to US interests). It will only comfort and accelerate the determination of the BRICS+ to 1. Trade in local currencies 2. De­­-dollarize 3. Divest from US Treasuries (as the BRICS Summit will only make clearer), exacerbating the funding difficulties of the US and its dire fiscal situation. This is more a process than an event.

 

Over the past week, the S&P500 sold off by -2,1% (14,1% YTD, Z-score -2,3) while the Nasdaq100 sold off by -2,2% (34,5% YTD, Z-score -2,3). The US small cap index sold off by -3,3% (5,9% YTD, Z-score -2,2). AAPL dropped -1,9% (34,3%).

Cboe Volatility Index rallied 16,6% (-20,2% YTD) to 17,3.

The Eurostoxx50 sold off by -2,4% (14,4%), underperforming the S&P500 by-0,3%.

Diversified EM equities (VWO) sold off by -2,5% (2,2%), underperforming the S&P500 by-0,4%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (3,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,6% (0,5%).


10Y US Treasuries underperformed with yields rising 10bps (38bps) to 4,25%. 10Y Bunds were unchanged (5bps) to 2,62%. 10Y Italian BTPs underperformed rising 8bps (-39bps) to 4,33%, underperforming Bunds by 8bps.

US High Yield (HY) Average Spread over Treasuries climbed 19bps (-77bps) to 3,92%. US Investment Grade Average OAS climbed 4bps (-9bps) to 1,34%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 7bps (-11bps, Z-score 2,6) to 0,88%.


Gold dropped -1,3% (3,6%) while Silver gained 0,3% (-5,0%). Major Gold Mines (GDX) sold off by -6,8% (-4,2%).


Goldman Sachs Commodity Index dropped -1,5% (-2,4%). WTI Crude sold off by -2,3% (1,2%).



 

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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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