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Raising the Debt Ceiling (for the 78th time)...

Updated: May 30, 2023

BentinPartner Weekly




Over the past week, the price action remained dominated by runaway gains on AI related stocks that drove tech stocks higher and the S&P to a large extent along with them, defying uncertainties concerning both a stubborn inflation, rising bond yields and political convulsions centred on the debt ceiling.


The core personal consumption expenditures price index, the Fed’s preferred inflation measure gauging a variety of goods and services, climbed 0.4% for the month (vs. 0.3% expected) and 4.7%, also slightly higher than expected.


At the same time, Fed tightening expectations, judging from Minutes of the May meeting and recent comments from J. Powell, were seen tilting towards a softening case for additional rate hikes as economic risks increased, although the US central bank remained open to additional rate rises if warranted by the data… Citing both the ‘lagged effects’ of the Fed’s previous rate rises, as well as the spectre of tighter credit conditions stemming from the recent bank failures, the minutes of the last FOMC meeting published last week showed participants ‘generally agreed’ that ‘the extent to which additional increases in the target range may be appropriate after this meeting had become less certain’.


In Europe, Europeans are left facing, despite lower energy prices, a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts, the WSJ reported.


In China, no major data were issued but China questioned the ‘sincerity’ of the Biden administration, as it pushed to resume high-level diplomatic talks while imposing more tech sanctions on China.


Discussions between the two nations began to look completely surrealist with China announcing that it would introduce a ban on Micron chips …and the US commerce secretary saying it would not tolerate China’s ban… after spending most of the Biden term trying to hold back Chinese access to US and Western technology.


Elsewhere in Japan, Japan's manufacturing activity expanded for the first time in seven months in May, while the service-sector hit record growth… Japan’s new central bank governor warned that ‘There is a risk that we will be late in raising interest rates if we get our future outlook wrong, and there is also the risk of prematurely doing a rate hike.’” This was read as a dovish statement that led to renewed JPY weakness but also to a continuation of the strong Japanese equity market performance.


Biden and McCarthy sealed a tentative deal in a 90-minute phone call late Saturday and today, where the US market will be closed, President Biden and House Speaker McCarthy expressed confidence that the debt-ceiling deal reached over the week end will pass Congress, averting a historic US default.


The deal suspends the debt ceiling, effectively giving Treasury unfettered borrowing authority through January 2025 before another debt-ceiling increase would need congressional approval, Bloomberg reported, constituting a win for Democrats and Biden, who wouldn’t have to face another debt-limit battle before seeking re-election next year.


 

Over the past week, the S&P500 gained 0,3% (9,8% YTD) while the Nasdaq100 rallied 3,5% (30,8% YTD, Z-score 3,1). The US small cap index was unchanged (1,0% YTD). AAPL gained 0,2% (35,0%).

Cboe Volatility Index rallied 6,8% (-17,2% YTD) to 17,95.

The Eurostoxx50 dropped -1,1% (17,2%), underperforming the S&P500 by-1,4%.

Diversified EM equities (VWO) dropped -0,1% (2,2%), outperforming the S&P500 by -0,4%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,1% (2,8%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (1,1%).


10Y US Treasuries underperformed with yields rising 13bps (-8bps) to 3,80%. 10Y Bunds climbed 11bps (-3bps) to 2,54%. 10Y Italian BTPs underperformed rising 12bps (-32bps) to 4,39%, underperforming Bunds by 1bps.

US High Yield (HY) Average Spread over Treasuries dropped -31bps (-23bps) to 4,46%. US Investment Grade Average OAS dropped -6bps (4bps) to 1,47%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (-7bps) to 0,92%.


Gold dropped -1,6% (6,7%) while Silver sold off by -2,3% (-2,7%). Major Gold Mines (GDX) sold off by -5,4% (6,1%).


Goldman Sachs Commodity Index gained 0,6% (-10,3%). WTI Crude gained 1,6% (-9,5%).


 

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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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