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  • Marc Bentin

Stagflation Ahead...

Updated: Jun 27, 2022

BentinPartner Weekly



Dear Reader,


Stocks dropped sharply again last week as doubt emerged whether investors need to be scared more of the upcoming recession or relentless inflationary pressure.


The “Atlanta Fed GDP now” now sees a flat GDP for the year (from still +0.9% last week) which is fair bit lower than the optimist Fed forecast delivered last week (it lowered its GDP growth forecast from 2.8% to 2.7% for the year) after tightening by +75bps rather than the 50bps expected until last Monday when the WSJ published an article suggesting that the CPI printed the previous Friday (+8.6% yoy) deserved a stronger Fed rate hike than what had been telegraphed so far.


US retail sales for May dropped -0.3% (and -0.7% excluding gas sales) and US housing starts dropped -14.4% (vs. -1.8% expected) providing further evidence of the sharp economic slowdown and hard landing scenario. L. Summers opined over the week end that the stagflationary outcome is now the “base case”.


As a result, economic leading equity sectors got hit the hardest last week including energy, utilities and metals while more defensive non-cyclical sectors such as consumer staples and health care fared best dropping “only” -4% on the week. Energy got hit the hardest with a 17% weekly decline (+40.3%). Home builders shed -11.4% (-39%) as the doubling in mortgage rates literally took the carpet from under the prospects of the real estate market. Materials were bruised as well, posting a weekly loss of -8.3% (-17.3%).


On Wednesday, the ECB held an emergency meeting to deal with the possible emergence of a European debt crisis as BTP yields soared to 4% promising to soon deliver an “anti-fragmentation tool” which sent peripheral spreads back down after spiking.


The real Central Bank surprise came from the SNB which tightened by 50bps ahead and independently from the ECB, raising rates for the first time in 15 years. This sent EURCHF sharply lower to 1.01 (from 1.045) before settling the week around 1.02.


The BoE also raised rates by 25bps, calling for more rate hikes if its inflation forecast of 11% materializes by October. Brazil also tightened.


While equity markets were bloodied last week, currency volatility surged as well and not only with CHF rallying but with its former “safe haven currency” peer dropping to a fresh 24 year low vs. USD at 135.35 after the BoJ chose to ramp up the defense of its yield control policy (at the expense of its currency) by squeezing the cheapest to deliver bond of the JGB contract so as to inflict maximum pain on traders using this (broken) instrument to position for higher yields. This forced the biggest move lower in yield in 10 years in the highest turnover of the year. Shorting JGB’s is called the “widows’ trade” for a reason but shorting JPY ultimately paid off despite some nerve wrecking volatility.


Another sign of negative sentiment last week came from cryptos which suffered one of their most dramatic weeks in their short history, dropping through key supports after Celsius, merely one month after the debacle of Terra/Luna, paused all customer deposits and transfers. Bitcoin dropped another 10% on Saturday before the saving grace emerged with E. Musk tweeting that perhaps cryptos could be used to purchase Tesla’s in the future…. And that “he will keep supporting Dogecoin”. Hanging on that branch may prove temporary and elusive but cryptos carnage certainly deserve a pause and a break after bitcoin shed 22% in 5 days.


Credit markets ended the week sharply lower as well with the cash price of the two bellwether US HY ETF’s closing at a discount of 1.2% to 1.8% last Wednesday for the first time since March 2020. Nervousness in credit markets and tightening in credit conditions were made evident by the absence of any IG deal issuance last week.


 

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Over the past week, the S&P500 sold off by -6,1% (-23,0% YTD) while the Nasdaq100 sold off by -4,9% (-31,0% YTD). The US small cap index sold off by -7,5% (-25,7% YTD).

CBOE Volatility Index rallied 12,2% (80,8% YTD) to 31,13.

The Eurostoxx50 sold off by -4,5% (-18,2%), outperforming the S&P500 by 1,6%.

Diversified EM equities (VWO) sold off by -3,1% (-16,2%), outperforming the S&P500 by 3,1%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (9,1%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,6% (-3,6%).


10Y US Treasuries underperformed with yields rising 7bps (172bps) to 3,23%. 10Y Bunds climbed 15bps (184bps) to 1,66%. 10Y Italian BTPs rallied -17bps (243bps) to 3,60%, outperforming Bunds by -10bps.

US High Yield (HY) Average Spread over Treasuries climbed 64bps (219bps) to 5,02%. US Investment Grade Average OAS climbed 8bps (56bps) to 1,56%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 15bps (68bps) to 1,23%.


Gold dropped -1,7% (0,6%) while Silver dropped -1,0% (-7,0%). Major Gold Mines (GDX) sold off by -6,7% (-5,1%).


Goldman Sachs Commodity Index sold off by -5,9% (45,0%). WTI Crude sold off by -9,2% (45,7%).


Precious metals also traded lower, making last week one to forget about. The degradation of money is still in front of us as Central Banks efforts to normalize policy will get short circuited by the abrupt decline of global markets, liquidity and credit conditions, in our view.



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,

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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