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Rally Pfizzled

BentinPartner Weekly

Dear Reader,

Stocks and risky assets rallied further and the Dow reached what D. Trump labelled the “sacred” 30’000 milestone. Stocks remained supported by the perspective of coming vaccines, the start of transition to the White House of President elect J. Biden, and expectations of more fiscal accommodation after former Fed Chair J. Yellen was set to be taking over the US Treasury.

After weeks of waiting D. Trump on Monday cleared the way for the transition to President elect J. Biden to transition to the White House, giving him access to briefings and funding whilst continuing to dispute the outcome of the election.

Geopolitically, tensions rose in the Middle East after one of Iran’s top nuclear scientists was killed. D. Trump retweeted the news in English and Arabic; Saudi Arabia said it had nothing to do with it and Iran while vowing revenge said it would not fall into the trap laid out by Israel after multiplying signs of opening since the election of J. Biden and a willingness to save what can be saved from the international nuclear agreement concluded in 2015.

Senior Trump officials said they were pushing for new hard-line measures against Beijing, arguing that China is trying to beat countries into submission by egregious economic coercion (in reference to Chinese economic pressure on Australia).

Besides a further rally defying evidence of a slowing economy (jobless claims rose for a fifth week) and an accelerating pandemic, notable developments last week included renewed and broad based dollar weakness which re-joined the lows from last July, a move that was exacerbated by Wednesday’s US Goods Trade deficit which climbed to USD80.3bn, only lagging the previous record deficit of USD83.1bn dating from last August as imports of consumer goods climbed 6.6% to $65 billion, the second-highest reading on record. Other analysts opined that with the US set to increase its borrowing needs by USD4trn this year alone (the CBO also projects USD1trn+ deficits for the next decade independently from covid exceptional fiscal support). With foreign buyers only buying USD150bn so far this year, something is missing to solve the equation, except for significant additional money printing by the Federal Reserve.

US home sales hit their highest level since 2006, leading to the strongest house price inflation in years (+7% annually from September, up from 5.8% in August). Besides the obvious hidden inflation and resulting social (and generational) divide that ever rising real estate prices are creating, the WSJ noted (citing a study from the BIS by economist Sebastian Doerr), that besides housing booms being a well-known risk to financial stability, “a growing body of research suggests that even where there is no market blow up, surges in prices and investment can have a deleterious impact on productivity”. This is not to speak about the increased leverage resulting from ever increasing collateral values which contribute to fuel the bubble blowing dynamics at play.

Over The Past Week…

Over the past week, the S&P500 added 1,6% (13,0% YTD) while the Nasdaq100 rose 2,3% (40,6% YTD). The US small cap index rallied 4,0% (11,3% YTD).

Cboe Volatility Index sold off by -9,8% (51,2% YTD) to 20,84.

The Eurostoxx50 gained 1,8% (-3,4%), outperforming the S&P500 by 0,2%. A growing number of top ECB officials voiced their support for ending the ban on banks paying dividends during the pandemic, laying the groundwork for a resumption next year and a return of investor confidence to the sector (and hence to European bank heavy indices), Bloomberg reported.

Diversified EM equities (VWO) rallied 2,5% (9,6%), outperforming the S&P500 by 0,9%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,6% (-4,7%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (1,8%).

10Y US Treasuries dropped 1bps (-108bps) to 0,84%. 10Y Bunds dropped -1bps (-40bps) to -0,59%. 10Y Italian BTPs dropped -4bps (-82bps) to 0,59%, outperforming Bunds by -1bps.

US High Yield (HY) Average Spread over Treasuries dropped -12bps (74bps) to 4,10%. US Investment Grade Average OAS dropped -4bps (11bps) to 1,12%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -4bps (9bps) to 0,60%.

Gold sold off by -4,4% (17,8%) while Silver shed -6,6% (26,4%, Z-score -2,3). Major Gold Mines (GDX) dropped -3,6% (16,9%). Despite some broad-based USD weakness to which gold is generally positively correlated, gold and silver suffered from further de risking last week. Since 2017 that the current gold bull market phase has been in place, each breach of the 200dMa, was followed by a revival of the rally and fresh highs. Given the still largely positive context for precious metals (linked to planned debt monetization and further dollar weakness), we expect the same to happen this time. After decorrelating from everything (which seems to be one of its cardinal values), Bitcoin also suffered a bit of a rout late last week, stalling just USD7 from a previous all-time high, still ending the week as one of the best performing assets of 2020 (next to Tesla shares).

Goldman Sachs Commodity Index rallied 4,8% (-22,8%). WTI Crude rallied 9,1% (-25,4%).

Have a nice week ahead and stay safe.


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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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