Squeezing A Little Longer...
The catalyst for last week’s continued rally in risk assets was a lower-than-expected US July CPI print which instead of the +0.2% headline expectation came out flat (core prices rose 0.3%, less than the expected 0.5% as well). Whether this inflation improvement will be lasting and/or structural remained an open question as most of the improvement came from lower energy prices (the Bloomberg Commodities Index surged back 4.5% last week) but inflation “topping off” motivated equity markets with more “short covering” gains.
The technical backdrop further improved, especially for US stocks which marked a 50% retracement from this year’s selloff, leading to a speculative frenzy (including in “meme” stocks such as AMC which surged 75% from its lows in a matter of 10 days) of investors heading for the pool to party whilst the fundamental story (that few care about now) remained sub-par whether we consider geopolitics (tensions with Russia and China rose further) or the outlook for growth and earnings.
The Goldman Sachs Short Index (GSSI) surged 5.1% Wednesday (up 7.5% for the week), confirming the short squeeze nature of the rally. HY CDS dropped 43bps this week as well to 421 bps with a similar move observed on EM spreads that narrowed in concert with the region’s currencies gains on reduced US tightening expectations. No similar improvement was noticed in Europe or China.
Fed officials did not rejoice too loudly with Neel Kashkari saying: "This is just the first hint that maybe inflation is starting to move in the right direction, but it doesn't change my path." Quite possibly, the runaway “risk on” and swift loosening in financial conditions runs contrary to the Fed’s objective of taming the economy to bring down inflation including the one coming from excessive froth in financial markets. The Fed remains expected to increase QT (quantitative tightening) next month.
A Bloomberg story caught our attention last week referring to a San Francisco property that was put on sale at USD9.5mn in April, dropped to USD7mn in June and put on auction last week with an opening bid at USD4.5mn and no offer... San Francisco stands out as one of the most overpriced location but Nobel laureate economist Robert Shiller (who stands as an authority on US real estate market analysis) drew a bleak picture last week, saying “the prospect of a higher path for rates could initially lead to a rush of home purchases, as buyers try to lock in mortgage rates before they rise further. But as the property market buckles, that could stir memories of the last time it happened”. “The idea that we’re in a housing bubble is not so much talked about yet,” the Nobel laureate said. “But it’s starting to come back.”
Micron Technology, the leading US chipmaker also declared last week that demand was falling off rapidly, following a similar warning from Nvidia and Intel (their share price closed the week higher nonetheless).
On the geopolitical front, Reuters wrote that “Satellite pictures showed devastation at a Russian air base in Crimea, hit in an attack that suggested Kyiv may have obtained new long-range strike capability with potential to change the course of the war”.
Then the next day… Ukraine and Russia accused each other on Friday of risking nuclear disaster by shelling Europe's largest nuclear power plant from Zaporizhzhia.
China's ambassador to Moscow, Zhang Hanhui, accused Washington of backing Russia into a corner with repeated expansions of the NATO defence alliance and support for forces seeking to align Ukraine with the European Union rather than Moscow. 'As the initiator and main instigator of the Ukrainian crisis, Washington, while imposing unprecedented comprehensive sanctions on Russia, continues to supply arms and military equipment to Ukraine,' Zhang was quoted as saying. 'Their ultimate goal is to exhaust and crush Russia with a protracted war and the cudgel of sanctions…'
Looking above the hill, the exact same strategy is being applied to China which will lead to nowhere safe and seal the multi-polarisation of the new world.
Referring to a more neutral and “patriotic” voice perhaps, H. Kissinger in an interview to the WSJ accused Washington to have rejected traditional diplomacy and in the absence of a great leader, driven the world to the precipice of war over Ukraine and Taiwan.
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Over the past week, the S&P500 rallied 3,3% (-10,1% YTD, Z-score 2,1) while the Nasdaq100 rallied 2,7% (-17,0% YTD). The US small cap index rallied 5,0% (-9,9% YTD, Z-score 2,3).
Cboe Volatility Index sold off by -7,7% (13,4% YTD, Z-score -2,1) to 19,53.
The Eurostoxx50 gained 1,4% (-9,9%), underperforming the S&P500 by-1,9%.
Diversified EM equities (VWO) rallied 2,8% (-14,0%, Z-score 3,0), underperforming the S&P500 by-0,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,9% (10,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (-3,8%).
10Y US Treasuries dropped 0bps (132bps) to 2,83%. 10Y Bunds climbed 3bps (116bps) to 0,99%. 10Y Italian BTPs climbed 5bps (190bps) to 3,07%, underperforming Bunds by 2bps.
US High Yield (HY) Average Spread over Treasuries dropped -33bps (125bps) to 4,09%. US Investment Grade Average OAS dropped -7bps (46bps, Z-score -2,7) to 1,42%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -11bps (45bps) to 1,00%.
Gold gained 1,5% (-1,5%) while Silver rallied 4,7% (-10,7%). Major Gold Mines (GDX) rallied 3,6% (-15,0%).
Goldman Sachs Commodity Index rallied 4,5% (33,7%). WTI Crude rallied 3,5% (22,4%). Goldman Sachs warned clients saying 'Today, commodity markets appear to hold irrational expectations, as prices and inventories fall together with demand still beating expectations and supply disappointing’.
Overnight in Asia,,,
S&P500 -9 points; Nikkei +1%; CSI300 unch.
Overnight, PBOC unexpectedly announced a cut in its 7-day (and 1 year loan rate) reverse repo to 2% (from 2.1%). The PBOC decision was in response to a lower-than-expected CPI of 2.7% year over year in July (much lower than in major economies) and to the need to stimulate the Chinese economy that remains handicapped by weak real estate dynamics.
The impact on stocks was muted by the negative effects of China’s major public companies announcing on Friday their intention to delist from US markets.
China’s July retail sales rose 2.7% (vs. 4.9% expected) while industrial production also came out at 3.8% year over year (from 4.3% expected), also weaker than expected.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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