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Rotation

Updated: Nov 30, 2020

BentinPartner Weekly



Dear Reader,


The announcement last Monday of Pfizer’s (and BioNtech’s) 90% effective vaccine against Covid was cheered by international equity markets but it also hit some of Wall Street’ most popular quant trading styles (long/short strategy performance which suffered from the brutal short squeeze and from violent rotations), producing market moves that should never happened (at least statistically). Value significantly outperformed the crowded “stay at home” growth stocks which still managed to catch up some of their underperformance on Thursday and Friday.

News of a vaccine enabled equity markets to overcome a (still) contested election and infections spiraling across the US and Europe. D. Trump’s firing of Defense Secretary Mark Esper cast doubt on the prospect of a smooth power transition (including with some rising risks of a geopolitical incident). The Electoral College will formally confirm Biden’s victory on Dec. 14. The Wall Street Journal wrote that “President-elect Joe Biden’s tax plan is on life support even before he takes office, and his chances of raising taxes on businesses and high-income individuals likely rest on whether Democrats can win two January runoffs in Georgia to take control of the U.S. Senate.” He may still happen…


“The United States may still face a wave of debt defaults and ‘significant declines’ in asset prices because of the coronavirus pandemic and recession, the Federal Reserve warned in its latest biannual Financial Stability Report…. “As many households continue to struggle, loan defaults may rise, leading to material losses.”, the report said.

“The U.S. federal budget deficit more than doubled in October, amassing a record $3.1trn budget shortfall from a year earlier, reflecting a decline in revenue and increased spending tied to the government efforts to contain the economic damage from the coronavirus…”, Bloomberg reported. Revenue decreased 3.2% and spending jumped 37.3% from a year ago. In fiscal 2020… the U.S. amassed a record $3.1trn budget shortfall, extending a rapid deterioration.

Elsewhere in China, China’s ex-finance minister said it’s time to consider withdrawing the monetary stimulus injected into the economy this year and fine-tune fiscal policies as the recovery strengthens. “The challenge is to carefully manage the pace of the exit”, Lou said, “given high debt levels in the economy. If liquidity is withdrawn too soon it could trigger debt crises, he said.”

Not everything was “green” in China, as witnessed by the surprise default of a state-run Chinese coal miner and a slump in bonds of a prominent chipmaker amidst deepening concerns over the health of some of China’s state-owned enterprises. Beijing also unveiled regulations to root out monopolistic practices in the internet industry, seeking to curtail the growing influence of corporations like Alibaba and Tencent (which sent Alibaba and Tencent reeling last week despite rallying global markets).


The energy and banking sector performed best last week with gains of respectively 17% (to -41.9% ytd) and 12.6% (to -17.4%). In this context, Europe outperformed as well.


Last week's summary...


Last week, the S&P500 rallied 2,3% (11,3% YTD) while the Nasdaq100 dropped -1,2% (36,8% YTD). The US small cap index added 6,0% (4,7% YTD).

Cboe Volatility Index sold off by -16,2% (67,6% YTD) to 23,1.

The Eurostoxx50 rallied 7,1% (-6,1%), outperforming the S&P500 by 4,8%.

Diversified EM equities (VWO) gained 0,6% (6,0%), underperforming the S&P500 by-1,7%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies rose 0,6% (-3,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,1% (0,9%).


10Y US Treasuries underperformed with yields rising 8bps (-102bps) to 0,90%. 10Y Bunds climbed 7bps (-36bps) to -0,55%. 10Y Italian BTPs climbed 3bps (-75bps) to 0,67%, outperforming Bunds by -1bps.

US High Yield (HY) Average Spread over Treasuries dropped -7bps (99bps) to 4,35%. US Investment Grade Average OAS dropped -3bps (20bps) to 1,21%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (15bps) to 0,67%.


Gold shed -3,2% (24,5%) while Silver dropped by -3,7% (38,2%). Major Gold Mines (GDX) sold off by -8,2% (29,8%).


Goldman Sachs Commodity Index gained 1,7% (-27,5%). WTI Crude rallied 8,1% (-34,3%).


Overnight…


  • Equity futures surged overnight after some analysts argued that the expected line up of (efficient) vaccine could hit as early as today and trigger more of the “great rotation” into value witnessed last week. While Wall Street strategists have been climbing over each other (including Morgan Stanley) to raise market targets, sentiment was also buoyed by two of J. Biden’s coronavirus advisers saying they oppose a nationwide lockdown. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said that Biden’s Covid team has been stymied from communicating with the current administration (as is the case across the federal government at the moment).

  • Trump tweeted several times over the week end that he is not conceding (anything). He is also denying access of the transition team to the White House and security files and federal agencies.


Have a nice week ahead and stay safe.

 

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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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