BentinPartner Weekly
Dear Reader,
Squeezing The Big Short...
With the rejection of the lows printed on Friday last week (the one before last), equity markets looked set for a squeeze and squeezing they did, fueled mid-week by more dovish Fed minutes and several Fed speakers whose spirit was to remind that the reason for tightening and raising rates is less about fighting inflation than reloading the chamber to be able to ease in the next recession or crisis.
Talking from the height of an 8% CPI (and relentlessly rallying oil and gas prices), one of the leading Fed hawks, J. Bullard said last week “The more we can front-load and the more we can get inflation and inflation expectations under control, the better it will be. In out years - 23 and 24- we could be lowering the policy rate because we got inflation under control”.
Atlanta Fed President R. Bostic also delivered a speech on Tuesday about “Policy Amid Changing Labour Market Dynamics”, which albeit warning about the need to fight inflation also cautioned that “Monetary policy makers must be mindful of these uncertainties and proceed carefully in tightening policy” “I plan to proceed with intention and without recklessness. Even fire trucks with sirens blaring slow down at intersections lest they cause further preventable trouble”.
This signaling took away the fear of 75bps tightening clips, brought back souvenirs of more tepid 25bps moves and clipped some of the wings of tightening expectations by 75bps which now also assume rates will be 25bps lower by the end of 2023 than the end of 2022. From within the context of seven consecutive weeks or losses, or the longest string of weekly losses since 1932, this was enough to trigger a solid short covering rally, which may very well have further to go before ultimately petering out. Bringing rates to 2%…before thinking about cutting rates again certainly does not look reckless and long gone are the talks of 5%-6% Fed funds.
L. Summers called for …humility in setting monetary policy (whatever this means for him). M. El Erian was less equivocal saying the Fed is contemplating the choice between two policy mistakes after failing to contain price pressures. Aggregate supply and demand will be impacted by what happens to China, he said, noting that China’s retail sales were bad and that the real estate dynamics of the global economy are also slowing down, meaning that the three engines (consumption, export and real estate) of the economy seem to be stalling at the same time. At best, he expects a “softish landing” but opined that the time for a soft landing has passed. The Fed is now tightening into a slowing economy which makes a soft landing very unlikely. The Fed’s feeling must be that of a driver approaching a steep curve at too high a speed. It will take skills to keep both the grip of growth and the curve of inflation under control.
With the S&P500 gaining 6.6%, HY credit spreads also dropped 66bps to 457bps, the biggest rally since June 2020 but it was certainly too early to rejoice about getting inflation back under control as oil added another 1.6% on the week and gasoline +4.6%, bringing YTD gains to 80% (the oil service index climbed +11.8% on the week with commodity producing companies becoming huge free cash flow generators). Nat Gas climbed another 8% (+134% YTD).
Still, Goldman over the week end, speculated that core inflation has likely peaked, perhaps assuming the US is about to experience a major downside shock to the labour market that should impair the US consumer whose savings rate have dropped to a 14 year low with an accompanying sharp increase in credit card debt. The question is what to do with stocks after inflation peaked (assuming it did). The conclusion is not firm if the ensuring economic weakness is too strong.
No major advance was reported last week after the US rejected a plan by V. Putin to facilitate grain and fertilizer exports only if sanctions on his country are lifted. For the first time since the war started, Zelensky admitted an “indescribably difficult” situation in Donbas, admitting it could soon fall.
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Over the past week, the S&P500 rallied 6,6% (-12,6% YTD) while the Nasdaq100 rallied 7,1% (-22,3% YTD). The US small cap index rallied 6,6% (-15,6% YTD).
CBOE Volatility Index sold off by -12,6% (49,4% YTD) to 25,72.
The Eurostoxx50 rallied 4,4% (-9,4%, Z-score 2,2), underperforming the S&P500 by-2,1%.
Diversified EM equities (VWO) rallied 2,0% (-13,0%), underperforming the S&P500 by-4,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,4% (6,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (-2,3%).
10Y US Treasuries rallied -4bps (123bps) to 2,74%. 10Y Bunds climbed 2bps (114bps) to 0,96%. 10Y Italian BTPs rallied -10bps (173bps) to 2,90%, underperforming Bunds by 5bps.
US High Yield (HY) Average Spread over Treasuries dropped -70bps (129bps) to 4,12%. US Investment Grade Average OAS dropped -19bps (44bps) to 1,44%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -14bps (42bps, Z-score -2,3) to 0,96%.
Gold gained 0,4% (1,3%) while Silver gained 1,6% (-5,1%). Major Gold Mines (GDX) gained 1,4% (1,5%).
Goldman Sachs Commodity Index rallied 3,5% (49,1%). WTI Crude gained 1,6% (53,0%).
Overnight in Asia,,,
Ø S&P500 +10; Nikkei +1.8%; CSI300 unch.
Ø Stocks in Asia and US futures advanced after China eased some virus curbs and after Wall Street rallied most since November 2020 last week.
Ø US markets will be closed for Memorial Day today.
Ø China PMI are due for tomorrow. The Fed will meet on Wednesday on the same day as OPEC+ will meet. US job report will be released on Friday.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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