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Tapering QT...

Updated: May 8

BentinPartner Daily

Last week ended moderately in the green with an improved (but not entirely cleared yet) technical situation following a series of more treacherous than volatile trading sessions, driven by an FOMC meeting, earnings reports of various fortunes and a “goldilock labelled” US job report.


Tesla started the week with a slightly better than feared earnings report while AMZN delivered an “ok” report on Tuesday.


On Wednesday the attention shifted towards the FOMC meeting where Fed Chair J. Powell, despite several signs of deteriorating inflation and recent weaker growth data, delivered a dovish speech, signalling the Fed’s unchanged outlook.  ("Right now we have ... pretty solid growth ... We have inflation running under 3%" "I don't see the 'stag' and I don't see the 'flation'"), he said. The FOMC still announced a decision to taper QT (sell less Treasuries), starting on June 1st (from USD60bn/month to USD25bn/month) which was an (expected) easing move.


On the tech earnings side that day, SMC and AMD delivered worse than expected earnings as did Starbucks which hit all three stocks hard to the tune of 10-15%. From an economic perspective perhaps, the most interesting release was Starbucks which added to recent evidence that (the US) consumers are starting to crack, and cut on discretionary spending. Mac Donald’s results were weak as well (-2.7% on the week, -9% ytd). A first BoJ intervention came that day in support of the Yen, propelling JPY 2% higher, still causing some bond weakness (as BoJ needs to sell some to intervene and buy JPY).


The enthusiasm triggered by AAPL earnings report on Thursday night which despite a 4% revenue decline and a sharp decline declining in Chinese sales, also announced a share buyback program of USD110bn (the largest ever) is what made the whole difference between a green and a red week.

The importance of share buy backs in the US stock market outperformance can never be underestimated and with the blackout period for share buyback now closed, more of those are expected to come in support of the market psychology. USD1trn of share buy backs is in the pipeline for this year alone, 20% of which will come from two companies; AAPL and GOOG.


Whether this represents a genuine and healthy development (similarly to the private equitization of the public market which takes out a lot of good companies replacing them by not as good and too expensive ones) is up to debate (no value is created with share buy backs and only EPS (earnings per share) receives a boost but not the earnings base or the overall company’s value creation). But EPS is what matters to value stocks remaining in circulation…give or take some under or over reaction (in the case of AAPL announcement, USD180bn of market value was created after the announcement of a USD110bn share buy back program) and the introduction of a small dividend.


Perhaps, the most important development that also helped US stocks last week, was the gaining traction of EM markets, in particular from China Tech and MSCI China. The breakout of Alibaba blasting over its 200dMa was worth noting in conjunction with record volumes seen on mainland Hong Kong Northbound flows (see chart below) which occurred at the same time as the same time as China readies to crank up stimulus.





The week ended on the high note of a “Goldilocks” non-farm payrolls report showing that nonfarm payrolls, wage growth, and the unemployment rate all pointed towards a weakening labour market.


Elsewhere in FX, the two or three BoJ intervention that ensued the markets efforts to drive JPY to fresh lows after the central bank refused to back away from ZIRP and the bond buying habit that led the Central Bank to now own more than 50% of all JGB outstanding bonds kept FX markets on their toes and led to some moderate but broad-based dollar weakness last week.


While the ECB remains largely expected to cut rates in June, Chief Economist Philip Lane said the Central bank is expected to take a meeting-by-meeting approach for its next steps on monetary policy. “We are not pre-committing to a particular rate path,” Lane said at the Stanford Graduate School of Business on Thursday.


Ray Dalio expressed his concern over the Fed policy, aligning with former US Treasury Secretary L. Summers, who cautioned against potential rate cuts, highlighting the accelerating Employment Cost Index (ECI) and housing price inflation, which point at inflation not heading towards target. At some point, rentals will pick back up due to rising interest rates and increased unit values, he also cautioned. "The dollar is extremely strong right now” and "indeed, it’s not just that the dollar is strong, but that the dollar is strengthening,” he said, which may not last, cautioning this deflation effect could wane, adding to Federal Reserve policymakers’ challenges.




Over the past week, the S&P500 gained 0,6% (7,6% YTD) while the Nasdaq100 added 1,0% (6,3% YTD). The US small cap index rose 1,8% (0,6% YTD). AAPL rallied 8,3% (-4,8%, Z-score 4,6).

The Equally Weighed SP500 gained 0,2% (3,2% YTD), underperforming the S&P500 by-0,4%. The median SP500 YTD return closed the week at 2,2%.

Cboe Volatility Index sold off by -10,2% (8,4% YTD) to 13,49.

The Eurostoxx50 gained 0,1% (10,4%), underperforming the S&P500 by-0,5%.

Diversified EM equities (VWO) rallied 3,1% (6,2%, Z-score 2,6), outperforming the S&P500 by 2,5%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,8% (5,8%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (-0,9%).


10Y US Treasuries rallied -16bps (63bps) to 4,51%. 10Y Bunds dropped -8bps (47bps) to 2,50%. 10Y Italian BTPs rallied -11bps (11bps) to 3,81%, outperforming Bunds by -3bps.

US High Yield (HY) Average Spread over Treasuries dropped -11bps (-30bps) to 2,93%. US Investment Grade Average OAS dropped -2bps (-11bp) to 0,94%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (-7bps) to 0,61%.


Gold dropped -1,5% (11,6%) while Silver shed -2,4% (11,6%). Major Gold Mines (GDX) sold off by -3,3% (7,8%).


Goldman Sachs Commodity Index sold off by -2,3% (4,9%). WTI Crude sold off by -6,8% (9,0%, Z-score -2,2).



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