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Technically Bullish but Fundamentally Bearish...

BentinPartner Weekly

While the rally tried to broaden to small caps last week, the US rally of the past three months that has been essentially fuelled by 7 tech stocks (mostly AI related) reached a new milestone, extending to 20% from last October lows, which some suggested equated to the rebirth of the Bull market.

While the price action commands respect, increasingly fuelled by FOMO (the American Investors survey showed a fairly high proportion of bullish investors and commensurately low % of bearish investors), at the same time, the fundamental outlook keeps deteriorating with most leading indicators now pointing at more economic weakness and the near certainty of a coming recession.

According to analysts, it never happened that LEI’s bottomed before stocks did over the past 70 years…while stocks did just that if the current price action is to be labelled as a new bull market. In other words, equity markets never bottomed before a recession happened. And the LEI’s are signalling that the US economy is heading into a recession, possibly into a hard landing.

The confusion may rest on the impression conveyed by the notoriously flawed US non-farm payrolls published two weeks ago, that the US economy is creating a lot of jobs which it did not, judging from other metrics of job creation such as the household survey which showing the exact opposite i.e. that the US shed 310k jobs last month.

Other leading indicators of job market weakness are showing up in declining average workweek, a fall in overtime, a decline in temporary workforce and an increase in part time jobs.

When looking at the nature of job losses, it is affecting white collar workers more than blue collar ones, which suggests that we might be comparing pears with apples when it comes to net jobs creation and destruction translating into a growing loss of net income.

The analysis of jobless claims and more importantly of continuing claims also shows that there is a very significant and historic increase in number of states witnessing an increase in continuing jobless claims.

Other data pointed towards additional weakness. The Institute for Supply Management’s overall gauge of services fell to 50.3, the weakest level this year, from 51.9 in April… The business activity index… fell for a fourth month to a three-year low of 51.5. Combined with softer orders, the decline indicates service providers are experiencing sluggish demand.

The yield curve inversion is another leading indicator of recession and they are inverting everywhere.

To these indicators, we can add the fact that very rarely in the past did the equity market recover when the Fed, fiscal policy and credit conditions were tightening which they all do now.

As regards credit formation, data showed last week that mortgage lending stalled across the board in Q1. Household mortgage debt expanded only $50 billion (nominal) during Q1, down from Q2 '22’s peak $281 billion and Q4’s $164 billion. Bank lending also came to a halt, slumping to only $31bn, down from Q4’s $356bn and Q2’s near-record $549bn.

For what it is worth, U.S. investor S. Druckenmiller also said he still expected a hard landing for the U.S. economy - a scenario where the Federal Reserve's rate-hiking pushes the economy into a recession. ‘I think the probabilities would suggest that Silicon Valley Bank, Bed Bath & Beyond, they're probably the tip of the iceberg,’ he said. “Billionaire Ray Dalio, founder of Bridgewater Associates, for his part, said the US is seeing stubbornly high inflation along with elevated real interest rates. ‘We are at the beginning of a late, big-cycle debt crisis when you are producing too much debt and have a shortage of buyers,’ Dalio said…”

Morgan Stanley reiterated over the week end its near-term bearish equity market outlook (expecting an earnings recovery in 2024).

All of that being said, the technical picture of the equity market keeps improving including with a broader rally (small caps have started to rally as well…mostly due to a large amount of call options buying in the sector).

The dollar traded lower last week, moderately vs. DM and more solidly so vs. EM currencies (ex CNY) as BRICS currencies are slowly getting broader attention and acceptance for trade and investment. The US trade deficit also jumped 23% (to USD74.6bn), more than expected last week (except against China).

Bonds sold off (with 10 y yields up 5bps) on the expectation of an avalanche of close to 1trn US Tbills issuance (in the next 8 months following the end of the debt ceiling circus) after the Bank of Canada (and the Reserve Bank of Australia) defied expectations last week raising the overnight lending rate to 4.75%, claiming the economy is running too hot. In the meantime, flows continued into Money Market Funds by another USD36bn to a record USD5.45trn (+54% annualized over three months, +205 yoy), suggesting the regional banks disintermediation is continuing (despite a solid rally from the lows in their stock price).

Elsewhere in China, CNY dropped further and local stocks dropped 1% overseas shipments shrank 7.5% from a year ago to $284bn…, worse than the median forecast for a 1.8% drop. However, China's services activity picked up in May, a private-sector survey showed.

Gold gained slightly as the dollar weakened and after China signalled it added to Gold holdings for the 7th straight month by 16 tons in May (+144tons since November).

The Fed will deliver its verdict on Wednesday and much will depend over the short term on whether the Fed pass this month will be presented as a skip or a pause after raising rates for 10 times in a row.

The ECB will meet as well on Thursday and is expected to raise rates one more time. “The European Central Bank still needs several more interest rate hikes to rein in inflation and it is not certain that rates could peak this summer, Bundesbank President Joachim Nagel said on the matter, joined by ECB President C. Lagarde and Dutch central bank chief Klaas Knot said he’s “not yet convinced that the current tightening is sufficient”.

Most likely, the ECB will do another tightening in July but then look at cutting rates next year, waiting for the Fed pivot and observing the BoJ standing pat.

Over the past week, the S&P500 gained 0,5% (12,4% YTD) while the Nasdaq100 was unchanged (33,1% YTD). The US small cap index gained 1,7% (6,1% YTD). AAPL was unchanged (39,3%).

CBOE Volatility Index sold off by -5,3% (-36,2% YTD) to 13,83.

The Eurostoxx50 dropped -0,8% (16,0%), underperforming the S&P500 by-1,2%.

Diversified EM equities (VWO) gained 1,3% (4,8%), outperforming the S&P500 by 0,8%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,3% (2,4%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,3% (1,7%).

10Y US Treasuries underperformed with yields rising 6bps (-13bps) to 3,74%. 10Y Bunds climbed 7bps (-19bps) to 2,38%. 10Y Italian BTPs climbed 4bps (-60bps) to 4,11%, outperforming Bunds by -3bps.

US High Yield (HY) Average Spread over Treasuries dropped -8bps (-53bps) to 4,16%. US Investment Grade Average OAS climbed 3bps (4bps) to 1,47%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-12bps) to 0,88%.

Gold dropped -0,3% (7,3%) while Silver rallied 2,5% (0,8%). Major Gold Mines (GDX) dropped -1,1% (8,4%).

Goldman Sachs Commodity Index dropped -0,7% (-10,8%). WTI Crude sold off by -3,3% (-13,1%).


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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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