This Time IS Different...
- Marc Bentin
- Apr 13
- 8 min read
Updated: Apr 20
BentinPartner Weekly
Dear Reader,
Please find below our latest Weekly Trend Report.
Have a nice start of the week.
Marc Bentin,
Bentinpartner GmbH
Last week will likely go down in the annals of the US stock market history as one of the most volatile with risk-off gripping not only stocks but government bonds, credit markets, FOREX and precious metals altogether.
While the volatility burst was rooted in the aftermath of “liberation day” and D. Trump’s erratic tariffs policy implementation, and although stocks managed to end the week in positive territory (+5.6%), investors’ (and policy makers’) remained worried, going into the week end, by losses inflicted to the US bond market which saw 10Y Treasury yields spike 50 bps on the week, the largest such jump since 2001.
Most concerns were focused on the (partial (ly) disorderly) unwind of the so-called “basis trade” (a popular hedge fund trade, with an outstanding estimated to be USD800bn-USD1trn, whereby investors buy US Treasuries and sell US futures for a small profit but with a leverage of 20X. When markets run smoothly, the expected return of the strategy is around 10% annual. However, with markets in disarray and volatility exploding (VIX spiked to 50 intra week), hedge funds (and not only them) were forced to reduce exposure, following a “value-at-risk” shock, leading to mass liquidation of US Treasury positions. This caused havoc on the trade bearing resemblance with what brought LTCM down in 1992.
This was only half of the bond story last week, with the other half coming from speculation about heavy foreign selling of US Treasuries with China having a good reason (or two) to sell treasuries as well; first to yield some deterrence in their tariff’s negotiation, and second to defend the CNY which came under pressure, dropping to its lowest level since October 2022.
Reassurances came from US Treasury Secretary S. Bessent that the bond market continued to function normally but scars remained of the injuries inflicted to the US bond market, as 10Y yields closed +50bps higher on the week, accompanied by sharp weekly steepening of the curve (in both 2/10 and 10/30). Credit markets stayed fairly nervous all week, although HY credit spreads closed slightly tighter in a move that coincided with “huge” (actually all-time high) volumes, exceeding those seen during the official intervention on the HYG ETF that materialized in March 2020 in the midst the COVID related market chaos.
In stocks with the exception of the wild session on Wednesday (that followed D. Trump back-pedaling with a 90day grace period on most tariffs), Thursday saw some renewed weakness and on Friday, starting in the overnight futures action, the SP500 after starting weak again, recouped its losses, setting the market in a good spirit to continue on a strong recovery (and short covering) mode. I think that I can pinpoint the moment when futures’ intervention occurred, although it could also be pure speculation on my part. In any case, with SP500 futures trading higher in the overnight session on Friday, this created a good impression to close the week green and on a high (although fatigued) spirit.
With international confidence in US policies shaken, the USD dropped sharply last week while a commensurate rally in precious metals occurred. Not much comment came from the US Treasury on USD weakness (as it is part of the policy mix to drive it lower), except those aimed at China with a warning against devaluing CNY as a way to counter US tariffs…
The gold price reached a new all-time high at $3,245, recovering from the 5% drop inflicted on April 2d US tariff announcement as investors liquidated gold to meet margin calls from the equity selloff, in line with previous episodes of market stress (including 2008 and 2020). This time was different, it seems, with the price action remaining supported by unabated demand from Central banks. Goldman raised its price target for year end to USD3’700 with a tail risk at USD4’500, arguing that gold is “uniquely positioned to hedge recession risks” (which could lead to lower rates, QE, lower USD and continued volatility in stocks).
Gold shares accelerated on the upside last week as well, starting to play (in sharp contrast with previous years) as a levered play on gold.
Expectations of Fed Funds rate for the end of the year now stand at 3.5% (vs. 4.5% Fed funds rates currently).
Given the systemic risks implied, we would not be too surprised to see the Fed cut rates by 50bps at its May meeting. The rationale could be the drastic fall in the PPI report (old news but still…) and having to deal with the “basis trade” risk. This is a risk the BIS has been warning about for years and repeatedly. The Fed will bail it out, if need be, even if the size is now much larger than at the time of LTCM…
With the US Treasury still having to refund USD8trn (out of USD27trn outstanding) this year (about USD5trn of which being US bills), a failure to bring rates lower could easily jeopardize the fiscal efforts of the new administration.
The tariff’s implementation is chaotic but the consensus of US (and international) economists calling Trump’s policy “crazy” might be wrong and still heavily politically (more so than economically) tainted, including with the views expressed by Olivier Blanchard in a recent interview (see CONTACT interview in French), a former IMF Chief Economist, who thinks they could lead to WWIII, not to speak about L. Summers calling for defections of close lieutenants of D. Trump (he would call them stupid if they were). Many cannot wait to see Trump’s policies fail, Tesla to go bankrupt and the bond market to go off the rails to prove that they are right in saying D. Trump’s policies are “crazy”, need to be taken back and are doomed to fail.
As I wrote on Thursday the US tariff policy as it is being implemented is an example of the “Strategy of the Fools”, not to be confused with a Fools’ strategy. Only one thing is unsustainable; the US fiscal policy (and that of much of Europe). And the only fools are those who do not recognize it and wish to continue as before.
There is some truth in saying that “the patient needs to take its medicines” even if there is no certainty that they will work (including for the US). But the alternative is the fiscal brick-wall anyway…D. Trump has vowed to reduce military spending by 8% a year, to terminate the war in Ukraine, to seek avoiding wars in the future, and to drop its military commitment to Europe.
Cost cutting will also reduce abuses in social security and D. Trump will do what he can to compress bond yields (the part that is not working right now…). Getting the dollar to weaken will make US exports more competitive and tariffs will fill in the coffers and stimulate onshoring, including by foreign corporations. This is all a very selfish policy but one that could still work for the US….and help making America great again.
The “absolutist” policy towards China is the one policy that I see most likely to fail… The intention of the US administration (filled with China haters) to cut China’s wings may be doomed to fail. The world is vast outside of the US and China is fast getting ready to seal off from the US economy.
Late on Friday, President D. Trump also announced that tariffs on China would not apply on PC’s, Iphone components and other chip related items which was another backpedaling effort to stabilize the market.
The Federal Reserve “would absolutely be prepared” to help stabilize financial markets if conditions become disorderly, Boston Fed President Susan Collins also said in an interview with the Financial Times.
In terms of near-term market outlook, there may be juice left to squeeze US stocks but with the odds of recession now rising to 50/50 (“GDP now” actually sees GDP flat at the current time), earnings will have to be guided lower and I would remain cautious, especially on US tech, preferring so called value, “domestically orientated” companies to ride the coming waves which could continue to be treacherous if not rogue.
Unhedged holdings of US equities and long bonds, for European and Swiss investors have underperformed significantly (with a 10-15% loss on securities now compounded by a 10% loss on the currency). This is despite the recent squeeze higher of US stocks, with accumulated losses so far this year nearing those of the drawdown from 2022.
The ECB meets this week and is widely expected to cut rates by 25bps. Perhaps it might do so by 50bps as well because of the strength of the currency …just as the Fed might do in May.
Over the past week, the S&P500 rallied 5,7% (-8,9% YTD) while the Nasdaq100 rallied 7,5% (-11,1% YTD). The US small cap index gained 1,7% (-16,6% YTD). AAPL rallied 5,2% (-20,9%).
The Equally Weighed SP500 rallied 3,1% (-7,5% YTD), underperforming the S&P500 by-2,6%. The median SP500 YTD return closed the week at -8,3%.
Cboe Volatility Index sold off by -17,1% (116,5% YTD) to 37,56.
The Eurostoxx50 dropped -1,5% (-1,7%), underperforming the S&P500 by-7,1%.
Diversified EM equities (VWO) rallied 2,3% (-2,1%), outperforming the S&P500 by -3,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies sold off by -2,9% (-6,7%, Z-score -2,9) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) was unchanged (1,7%).
10Y US Treasuries underperformed with yields rising 50bps (-8bps) to 4,49%. 10Y Bunds dropped -1bps (20bps) to 2,57%. 10Y Italian BTPs climbed 4bps (29bps) to 3,81%, underperforming Bunds by 5bps.
US High Yield (HY) Average Spread over Treasuries dropped -8bps (132bps) to 4,19%. US Investment Grade Average OAS climbed 1bps (33bps) to 1,20%.
Gold rallied 6,6% (23,4%, Z-score 2,6) while Silver rallied 9,2% (11,8%). Major Gold Mines (GDX) rallied 19,2% (46,6%, Z-score 2,6).
Goldman Sachs Commodity Index dropped -0,1% (-2,1%). WTI Crude dropped -0,8% (-14,2%).
Overnight in Asia…
S&P future +43 points; Hong Kong +2.2%; Nikkei +1.6%; China +0.5%
Asian stocks advanced after President D. Trump paused import duties on consumer electronics (most of which are made in China), offering some reprieve for markets, but Trump indicated a specific tariff will be announced in due course.
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