BentinPartner Weekly
US stocks gained further last week, starting with more good news from Wall Street as Goldman Q3 profits soared 45% on a solid increase in equity-trading revenue and resurgent investment-banking while Morgan Stanley also posted a record quarter in wealth management.
Tech news were more subdued and the sector underperformed last week after ASML lowered guidance on Tuesday after disappointing bookings in Q3 as the Dutch group booked less than half the EUR4 to EUR6bn of new machine orders expected by analysts.
One sector caught the attention last week with the nuclear complex rallying after Amazon said that it was investing in small nuclear reactors, just two days after a similar announcement was made by Google to meet surging demand for data centers and AI. The plans came after the owner of the Three Mile Island nuclear power plant said it will restart the reactor so that tech giant Microsoft can buy the power to supply its own data centers.
On the US data side, US retail sales strengthened in September more than forecast, suggesting resilient consumer spending. The value of retail purchases rose 0.4% (from 0.1% in August). The number of Americans filing for unemployment benefits also dropped by the most in 3 months by 19,000 to 241,000, well below the 262,000 expected.
That said, a former Target executive issued a dire warning about consumers stalling this holiday season as he downplayed the latest good retail sales on …higher prices. Consumers are spending more but receiving less, he said. Storch's outlook for the holiday season came after Goldman noted that the "trade-down phenomenon" has rippled across high-end and low-end consumers. The last time "trading down" mentions soared on earnings calls was during the GFC crisis in 2008.
European bonds and in particular those from the so-called peripheral bonds rallied strongly last week after the ECB met expectations for a 25bps cut, hinting at more cuts for December but declining to say by how much which kickstarted some speculation that it might then deliver a 50bps cut. Italian 10Y yields dropped 20 bps, Greek 10-year yields fell by 18 bps, Spain and France by 14bps, all outperforming the 8bps drop in German 10Y yields.
Credit markets were well bid as well with the credit spread of US blue chip companies dropping to their lowest levels in 20 years leading the average risk premium on a US investment-grade bonds (vs. Treasuries) Treasuries to drop to 0.79% on Thursday. Junk bonds were also propelled by CCCs, rallying for the 16th consecutive week.
Federal Reserve Bank of Minneapolis President Neel Kashkari had only good things to say about the rise in credit markets, saying they disgorge banks’ balance sheets which may lead to less systemic risk in the US financial system despite a lack of political appetite for increasing bank capital requirements. ‘It’s scary at some level, because it’s exploded to a trillion dollar plus market fairly quickly,’ Kashkari said… ‘But as I’ve examined it, a bank in the US today — a big bank — is levered roughly 10 to one, 10 times as much assets for their equity. These private credit vehicles are typically levered one to one, so it’s much less leverage as well.
His view was not shared by all with some analysts opining instead that the US economy is in the throes of a historic – and deeply systemic - “subprime” Bubble, arguing so-called “private credit” is mainly risky “subprime” corporate lending which have now morphed into a primary source of finance for many unprofitable businesses. As for “leveraged lending”, on the consumer side, with auto and credit card lending still booming, the “buy now, pay later” lending programs likely also constitutes mainly “subprime” lending. “Carmakers’ debt woes, to the extent they are also lending stand out as one of the global corporate bond market’s red spots this year, with investors selling the sector’s debt, as vehicle sales stalled and salaries increased.
While the dollar gained slightly as the European economic news flow remained underwhelming and following the ECB rate cut, the real story last week was the strong performance of precious metals as gold printed a fresh all-time high, remaining supported by geopolitical concerns, unsustainable debt dynamics and more central banks’ buying along with positive pronouncement about gold and their intention to increase holdings in the future.
Members of the rapidly growing club of BRICS+ countries (who will hold an important Summit in Russia this week) are likely to make announcements (read here and here) regarding the “Unit” or the new payment and settlement system that is expected to be implemented in the coming 12 months, as a partial substitute to the dollar and the euro for settling trade. Countries from BRICS+ have been buying and will keep buying more gold as the precious metal holds a key role in the unit with a 40% allocation (with the balance constitutive of local currencies from BRICS+ countries). Considering that these countries will not hold the gold backing the “Unit” in either London or New York, they may also increasingly be tempted to relieve themselves from reporting their additional gold purchases to the IMF.
The price action of the past week seemed to indicate increased betting on Trump winning the elections with banks, small cap stocks, and the US dollar somehow front-running the 2016 bull moves, with the exception of gold and oil that are diverging. Perhaps, the US fiscal “train wreck” is playing a role (US government spending was $4.5tn in 2016 vs $6.9tn currently). Even if US government bonds improved marginally last week, they are clearly disconnected with expectations of more rate cuts and with the continued run into equities, which are safer bets than government bonds when too much debt becomes too much debt and a structural bear market potentially ensues, exacerbated by trade tariffs and protectionism.
It has unfortunately become a recurrent weekly iteration to report further escalation in the Middle East conflict with the FT reporting that Hizbollah militant group said it was entering a ‘new and escalating phase’ in its battle with Israel, hours after Israel announced the death of Hamas leader Yahya Sinwar in Gaza. The closer we get to US elections, the tenser the situation seems to get, although it should not be expected that the US policy will meaningfully change before or after the election. Prime Minister Netanyahu also asserted the country is free to act how it chooses after more than a year of battling Iranian proxy groups. ‘We listen to the opinions of the United States, but we will make our final decisions based on our national interests,’ Netanyahu’s office said.” Russia also warned Israel to not even consider striking Iranian nuclear facilities… ‘We have repeatedly warned and continue to warn, to caution (Israel) against even hypothetically considering the possibility of a strike on (Iranian) nuclear facilities and nuclear infrastructure…’ Russian state media said, quoting the Russian Deputy Foreign Minister.
China employed a record 150 aircraft in large-scale military exercises surrounding Taiwan and its outlying islands last week, simulating the sealing off of key ports in a move that underscored the tense situation in the Taiwan Strait.
Over the past week, the S&P500 gained 0,9% (23,0% YTD) while the Nasdaq100 gained 0,2% (20,7% YTD). The US small cap index gained 2,0% (12,4% YTD). AAPL rallied 3,3% (22,1%).
The Equally Weighed SP500 gained 1,1% (15,3% YTD), outperforming the S&P500 by 0,2%. The median SP500 YTD return closed the week at 16,0%.
Cboe Volatility Index sold off by -11,9% (44,8% YTD) to 18,03.
The Eurostoxx50 dropped -0,4% (13,2%), underperforming the S&P500 by-1,3%.
Diversified EM equities (VWO) dropped -0,7% (16,4%), underperforming the S&P500 by-1,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (7,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (1,5%).
10Y US Treasuries rallied -2bps (20bps) to 4,08%. 10Y Bunds dropped -8bps (16bps) to 2,18%. 10Y Italian BTPs rallied -20bps (-34bps) to 3,36%, outperforming Bunds by -12bps.
US High Yield (HY) Average Spread over Treasuries dropped -8bps (-37bps) to 2,86%. US Investment Grade Average OAS climbed 1bps (-16bps) to 0,89%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (-6bps, Z-score -2,1) to 0,62%.
Gold rallied 2,4% (31,9%, Z-score 2,7) while Silver rallied 6,9% (41,7%, Z-score 3,1). Major Gold Mines (GDX) rallied 7,7% (39,1%, Z-score 2,7).
Goldman Sachs Commodity Index sold off by -4,1% (1,3%). WTI Crude shed -8,4% (-3,4%).
Overnight in Asia…
S&P500 unch. ; Nikkei +0’.1%; Hong Kong -0.75%; CSI300 +1.0%
China’s CSI 300 Index climbed after the nation’s banks, not too unexpectedly, cut their one-year benchmark lending rates, adding to optimism over recent stimulus measures.
Moldavia voted against a referendum on joining the EU while at the same time voting to elect the candidate who was in favour of adding adhesion to the EU in the constitution. There were wide accusations of corruption scheme by a foreign agent.
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