BentinPartner Daily
Primarily focussed on their own optimism, stocks pursued their march higher last week, propelled by more gains in super tech names (those that are present in the SP500 and Nasdaq indices and the myriad of active and passive funds tracking or “desperately trying” to keep pace with them) and NVidia in particular.
New York Community Bancorp, which saw its share price almost halved over the past week on concern about exposure to commercial real estate, triggered some, albeit temporary, concerns.
Some encouraging signs of broadening of the rally came from strength in the industrials sector and international markets. The Dow theory which has been around for a century and still gathers many apostles has not yet but is nearing “confirmation” as the Dow printed an all time while the Dow transport is very close from doing the same which would trigger a buy signal from that angle.
That said, the Equally Weighed SP500 only gained 0,5% last week and is only +0,7% YTD (same as the “median” SP500 member performance), amply illustrating the “narrowness” of the rally which is being led by the ongoing squeeze in Nvidia more than anything else, to the despair of some and excitement of others.
On the bond side, things looked less rosy with 10Y US yields closing the week 16 bps higher as several Fed speakers distanced themselves from some of the rapid and rabid rate cut expectations still being priced in by the market for this year.
Fed Chair Powell said that in December ‘almost all’ of the members of the Federal Open Market Committee expected the US central bank to cut rates … on average by an expected 75 bps of cuts and that, while new projections were not due out until March 20, ‘nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts’.” Timing-wise, four Fed officials also suggested they don’t see an urgent case for lowering interest rates, trying to make it clear that a cut isn’t likely until May at the earliest…
Datawise, nothing last week came to deter the Fed from thinking this way. The January US service sector expanded at the fastest pace in four months with the ISM gauge of services climbing to 53.4 (+2.9 on the month) while the prices paid component for materials jumped to 64 (+7.3 points), the most since 2012 in January, largely as a result of soaring shipping costs and across-the-board increases in commodity prices. Incidentally, the great cocoa squeeze showed no signs of abating last week, with prices now on the cusp of topping a peak set when Jimmy Carter was in the White House.
This, coupled to a heavy debt issuance and some bleak perspectives coming from the CBO office last week conjured to keep the pressure up on bond yields. While projecting a small improvement for this year’s federal budget deficit to USD1.5trn, the CBO said the deficit would resume its march upward to USD1.8trn in fiscal 2025… hitting $2.6 trillion in fiscal 2034.
“Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034,’ said CBO Director Phillip Swagel.
Added to the fact that the Fed will not want to be seen unsupportive of the stock market in an election year, most likely than not, this is also the reason why the market seems to be calling the Fed bluff, sufficiently confident that the Fed next policy steps remain to cut rates (whether in March or later), to end QT, and to bring back QE in that order…because there is no other way out to assure debt sustainability over time (my own view is that the ultimate end-game of the US fiscal trap will go to the bottom of B. Bernanke toolkit with “yield curve anchoring” a la Japan rather Japan normalizing policy). And while this could prove challenging to the USD at some point (and for inflation) and even for stocks for a brief period of time, over the long term, this will be supportive for stocks and even more so, for precious metals which were hit with hard selling, over a statistically bizarre number of consecutive days in the recent past, only to prove resilient in the end (meeting demand each time).
Chinese stocks also managed to climb 5 days in a row in a week that saw the head of China Securities Regulatory Commission being replaced in a further sign that China’s fourth year of equity market selloff (meltdown) is now attracting sufficient government attention. Last week’s gain in Nvidia saw the company’s market cap reach…the value of the entire Chinese stock market. Nobody will ring the bell at the top or the bottom…
Credit card delinquencies surged more than 59% yoy at the end of 2023 (to 6.4% of the total balance) as total consumer debt swelled also swelled to $17.5 trillion, the New York Federal Reserve reported last week without causing much concerns.
While the dollar was marginally higher on the week vs. both DM and EM, Mexico last year and for the first time in 20 years, overtook China as the leading source of US imported goods, reflecting growing tensions with China (Chinese imports tumbled 20% while imports from Mexico rose 5%). For obvious reasons now, the US trade deficit with Europe has shrunk from EUR258bn in 2022…to USD80bn in 2023.
Compared to the euro, the risk-adjusted attractiveness of EM currency carry trade has become even more compelling, in our view. The US trade deficit widened slightly in December but only after contracting the most in 14 years for the whole of 2023 as imports declined and exports jumped to a record high.
Over the past week, the S&P500 gained 1,4% (5,4% YTD) while the Nasdaq100 gained 1,9% (6,7% YTD). The US small cap index rallied 2,5% (-0,7% YTD). AAPL gained 1,6% (-1,9%).
The Equally Weighed SP500 gained 0,5% (0,7% YTD), underperforming the S&P500 by-0,9%. The median SP500 YTD return closed the week at 0,2%.
Cboe Volatility Index sold off by -6,6% (3,9% YTD) to 12,93.
The Eurostoxx50 gained 1,4% (4,5%), matching the SP500.
Diversified EM equities (VWO) rallied 2,5% (-1,1%), outperforming the S&P500 by 1,1%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,2% (3,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (-1,0%).
10Y US Treasuries underperformed with yields rising 16bps (30bps) to 4,18%. 10Y Bunds climbed 14bps (36bps) to 2,38%. 10Y Italian BTPs underperformed rising 15bps (27bps) to 3,97%, underperforming Bunds by 1bps.
US High Yield (HY) Average Spread over Treasuries dropped -14bps (-7bps, Z-score -2,3) to 3,16%. US Investment Grade Average OAS dropped -1bps (-2bps) to 1,03%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 0bps (2bps) to 0,70%.
Gold dropped -0,8% (-1,9%) while Silver dropped -0,3% (-5,0%). Major Gold Mines (GDX) sold off by -3,7% (-13,0%).
Goldman Sachs Commodity Index rallied 2,1% (1,0%). WTI Crude rallied 6,3% (7,2%).
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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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