BentinPartner Weekly
Dear Reader,
In 2008, the US debt/GDP ratio was 41%. In 2019 it reached 87%. In 2020 it crossed 100%, ending at 108% and so far in 2021 it stands at 125%. In this context, although many central bankers including J. Yellen, readily admit that the trajectory of debt is unsustainable, during her confirmation hearing last week, she nonetheless argued that “the smartest thing we can do is to act big”, which is what will be done most likely (with deficits to the tune of USD3trn).
At the same time, the US money supply inflated by USD4trn in 46 weeks or 32% annualized, the greatest monetary (and actually parabolic) inflation ever witnessed in the US.
This is not a criticism…just an observation…for it can also be argued that there is no alternative to combat an economic slump, artificially created by setting the world economy in an artificial coma.
Some analysts opined that last week’s ECB meeting provided the first step to a shift towards yield control with an implicit yield target close to the current yield and spread levels. We are more of the opinion that this discussion is largely semantic and that the ECB implicitly embarked on the path taken by BoJ and Reserve Bank of Australia a while back without having to admit it. That being said, ECB President Lagarde did note last week that inflation was showing signs of revival which caused some stir in government bonds on Thursday before yields ebbed back on Friday, still leaving Bund yields 3 bps higher and the BTP/Bund Spread 14 bps wider on the week.
Fiscal deficits and debt monetization are just “less staggering” in Europe than in the US which drove more dollar selling last week. Towards the end of the week, Dollar weakness halted vs. EM currencies, and rather abruptly, on political unrest in Russia.
The news flow on the sanitary front was mixed at best with the perspective of more virus mutation and more restrictions looming on border crossing and the risk of school closing in Europe. A UK study showed that a third of covid 19 patients in the UK ended up back in the hospital within 5 months and one in eight dying of complications from the illness.
Over The Past Week…
Over the past week, the S&P500 gained 1,2% (2,4% YTD) while the Nasdaq100 rallied 3,5% (3,7% YTD, Z-score 2,5).
Last week rang the bell of the return of tech as the pandemic brought back the theme of investing in stay-at-home stocks and the usual mega caps winners in that space. AAPL rallied 7,9% (4,8%, Z-score 2,8). FB rallied 11,7% (0,5%). AMZN rallied 5,3% (1,1%). NFLX rallied 12,8% (4,5%). Banks (despite block buster trading results from JPM, BoA and Citibank) and energy took the other side, dropping by 3-4% last week as investors flocked back into tech shares as the pandemic intensified. Speculation remained strong with trading volumes for stocks and options at record levels. Year over year, January volumes are up 92% and from December, they are up 33%.
The US small cap index gained 0,5% (9,7% YTD).
Cboe Volatility Index shed -5,8% (-3,7% YTD) to 21,91.
The Eurostoxx50 gained 0,1% (1,9%), underperforming the S&P500 by-1%.
Diversified EM equities (VWO) gained 1,7% (7,8%), outperforming the S&P500 by 0,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies added 0,1% (0,4%), while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (-0,1%). EM currencies suffered in the second half of the week of a cleansing of positions but besides that EURUSD gained 0,7% (-0,4%) after ECB President Lagarde left policy unchanged on Thursday.
10Y US Treasuries were unchanged (17bps) to 1,09% while 10Y Bunds climbed 3bps (6bps) to -0,51%. 10Y Italian BTPs underperformed rising 14bps (21bps, Z-score 2,8) to 0,75%, underperforming Bunds by 9bps.
US High Yield (HY) Average Spread over Treasuries dropped -2bps (-12bps) to 3,48%. US Investment Grade Average OAS climbed 3bps (1bps) to 1,03%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (2bps) to 0,61%.
Gold gained 1,5% (-2,3%) while Silver gained 2,9% (-3,4%). Major Gold Mines (GDX) dropped -1,1% (-2,2%).
Commodity prices ebbed back last week with Goldman Sachs Commodity Index sold off by -2,2% (4,1%). WTI Crude sold off by -2,4% (7,7%). XLE (ENERGY SELECT SECTOR SPDR) met profit taking after the strong start of the year, selling off by -5,4% (11,0%).
Have a nice week ahead and stay safe.
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Marc Bentin, BentinPartner GmbH
Founder, Chief Investment Officer
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