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Reality Check...

BentinPartner Weekly



Last week ended with sentiment impaired following Fitch decision to downgrade the US Sovereign debt rating and the publication on Friday of a weaker than expected US Non-Farm payrolls. The BoE also raised rate by 25bps (to 5.25%) giving additional warning that rates will likely stay high for some time.


Fitch decision was due to fiscal concerns, a deterioration in US governance as well as political polarization according to the Fitch statement. The decision was immediately followed by a similar downgrade of Fannie Mae and Freddie Mac which was logical given that the two ratings are linked.


Washington and Wall Street pushed back. US Treasury Secretary J. Yellen shared her disagreement with Fitch ahead (and after) the overnight announcement saying Fitch decision was “flawed, entirely unwarranted” and “based on outdated data” to which some analysts responded that US interest rate expense is now closer to USD1trn than USD500mn and because the US government debt spiked USD1.2trn (to USD32.7trn) since the debt ceiling was raised, the Wolf Street explained.

L. Summers opined that he did not think that Fitch had any new or useful insights into the situation.

It still remains that the US fiscal deficit for 2023 is dire, especially in a period of economic expansion with the CBO projecting a 6% deficit for 2023.


While not necessarily related to one another, the BoJ decision to raise (“tweak”) its 10-year yield cap coupled to the US debt downgrade constituted a toxic brew for global bond markets which suffered a further setback last week with higher yields coupled to a significant bear curve steepening (with 10-year bonds underperforming).


Fundamentals do matter over the long term and what is not sustainable is likely not to be sustained over time. The bond vigilantes were on their guard last week, especially as massive deficits will likely lead to massive new bond supplies, with inflation also set to remain sticky despite recent improvements and the Fed continuing QT program.


This situation did not prevent the dollar to stage a swift rebound as risk aversion seized markets, also leaving EM currencies with losses for the week which were partially recouped on Friday despite stocks closing around their lows for the day.


Stocks bowed last week as hedge funds continued to de-gross with bonds (and precious metals) remaining unable to hedge stocks, being 82% correlated with one another (the most since 1990).


On the economic side, US job growth came in weaker than expected with non-farm payrolls printing at 187k (200k expected) and downward revision brought to last month data as well (lowered by 25k as they have been for the past 4 months). US job openings also fell to their lowest level in 2 years but remaining consistent with tight labour markets, according to analysts. The US Service sector also weakened slightly last month with businesses reportedly facing higher costs.


Elsewhere, China was said to speed up a plan to resolve its local government problem with extension and restructuring. China’s Central Bank also said it would increase funding support for the private sector with adjustments to be rolled out by big cities to implement measures to better meet the needs of homebuyers.


The Caixin index of manufacturing activity dropped to a six-month low at 49.2, pointing to a slight contraction.


That said, Chinese stocks outperformed slightly last week (and for a change).


On the Ukraine war front, the situation became way tenser last week with attacks hitting and putting at risk Ukraine and Russia’s grain export facilities, further fuelling food inflation (the rice situation is barely better with India and Thailand curtailing supplies). The expansion and escalation of the war front came as Ukraine’s counteroffensive advances more slowly than Kyiv officials planned, raising the stakes and unpredictability of the situation.

 

Over the past week, the S&P500 dropped -2,2% (16,8% YTD) while the Nasdaq100 shed -3,0% (39,7% YTD). The US small cap index dropped -1,2% (11,4% YTD). AAPL sold off by -7,1% (40,1%, Z-score -3,1).

Cboe Volatility Index rallied 28,3% (-21,1% YTD, Z-score 2,8) to 17,1.

The Eurostoxx50 sold off by -3,0% (17,6), underperforming the S&P500 by-0,8%.

Diversified EM equities (VWO) sold off by -2,9% (7,2%), underperforming the S&P500 by-0,7%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (1,7%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -1,0% (1,5%).


10Y US Treasuries underperformed with yields rising 8bps (16bps) to 4,03%. 10Y Bunds climbed 7bps (-1bps) to 2,56%. 10Y Italian BTPs underperformed rising 10bps (-50bps) to 4,21%, underperforming Bunds by 3bps.

US High Yield (HY) Average Spread over Treasuries climbed 19bps (-79bps) to 3,90%. US Investment Grade Average OAS climbed 5bps (-13bps) to 1,30%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 3bps (-19bps) to 0,81%.


Gold dropped -0,8% (6,5%) while Silver sold off by -2,9% (-1,3%). Major Gold Mines (GDX) sold off by -3,8% (3,1%).


Goldman Sachs Commodity Index gained 0,1% (-1,2%). WTI Crude rallied 2,8% (3,2%).


 

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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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