Equities forfeited all the previous week’s strong gains as de-risking struck across the board, causing broad weakness in risk assets (and beyond). Europe underperformed across the board with bond yields from the periphery rising and underperforming markedly as the energy crisis and mounting recession risks came back to the forefront of investors’ preoccupations. As a result, EURUSD dropped back close to parity again. While BTP yield rose 43bps, European cross over HY surged more than 60bps to 525bps.
The situation in China remained a hot spot of macro concerns as well with China’s surprise interest-rate cut doing little to relieve real estate and Covid Zero tolerance concerns not to speak about the dismal July credit numbers (new loans dropped from USD767bn in June to USD112bn in July, 50% below expectations). China’s currency slumped to the weakest level against the dollar in nearly two years as the nation’s widening monetary-policy gap with the US caused outflows. The yuan was also weighed down by Goldman Sachs and Nomura downgrading their growth forecasts further.
While Gold price action remained poor as bond yields rose and the dollar strengthened, China’s gold imports from Switzerland jumped to the highest in five years (80 tons in July), double the imports of the previous month, suggesting strong physical demand from the region.
Cryptocurrencies also suffered a swift reversal last week as global markets retreated with US Federal Reserve officials reiterating their resolve to keep raising interest rates until inflation is contained.
The trigger for last week’s bond selloff was the ongoing tug of war between market expectations (of an imminent Fed pivot as the economy weakens) and the Fed saying it will keep raising interest rates. With last week’s move, nearly half of the June-July bond rally has now been unwound as US 10y yields traded back at 3% (from a low at 2.57% at the beginning of August).
The trigger for the equity selloff was a technical failure at recapturing the 200d ma on the S&P500, weaker economic data and mounting tensions around the Zaporizhzhia Nuclear Power Plant after explosions wrecked infrastructure for cooling atomic reactions and transmitting power (Ukraine and Russia blamed each other as usual). US economic data also came weaker than expected. Sales of previously owned homes dropped nearly 6% in July. Outside of housing, the Conference Board posted that the July annual rate of change in their Leading Economic Index (LEI) dropped to 0% from its high in 2021, the 14th decline in 15 months.
In Europe and on Friday, bond markets (and the euro) were shaken after German producer prices in July, surged 37.2% on the year, the biggest rise since records began in 1949… The month-on-month rise of 5.3% was also the highest on record.
A couple of days earlier, the German ZEW Institute’s gauge of investor expectations had sunk to its lowest level since the eurozone debt crisis, dropping from minus 53.8 to minus 55.3.
In the UK, British households are feeling ‘a sense of exasperation’ about the surging cost of living that pushed consumer sentiment to its lowest since at least 1974 as well. The GfK consumer sentiment index sank to a record-low -44 in August from July's reading of -41, which was already the lowest since the survey began. UK Inflation hit a new 40-year high last month, rising above 10% for the first time since 1982.
All of that left us with the sentiment that what is holding risk assets remains the technical power of the short squeeze from the past few weeks and the hope of a Fed pivot that the Fed stands to contradict for now.
We share the view that the Fed will indeed pivot and that the only question is how early …but for the moment the Fed insists that it won’t, heading into next Thursday-Friday’s Jackson Hole Symposium of central bankers (C. Lagarde will not attend) as the loosening of financial conditions pulls the Fed and other central banks in the opposing direction of fighting inflation (the idea of rising rates is to slow the economy in order to tame inflation).
Looking forward, all technical indicators remained bullish (50% retracement of prior losses, 90% off stocks trading above their 50d ma) but most fundamental indicators remained…bearish with valuation stretched and unlikely to attract investors on their own. The last US job report (non-farm payrolls) conveyed a feeling of strength in the US job market…. Now, all other employment related numbers are suggesting a weakening in the job market instead (unemployment claims, household survey, employment component of manufacturing and non-manufacturing PMI’s, regional Fed surveys, small business hiring plans. and now a recent survey of BoA showed that half of US companies have firing or frozen hiring plans.
Following Friday’s PPI, the Bundesbank President warned over the week end that interest rates will have to rise further and that a recession in Germany is likely which makes it more likely that EUR weakness will persist in the short term and likely lead to a breach of parity.
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Over the past week, the S&P500 dropped -1,2% (-11,1% YTD) while the Nasdaq100 sold off by -2,3% (-18,8% YTD). The US small cap index sold off by -2,8% (-12,5% YTD).
Cboe Volatility Index rallied 5,5% (19,6% YTD) to 20,6.
The Eurostoxx50 dropped -1,2% (-11,1%), underperforming the S&P500 by-0,1%.
Diversified EM equities (VWO) sold off by -2,3% (-16,0%), underperforming the S&P500 by-1,1%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies rallied 2,4% (12,9%, Z-score 2,6) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,8% (-4,8%).
10Y US Treasuries underperformed with yields rising 20bps (148bps) to 2,99%. 10Y Bunds climbed 24bps (141bps, Z-score 2,7) to 1,23%. 10Y Italian BTPs underperformed rising 43bps (233bps, Z-score 2,4) to 3,50%, underperforming Bunds by 4bps.
US High Yield (HY) Average Spread over Treasuries climbed 23bps (149bps) to 4,32%. US Investment Grade Average OAS climbed 6bps (48bps) to 1,48%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 10bps (56bps) to 1,10%.
Gold dropped -1,9% (-4,6%) while Silver sold off by -6,4% (-18,5%). Major Gold Mines (GDX) sold off by -7,2% (-21,2%).
Goldman Sachs Commodity Index gained 1,6% (33,2%). WTI Crude gained 0,3% (19,3%).
Overnight in Asia,,,
S&P500 -15 points; Nikkei -0.4%; CSI300 +0.5%
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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