BentinPartner Weekly
Dear Reader,
The major news from last week was the ECB 50bps rate hike along with the details of its new anti-fragmentation tool TPI (Transmission Protection Instrument) program aimed at avoiding “disorderly” movements in bond markets (read higher yields and spreads). The ECB also found an elegant formulation for making the program potentially “infinite,” calling it “not restricted ex ante”, so that what the ECB delivered last week was sort of expected...
Some pundits (especially those on US financial TV…) complained about the lack of details (which only came after the conclusion of the ECB Press conference) and called it a “disappointment”. But what else was there to know or expect? If anything, there were too many details, considering that the new program was aimed primarily at supporting the Italian bond market and that the strings attached to it could make it more likely than not, that Italy would in the end not meet the eligibility criteria of this powerful new QE program. Indeed, eligibility criteria were said to include (a) a compliance with EU fiscal rules, (b) the absence of severe macro imbalances, (c) fiscal sustainability and (d) sound and sustainable macro policies, none of which should be taken for granted as far as Italy is concerned.
In any case, criticizing the ECB, bashing the Euro and the Eurozone has become the preferred pastime those days, on a pure ‘Schadenfreude” basis as it allows to relate to something else than US internal miseries (lack of gun control, baffling of abortion rights, the well engaged and irreversible transition towards a more multipolar world, a US pedal losing experiment on world geopolitical events, a war that is not going as wished and called for, a coming recession in the midst of tightening financial conditions, not to speak about Hilary wanting to run for President again...).
At least, the ECB got what it wanted in spades…with lower yields (they dropped 20bps on Thursday including in Italy) and lower peripheral spreads…during a same-day Italian political crisis outburst. Kudos to the ECB for that…at least.
As for the Euro performance, the “shorts” must have been “disappointed” that the common currency did not crater. Again, the ECB took the right decision to tighten by 50bps instead of just 25bps. Anything else would have indeed thrown the Euro under the bus, especially coupled to the TPI. The Euro did “alright” given the circumstances … even after a “shockingly” weak European PMI published on Friday (the US one was barely better). Again, what else could we expect? Europe was dragged into a nonsensical war that should never have happened, that could easily have been avoided, and that the forces of good are ‘losing’ at an enormous cost to Europe.
What remains are 8 trains of ineffective (and self-pain inflicting) trains of sanctions that led to higher energy prices and to Europe going potentially out of gas and straight into recession.
Nord stream 1 “unexpectedly” reopened with a 40% capacity on Thursday i.e. with the same flow as before the maintenance interruption that was caused at least in part by “sanctioned turbines” being held back abroad.
There is no point commenting the surrealist nature of the situation except that another train wreck of ineffective sanctions is under way, the outcome of which will be that Greek shipping companies will have to stop making a fortune shipping discounted Russian oil to India before it re-sells it to Europe with a nice premium. Somebody else ‘non-European’ will do the shipping… We will see how the buyers capping price limit on oil works in the end. For now, it is more the fear of recession that is dragging the price of oil lower, than this price cap which unless the basic law of economics and supply/demand run in reverse is also likely to fail.
What happened in Italy with the collapse of the Italian government is a direct consequence of this aberrant situation which could easily spill over in other European countries.
With 30% of French military supplies given away to Ukraine, more might be on its way if the calls of Zelensky’ s wife at the UN are heard…(more accountability is being asked as there seems to be leaks in the process of free delivery of highly valuable military goods to Ukraine as well…). Corruption is a known endemic problem in Ukraine and if you cannot win the war, at least you can try to benefit from it, some must have concluded (likely also explaining why Zelensky had to recently fire two very close allies from the entertainment business that held key posts of national security and intelligence).
On the topic of the war in Ukraine, the US is seemingly now considering providing military jets to Ukraine. This would breach another red line that would bring us closer to a direct US/Russo confrontation on European soil. There is a scary lack of vision behind the US tele-prompted “policy” except for making sure Russia does not win a war that Russia is equally determined and well on its way not to lose… For some broader context, I came across this article (in French) depicting what might happen in the years to come. Some will call it propaganda just because they do not agree or fear the outcome. As Clemenceau used to say, the first victim of war is always the “truth”. For this reason, we might better keep our ears open to different kinds of “truth” (than those sadly reflecting the lack of realism and independent thinking from most Western official media), spelling out why the age of the US hegemony has come to an abrupt end.
As regards other events of the week, Chinese developments remained a growing concern as more Chinese owners of uncompleted apartments decided to stop making their mortgage payments in over 100 Chinese cities, exposing China to potential systemic (banking) risks from its very own real estate bubble. Chinese bank stocks dropped 8% last week, and Chinese bank CDS spiked with China Construction Bank (one of the largest banks in the world with USD4trn in assets) CDS jumping 25 bps to 123 bps, exceeding their March 2020 pandemic highs. Other “Big Four” Chinese banks CDS surged to their highs from 2014.
Gold came back to life last week (not yet silver), posting some modest gains in a context of dollar strength ebbing back and bond yields dropping. When the dollar turns (and it will), Gold will recover. Don’t forget the golden rule: whoever has the gold makes the rules. I do not subscribe to the idea of my previous employer ever and/or knowingly, participating to the price manipulation scheme. But somebody does and in spades. According to hard data, US banks, primarily JP Morgan aided by Citibank and Goldman Sachs hold half a trillion dollars of derivative positions based on precious metals.
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Over the past week, the S&P500 rallied 2,6% (-16,8% YTD) while the Nasdaq100 rallied 3,5% (-24,1% YTD). The US small cap index rallied 3,7% (-19,3% YTD).
CBOE Volatility Index sold off by -5,0% (33,7% YTD) to 23,03.
The Eurostoxx50 rallied 3,4% (-14,3%), outperforming the S&P500 by 0,8%.
Diversified EM equities (VWO) gained 1,7% (-17,5%), outperforming the S&P500 by -0,9%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,3% (11,1%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (-4,9%). The COT positioning report from this week suggests investors are “well” short EUR and JPY (vs. USD) and exposed to more short covering, in absence of more negative news from both regions.
10Y US Treasuries rallied -16bps (124bps, Z-score -2,1) to 2,75%. 10Y Bunds dropped -10bps (121bps) to 1,03%. 10Y Italian BTPs climbed 4bps (215bps) to 3,32%, outperforming Bunds by -4bps.
US High Yield (HY) Average Spread over Treasuries dropped -39bps (207bps) to 4,90%. US Investment Grade Average OAS dropped -6bps (56bps) to 1,56%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -18bps (61bps, Z-score -2,1) to 1,16%.
Gold gained 1,1% (-5,6%) while Silver dropped -0,6% (-20,2%). Major Gold Mines (GDX) dropped -0,7% (-20,7%).
Goldman Sachs Commodity Index gained 0,8% (30,4%). WTI Crude sold off by -3,0% (25,9%).
For next week…
Events of the coming week include the outcome of the Federal Reserve Open Market Committee meeting on Wednesday July 27 for which the market has settled for a 75 bp move.
The first estimate of Q2 GDP will be published on Thursday. The Atlanta Fed's GDPNow tracker sees a Q2 1.6% annualized contraction (vs a Bloomberg's survey of 0.8%). While the job market is still holding strong, the four-week moving average of initial jobless claims rose to 240k (from a low of 170k).
On Friday, the eurozone will publish its first estimate of its Q2 growth and the preliminary estimate of July CPI. Eurozone growth is expected to have slowed to 0.2% quarter-over-quarter after the 0.6% expansion in Q1. Eurozone core CPI measure likely accelerated to a new high after slipping to 3.7% in June from 3.8% in May.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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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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