BentinPartner Weekly
US stocks dropped to the level they opened following the election of D. Trump with the main catalyst being sticky inflation published on Wednesday, relatively strong economic data and the Fed Chair Powell signaling that the Fed is in no rush to cut rates as inflation remains “on a bumpy path”. Rotation away from pre-election darlings of this year (GE, LDOS, Biotech but also Tech in general) further soured sentiment on Friday.
The latest CPI report showed that shelter costs, the largest component of CPI, ticked up 0.4% (4.9% yoy) from October (accounting for half the CPI increase in October), posing a lingering challenge to the Federal Reserve's inflation fight. On an annual basis, shelter costs rose 4.9% in October, matching September’s year-over-year gain of 4.9%, joined by higher used vehicles prices and adding to lingering worries about food inflation.
Last week was also peppered by D. Trump’s nominees’ appointment to key posts of his future administration. While he is entitled to appoint whoever he deems best loyal and fit to fulfill his program, there was also some talk that D. Trump had called on the Senate to allow for recess appointments that would allow him to install officials without congressional approval. While he is expected to get most nominees appointed, possible prospects for endless trolling and fighting about those may also have contributed to catch up to stocks late last week.
Health care names were particularly hard hit, closing the week with a -5.5% loss, as Wall Street weighed the impact that Robert F. Kennedy Jr. will have on the industry after President-elect D. Trump nominated him to lead the nation’s health and medical research agencies. Kennedy’s selection could have far-reaching and difficult-to-project implications for the biotechnology sector which also shed -9.4% on the week.
While the Nasdaq underperformed and the Nasdaq100 shed 3.4%, Semis sank hard as well, shedding 8.6% on the week.
10Y US yields rose +14bps (in contrast to Bunds and European yields which dropped slightly) after US small-business optimism rose in October on brighter views for the economy and after the National Federation of Independent Business sentiment index rose 2.2 points to 93.7, matching the highest reading since early 2022.
That said, despite higher yields and lower stocks last week, US junk bond spreads dropped to levels not seen since before the Great Financial Crisis (GFC) closing at 256 bps, down 19 bps in five days. Risk premium plunged across ratings in HY.
Bullion had a difficult week dropping $122 and the gold stock index sank -8.6%, driven by dollar strength, following higher yields and most importantly, in my view, in response to the massive retail inflows that rushed into cryptos last week, matching outflows from the same retail investors leaving Gold ETFs, following D. Trump nomination and in anticipation of G. Gensler firing/resignation as SEC Chair.
G. Gensler is deemed not to be sufficiently crypto friendly (although, when he was appointed SEC Chair, G. Gensler was reproached his deep interest and pro-crypto stance taught at the MIT…). I view this as a temporary phenomenon and a pause that refreshes as the structural demand for Gold (not to speak about the chronic shortfall in silver) which comes from Central Banks, may accompany but is unlikely to abate as a result of a crypto craze. Pressure on the bond market may well continue to mount, as it did since and despite the Fed last 50bps rate cut, due in our view, to excessive borrowing and a lack of international appetite for Treasuries that will likely be met sometimes next year by a resuming QE, yield curve anchoring and other measures of financial repression, including more rate cuts from a politically pressured Federal Reserve.
Elsewhere in China, the country moved to support of the yuan as pressure mounted on the currency (and most EM currencies) as D. Trump’s US election victory bolstered (for now) the dollar to its highest in two years. That said, China’s trade surplus remained on track to hit a fresh record this year with the gap between Chinese exports and imports set to reach almost USD1trn, assuming it keeps widening at the same pace. The goods trade surplus soared to USD785bn in the first 10 months, the highest on record, an increase of almost 16% from 2023. With Chinese export prices still falling, export volume growth was enormous, analysts reported, reflecting the story of an economy that is again growing off exports.
Along with a rising yield differential and explaining the continued pressure on the Euro, the NYT wrote last week that the outlook for the EU economy had been disappointing and was getting worse with deep uncertainty about the Trump administration’s policies on trade, technology, Ukraine, climate change and the launch of a possible tariff war by the United States, the biggest trading partner and closest ally of the EU and Britain that would hammer major industries like automobiles, pharmaceuticals and machinery. The NYT added that the need to raise military spending because of doubts about America’s guarantees in Europe, would further strain national budgets and increase deficits. “In addition, the president-elect’s more confrontational attitude toward China could pressure Europe to pick sides or face retribution”, the NYT wrote.
Over the past week, the S&P500 dropped -2,1% (23,2% YTD) while the Nasdaq100 shed -3,4% (21,3% YTD). The US small cap index sold off by -4,0% (13,8% YTD). AAPL dropped -0,9% (16,9%).
The Equally Weighed SP500 dropped -1,7% (14,7% YTD), outperforming the S&P500 by 0,4%. The median SP500 YTD return closed the week at 15,4%.
CBOE Volatility Index rallied 8,0% (29,6% YTD) to 16,14.
The Eurostoxx50 dropped -0,1% (9,0%), outperforming the S&P500 by 2%.
Diversified EM equities (VWO) sold off by -3,6% (9,8%, Z-score -2,5), underperforming the S&P500 by-1,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,9% (11,0, Z-score 2,4) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,7% (0,4%).
10Y US Treasuries underperformed with yields rising 14bps (56bps) to 4,44%. 10Y Bunds dropped -1bps (33bps) to 2,36%. 10Y Italian BTPs rallied -10bps (-15bps to 3,55%, outperforming Bunds by -9bps.
The French to German 10Y bond spread also improved by -3 bps to 73 bps.
US High Yield (HY) Average Spread over Treasuries climbed 10bps (-57bps) to 2,66%. US Investment Grade Average OAS climbed 5bps (-19bps) to 0,86%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 1bp (-6bps) to 0,62%.
Gold sold off by -4,5% (24,2%) while Silver sold off by -3,3% (27,2%). Major Gold Mines (GDX) shed -9,0% (14,5%).
Goldman Sachs Commodity Index sold off by -3,0% (-1,0%, Z-score -2,1). WTI Crude sold off by -4,8% (-6,5%).
Overnight in Asia…
S&P future +15 points; Hong Kong +1%; Nikkei -1%; China +0.7%
Asian shares edged higher, following a rally in heavyweight Samsung Electronics Co. Ltd. and gains in Chinese stocks on fresh signs of policy support, Bloomberg reported.
Over the week end, J. Biden authorized the lifting of some restrictions on Ukraine’s use of western-made weapons to strike military targets inside Russia. The decision was reportedly shaped by North Korea ramping up support for President Putin’s army and an increase in Russian missile and drone attacks on Ukraine. The approval represents a major US policy shift, occurring as J. Biden is about to leave office and incoming President-elect Donald Trump has said he would bring about a swift end to the war, expressing skepticism over continued US support. Russia reminded the nature of its nuclear doctrine in no uncertain terms. Russia has never bluffed in this conflict and some in the de-uniting West still believe that it does. “Après moi le déluge” donc…
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