BentinPartner Weekly
Last week delivered another week of gains for most US indices as more short sellers capitulated but not without sectorial losses of -4.7% in energy and similar declines for metals & mining or utilities.
Led by tech and in particular semis which rallied 4% while META and AMZN printed all-time highs of their own, Tesla also rallied 5% (now up 50% since D. Trump’s election) with talks circulating, ahead of Starlink going public, that E. Musk might soon become the first ever…$ trillionaire.
Amidst the stampede, European and Chinese markets participated to the rally late last year, with interest aroused on beaten down high-quality international 8including French) stocks. For what it is worth after the decade+ outperformance of US markets, the MSCI world is now made 75% of US stocks with the rest of the index only representing 25% of non-US equities.
The US Nonfarm payrolls report on Friday delivered the goods, rebounding from last month’s weather-related weakness with a monthly gain of 227k (from 12k last month). That said, the establishment survey (Non-farm payrolls from last Friday) and the household survey are depicting two completely different pictures with resilience seen in the former and signs of cracking and weakness appearing on the latter. Furthermore, permanent jobs are still declining and the rate of growth in temporary job growth is still declining which is not indicative of labor markets strength. Also, US services activity expanded in November at the slowest pace in three months.
Commenting on the economy last week, J. Powel said the US economy is stronger now than the Fed expected in September with inflation a little stickier than when it started cutting rates which should allow the central bank to be “a little more cautious when we try to find neutral”. Still three Fed officials made clear they still expect the Fed to cut this month and next year.
In any case, odds of a December Fed rate cut jumped to 80% and US 10-year yields dropped -5bps for the week as well while the long bond outperformed.
Elsewhere in Europe, Euro zone manufacturing activity fell sharply last month and a further decline in demand likely dashed any hopes for an imminent recovery after the sector had showed some signs of stabilization in October with HCOB's final euro zone manufacturing Purchasing Managers’ Index (PMI) sinking to 45.2 in November as new orders fell fast and at an accelerated pace. The services sector which had been holding up the whole economy is now shrinking for the first time since January as well. The ECB meets this week and is widely expected to cut with possibly as much as 50bps.
In Japan, BoJ Governor K. Ueda said interest rate hikes are nearing as inflation and economic trends develop, contributing to strengthen JPY last week.
On the geopolitical side, the potential impeachment of South Korea’s president after an aborted attempt to impose martial law may was said to complicate US efforts to increase pressure on China under President-elect Donald Trump by undermining American-led alliances.
Those thinking there are too many charged-up equity markets bulls which raises the odds of a short-term pullback, may have a point as last week witnessed another strong bear dropping the glove. D. Rosenberg, one of the most articulate and objective (but so far bearish) Wall Street analysts, wrote his case for “rethinking the Bubble Thesis”.
He departed from the assumptions of “overvaluation”, excessive positive sentiment and overcrowded positioning towards acknowledging the existence of a super technological revolution to defend a “Model Shift” when it comes to future growth and profits.
“… the stock market is going to extend its time horizon, build in expectations that transcend just one year, and a bear market only ensues if and when these expectations prove to have been excessive. That day may well come, but Mr. Market has been saying for some time: “not quite yet.” So, the lesson and epiphany for me is the realization that it is not helpful to be looking at lofty multiples on a one-year trailing or one-year forward basis in an era where we are going through a major technological revolution”, Rosenberg wrote.
“…if generative AI is a game-changer for the future, then the multiples based on a long-time frame may not be in a bubble at all. This comes back to the view that traditional valuations, at the least, are not that helpful right now.”, he also wrote.
Sentiment remains boosted on the consumer side (by stock markets gains) and on the corporate side by promises of a lower corporate tax rates (from 21% to 15%) and less bureaucracy. Whether D. Trump will be able to deliver on those promises is another matter but I still remain of the opinion that the primary cost saving on fiscal expense will come from the Fed having to cut rates aggressively next year (along with other major central banks) to keep the burden of debt affordable, whatever happens to inflation (with lower rates and QE).
At the minimum, we will indeed need a catalyst for the current markets dynamics to change like an earnings recession, monetary or fiscal policy tightening or very adverse and surprising developments on the geopolitical side.
Only this could send the markets out of buyers and If anything, fiscal and monetary policy will be leaning towards becoming more dovish while most recent developments including those from this week end may not make the bearish cut either.
D. Rosenberg has also turned more bullish on treasuries, arguing that higher productivity and deregulation will reduce the cost of doing business, supporting the interest rate outlook, that the political changeover in the US will be business friendly and that energy investment will contribute to make energy cheaper…
That said, the fact that Black Rock opined that the world had exited the “boom and bust cycle” may also suggest that we have not, and that investors remain with both hands in the honey pot with little lateral vision away from FOMO and the unwinding year- end rally.
There may be little else to do than to accompany the movement but the lack of interest for and the cheapness of puts may be worth our consideration as well.
Elsewhere, the CME group said it was launching a one-ounce gold futures contract in January to meet demand from retail investors. This may look odd, considering the plethora of ETF and funds present in the space allowing fractional ownership of gold. But the objective is to meet the demand of a clientele and that is getting younger, the CEO of CME said.
Earlier last year, COSTCO one stop shopping experience was also extended to gold buying by offering prices that undercut traditional specialized outlets.
A nice and educative Christmas gift could be a 20BEF Belgian Louis, 20CHF Vreneli, 20FF Napoleon or 20ITL Umberto gold coin which all reflect a loss of purchasing power of these fiat currencies, in various degrees. At the time of the “Latin Monetary Union” around 1865, when those coins were minted, 20BEF were worth 20CHF which were worth 20FRF which were worth 20ITL. They are all worth between EUR400-500 now (and represent a nice piece of monetary history).
Over the past week, the S&P500 gained 0,9% (27,9% YTD) while the Nasdaq100 rallied 3,3% (28,6% YTD, Z-score 2,1). The US small cap index dropped -1,2% (19,0% YTD). AAPL rallied 2,3% (26,1%).
The Equally Weighed SP500 dropped -1,3% (17,4% YTD), underperforming the S&P500 by-2,2%. The median SP500 YTD return closed the week at 15,7%.
Cboe Volatility Index sold off by -5,5% (2,6% YTD) to 12,77.
The Eurostoxx50 rallied 3,8% (13,6%, Z-score 2,4), outperforming the S&P500 by 2,9%.
Diversified EM equities (VWO) gained 1,8% (12,8%), outperforming the S&P500 by 0,9%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,3% (10,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (0,3%).
10Y US Treasuries rallied -5bps (26bps) to 4,14%. 10Y Bunds climbed 2bps (8bps) to 2,11%. 10Y Italian BTPs rallied -8bps (-51bps) to 3,19%, outperforming Bunds by -10bps.
US High Yield (HY) Average Spread over Treasuries dropped -3bps (-60bps) to 2,63%. US Investment Grade Average OAS was unchnaged (-19bps) to 0,86%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -5bps (-9bps) to 0,59%.
Gold gained 0,2% (28,2%) while Silver gained 1,9% (30,6%). Major Gold Mines (GDX) sold off by -2,2% (18,7%).
Goldman Sachs Commodity Index dropped -1,0% (-0,6%). WTI Crude dropped -1,0% (-5,9%).
Overnight in Asia…
S&P future -2points; Hong Kong -0.8%; Nikkei +0.5%; China -0.5%
Syrian President Bashar al-Assad’s government has fallen after a stunning territorial advance over the past few days by an opposition group considered as a terrorist group by the UN and the US. D. Trump took to social media to say that the US should “have nothing to do with” the developments in Syria. “This is not our fight,” he said. “Let it play out. Do not get involved!”. The power dynamics that have shifted in the Middle East over the last 6 months is looking more incredible by the day.
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