BentinPartner Weekly
Dear Reader,
The "New" Gold Narrative is Shot...
Last week was again brutal, inflicting US equity indices a seventh consecutive weekly decline, as they had to grapple with the persistence of central banks' hawkish rhetoric, building recessionary fears, still mounting inflationary pressures, and liquidation in some of the most defensive equity sectors. In contrast, EM equity indices posted gains, driven mostly by China while Europe ended mostly stable.
While the dollar had been strong all along with this year’s correction, last week, the dollar dropped across the board, including and especially vs. EM currencies such as BRL, MXN, ZAR, and indeed RUB (which gained so far this year by 17%) rallied in unison. An observation made the rounds catching FX markets’ attention that the recent dollar meteoric rise was not too dissimilar to the one that happened in 1985 before the Plazza Accord (that sent the USD sharply lower) which took place against a backdrop of soaring inflation, a steep Fed hike campaign and the surging dollar, i.e., in a situation not too dissimilar to the one prevailing today. Recent dollar gains had all to do with risk aversion and even more importantly, diverging monetary policy expectations, ignoring US current account deficit soaring to a historic all-time high.
On the economic side, most US data came weaker than expected such as the manufacturing index, Phili Fed, and the conference board which signaled more difficulties ahead. Retail sales unadjusted for inflation rose more than expected by 0.9% (vs. 0.5% expected) but for that reason alone (unadjusted for inflation) and jobless claims started to grind higher as well (218k vs. 200k expected). This was confirmed by weaker than expected earnings from Walmart and Target whose share prices both dropped sharply (for Target as much as in the 87 crash after missing earnings by 25% as the company noted behavioral customer changes in favor of discounted products and could not hike prices so as to maintain margins). The fact that consumer staples and discretionary sectors dropped so sharply was a painful wake-up call for all investors trying to hide in safe-haven sectors.
Serious concerns, echoed by the UN, emerged about the skyrocketing wheat price which rallied by the exchange limit on Monday as world producers outside of the disrupted area of Ukraine and Russia exposed just how tight global supplies became. While India moved to restrict exports due to weather-related weakening supplies, farmers in parts of Canada’s Prairies also struggled to get crops in the ground due to heavy rain. One top priority for European governments is to get whatever wheat is available, also from Ukraine to circumvent the Russian blockade or run the risk of seeing Africa endure famine and Europe a fresh wave of immigration similar to 2015 that would present Europe with enormous further challenges.
Reasons for why Gold has not been going up (and why it should ultimately do so more convincingly) were explained in the latest piece of Von Greyerz while Ray Dalio also wrote on the importance of building diversified inflation resistant portfolios as he considered a stagflationary period ahead as a given (just as S. Roach or M. El Erian in their own observations last week).
The “new gold” narrative suffered a blow last week following the USD40bn collapse of popular crypto tokens Terra and Luna. These two so-called “stable” coins, that promised to match the value of the USD became worthless in a matter of hours in what became “the largest destruction of wealth in this amount of time in a single project in crypto’s industry”. SEC Chair G. Gensler and later the G7 issued a stern warning to the investing public on crypto, reiterating the lack of investor protection and urging more regulation. ECB President C. Lagarde opined that these coins were “based on nothing” and “worth nothing” (she does not like gold either) and expressed similar concerns, calling for more regulation of the space. The G7 urged the Financial Stability Board to advance the swift development and implementation of consistent and comprehensive regulation”.
Credit markets underperformed notably last week on the back of weak economic releases and mounting evidence that consumers have been maxing out their credit cards to sustain spending amidst soaring inflation.
In this context, HY Credit Default Swaps rose +38bps to 523bps, widening 100bps in the last three weeks alone, which a growing number of analysts qualified as a warning sign of building stress. US Treasuries rallied (-14bps to 2.79% on US 10 years), however as their safe haven bid returned and on expectations, the Fed will not be able to deliver all of its ambitious rate rise campaign due to the ongoing financial markets “tightening” doing the work for them. The CDS of JPMorgan and BoA both climbed 9bps on the week.
In China, industrial output unexpectedly fell 2.9% in April from a year ago while retail sales contracted -by 11.1% in the period, weaker than the projected 6.6% drop. China’s home prices also declined for an eighth month in April (-0.3% mom) while the property sales by value slumped 46% from a year earlier, the biggest drop since 2006.
Following this string of disappointing economic data, China continued on the easing path cutting benchmark interest rates by 15bps (to 4.45%) which did not prevent CNY to gain 1.5% vs. USD last week as well. According to JPM calculation, the amount of fiscal easing China plans to unleash to take China’s economy to pick up from its current funk caused by lockdowns and a deflating real estate bubble will equate to 1/3d of the USD17trn Chinese economy, still a bit less than the initial covid related boost in 2020.
The ruling party’s top foreign policy body also said that it would continue to promote its “comprehensive strategic partnership” with Russia and quietly ramped up purchases of oil from Russia at bargain prices (while Germany said it would stop importing Russian oil by year’s end even if Europe fails to agree on such measure as now seems likely). In an obvious sign of mounting distrust and quiet preparation, the Communist party also said it would discourage senior officials, their wives, and children to hold significant assets abroad. It is not too much of a stretch of the imagination that China (and the US) are now actively preparing for the moment when China will be submitted to similar sanctions as well. China is also interrogating all foreign banks managing assets for China on the way they would respond in case sanctions would be imposed against China.
Over the past week, the S&P500 sold off by -3,0% (-18,0% YTD) while the Nasdaq100 sold off by -4,4% (-27,4% YTD). The US small cap index dropped -1,1% (-20,8% YTD).
CBOE Volatility Index gained 1,9% (70,9% YTD) to 29,43
The Eurostoxx50 dropped -1,1% (-13,2%), outperforming the S&P500 by 1,9%.
Diversified EM equities (VWO) gained 1,7% (-14,7%), outperforming the S&P500 by 4,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped by 1,5% (7,5%) while the MSCI EM currency index (measuring the performance of
EM currencies vs. the USD) gained 1,2% (-2,8%). BRL climbed +3.7% (+13% YTD) on the week, making it the second-best performing so far this year after RUB.
10Y US Treasuries rallied -14bps (127bps) to 2,78%. 10Y Bunds climbed 0bps (112bps) to 0,94%. 10Y Italian BTPs underperformed rising 15bps (183bps) to 3,00%, underperforming Bunds by 11bps.
US High Yield (HY) Average Spread over Treasuries climbed 30bps (199bps) to 4,82%. US Investment Grade Average OAS climbed 8bps (63bps, Z-score 2,0) to 1,63%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 8bps (55bps) to 1,10%.
Gold gained 1,9% (0,9%) while Silver rallied 3,1% (-6,6%). Major Gold Mines (GDX) rallied 3,8% (0,1%).
Goldman Sachs Commodity Index gained 0,8% (44,0%). WTI Crude dropped -0,2% (46,6%). Natgas rallied +5.5% (117%).
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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