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Spurious Correlation...

Updated: Oct 5, 2020

BentinPartner Weekly

Dear Reader,

Last week’s unwind affected most asset classes while the dollar continued to strengthen on short covering. The risk off mood started with additional weakness in bank shares after a new investigation by the International Consortium of Investigative Journalists saying that JPMorgan, Deutsche Bank and HSBC were among global banks who ‘kept profiting from powerful and dangerous players’ in the past two decades even after the U.S. imposed penalties on these financial institutions.” Fed Chair Powell pledged continued support for the economy, calling several times, along with several other Fed Governors, for more support from fiscal side.

Risk off also affected US credit markets amidst a global de-risking/deleveraging episode that hit precious metals equally hard.

Despite some wild gyration throughout the week, US equities managed a late recovery on Friday that reduced the losses to small numbers (while European and Chinese markets were closed).

Economist Stephen Roach reiterated his warning that next year will be brutal for the dollar. Not only does he see growing odds of a double-dip recession but ‘We’ve got data that’s confirmed both the saving and current account dynamic in a much more dramatic fashion than even I was looking for’, he said. ‘The current account deficit in the United States, which is the broadest measure of our international imbalance with the rest of the world, suffered a record deterioration in the second quarter… The so-called net-national savings rate, which is the sum of savings of individuals, businesses and the government sector, also recorded a record decline in the second quarter going back into negative territory for the first time since the global financial crisis.’, he added.

Those (like us) interrogating the turning point on the dollar will read with some amusement Reuters story below, suggesting that D. Trump also tries to leave his footprint on currencies through other means than tweets and public comments.

September 21 – Reuters (Jeff Mason): “U.S. President Donald Trump… said he was rebuffed when he asked officials to adjust the exchange rate of the dollar to counteract what he described as repeated currency manipulation by China of its yuan… ‘I go to my guys, ‘What about doing a little movement on the dollar?’ he said, but they countered that was not possible. ‘Sir, we can’t do that. It has to float naturally.’”

Last Week's Recap...

Over the past week, the S&P500 dropped -0,6% (2,1% YTD) despite a short covering rally on Friday and the Nasdaq100 finished the week with a gain of 1,8% (27,7% YTD). The US small cap index in contrast shed -4,5% (-11,6% YTD).

BofA’s weekly fund flow report showed that “Investors had (in the week ending September 23d) pulled $25.8bn out of US equity funds, the third biggest outflow from this asset class. The same report showed that investors pulled out from US HY debt as well.

CBOE Volatility Index climbed 2,1% (91,4% YTD) to 26,38.

The Eurostoxx50 sold off by -4,3% (-14,2%), underperforming the S&P500 by-3,7%.

Diversified EM equities (VWO) sold off by -4,5% (-5,2%), underperforming the S&P500 by-3,9%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,8% (-1,6%, Z-score 2,0) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -1,3% (-2,2%). The Mexican peso lost 5.4%, the South African rand 4.7%, the Colombian peso 3.9%, the Polish zloty 3.6%, the Russian rubble 3.2% and the Brazilian real shed 3.1%

10Y US Treasuries rallied -4bps (-126bps) to 0,65%. 10Y Bunds dropped -4bps (-34bps) to -0,53%. 10Y Italian BTPs rallied -8bps (-53bps) to 0,89%, underperforming Bunds by 2bps. For what it worth, the (bipartisan) Congressional Budget Office said in its long-term budget outlook, that projected debt will reach 195% of gross domestic product in 2050, up from 98% this year and 79% in 2019. Doing the math, this scary forecast may have looked optimistic to some.

Despite US indices doing their best to close on a strong impression before the week end (in contrast with European and EM markets which both closed the week with larger losses without the artificial construct of two late squeezes), US High Yield (HY) Average Spread over Treasuries climbed 47bps (201bps, Z-score 2,2), to 5,37%. US Investment Grade Average OAS climbed 14bps (49bps, Z-score 3,1) to 1,50%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 20bps (30bps, Z-score 2,1) to 0,82%.

Precious metals traded weaker across the board with Gold selling off -4,6% (22,7%, Z-score -2,1) while Silver shed -14,5% (28,2%, Z-score -2,1). Major Gold Mines (GDX) sold off by -7,1% (31,2%).

What was meaningful last week was the very high and unusual positive correlation with stocks from which gold is normally totally uncorrelated with. We wrote on this on Thursday.

Goldman Sachs Commodity Index sold off by -2,7% (-29,3%). WTI Crude sold off by -2,1% (-34,1%).

Have a nice week ahead and stay safe.


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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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