BentinPartner Weekly
All three major US equity benchmarks posted solid weekly gains last week recovering all of the hard selloff witnessed over the previous week.
While K. Harris was credited to have won the Presidential debate, initial stock market losses deepened after the US core CPI reportedly increased by 0.3% with the yoy rate holding steady at 3.2% which remained well above the Fed 2% inflation target and no reason to rejoice.
A nearly miraculous powerful turnaround was initiated on Wednesday after the Chairman of Nvidia made wildly bullish comments on demand for the company’s next generation chips. Nvidia shares soared +8.2% as a result (following a weak post earnings reaction the week before), bringing other Mag7 shares up with it and relieving a sector that had been pressured for some time.
Some tame PPI data the following day and stable jobless claims were no reason to sell and with the help of FOMO led to accelerated short covering gains. All sectors of the S&P500 gained including commodities which had been battered for a while.
Another important event last week was APPL new product announcement but the response there was muted at best as the company also lost a USD14bn lawsuit against the European Commission for tax evasion.
Precious metals were the real story with Gold taking a fresh all-time high, proving one more time very misleading, comments that gold was likely to drop because China had stopped buying (actually more likely stopped reporting it was still buying) for a fourth consecutive month. The precious metals’ rally was broad based and included those that had been lagging so far this year, such as palladium and platinum. The Banque de France published an interesting study articulating the dynamics and reasons coming in support of Gold of which some extracts are reproduced below:
“While geopolitical risks have increased globally, risk aversion on the financial markets as measured by equity volatility is at a low point (with the exception of the volatility spike on 5 August 2024, which rapidly dissipated). Global outflows in ETFs invested in gold were trending downward in 2023 and through to May 2024.
Despite this context, the price of gold has risen sharply, invalidating the traditionally strong correlation between the price of gold and ETF outflows, or with US real interest rates since the start of the war in Ukraine. This jump appears to be justified by investors buying for non-financial reasons, motivated by geopolitical tensions.
According to World Gold Council data, emerging market central banks, led by Russia and China, have been the principal buyers on the gold market (see Chart 4). Financial sanctions (often using the dollar as an instrument) and the resurgence of geopolitical tensions may encourage some emerging market central banks to diversify their foreign exchange reserves into gold and away from dollar-denominated assets. “
It was interesting to see some “official” statement that geopolitical risks do matter after all (despite being largely ignored by stocks and other risk assets) and that sanctions (weaponization of the USD) are leading to a reallocation of Central Banks reserves which may be slow but remain certain and likely irreversible.
Other factors supported the price of Gold last week such as intensifying Fed easing expectations (not least for this week’s meeting) and some broad based, albeit contained, dollar weakness in the latter part of the week.
The US federal budget deficit also surged in August with one month to go until the end of the fiscal year as higher interest costs continued to weigh on the overall balance, Bloomberg reported. The $1.9 trillion gap for the 11 months through August was up 24% from the same period last year… For the month of August alone, the deficit was $380 billion, compared with a surplus in August 2023. The interest burden on outstanding US debt remains a major drag on the budget. Interest costs in the first 11 months of the fiscal year totaled $1.05 trillion, up 30% from 2023, the first time the annual interest rate charge exceeds USD1trn, Bloomberg also reported, possibly also explaining the urgent need for the Fed to lower interest rates.
Last week was kind of strange. On the one hand we talked about economic resilience and on the other, several key participants urged the Fed to cut ….and more forcibly by 50bps. What seemed an outlandish prediction a week back is now rapidly becoming a near consensus with Former NYC Fed President, B. Dudley, saying that “if he was in the room” he would be pushing for 50bps and the (new) strategic team at JPMorgan joining the bandwagon this weekend also calling for a 50bps cut on Wednesday. Early last week, L. Hatteway from Jackson Hole Economics, previous UBS strategist (and one of my preferred analysts) also urged the Fed to cut by at least 50bps…or be set to fail “conventionally” as the risks to the US economy clearly shifted from inflation to growth in his view.
Despite all the Fed cut talks and possibly heralding some weakness in the economy, the financial sector was the weakest sector last week with JPM and GS stocks trading lower by 4% despite tech stocks rallying.
Elsewhere in Europe, former ECB President Draghi conveyed some pessimism on the European economic and productivity outlook, emphasizing the urgent need for Europe to significantly boost its investment levels, calling for an additional €800bn per year in both public (via joint issuance) and private investments to address the continent’s economic decline. Draghi highlighted that without such drastic measures, Europe would face tough choices between compromising its welfare, environment, or freedom. The report aimed to guide the European Commission’s work over the next five years but was met with scepticism by Germany.
This led to some profit taking on EURUSD which did not last long as expectations for a large Fed interest rate cut intensified, weakening the SUD across the board.
In geopolitics, White House National Security Communications Advisor Kirby told reporters on Friday that there's been no change in US policy regarding Ukraine using Western arms for long-rage strikes inside Russia. But Canada's Trudeau said he supports greenlighting this, despite V. Putin also making clear last week this would mean 'direct war' between Russia and NATO, with UK Prime Minister Keir Starmer also coming out in support last Friday, according to the Wall Street Journal.
So far, some form of restraint has prevailed but nobody knows for how long and the Ukrainian situation on the ground creates a fertile ground for aggravation from those not willing to admit that we are losing the war in Ukraine and are paying the price for it (Europeans). To prevent acceptance and accountability for this reality, some vocal warmongers consider we must broaden the conflict.
ntability for this reality, some vocal warmongers consider we must broaden the conflict.
Over the past week, the S&P500 rallied 4,0% (18,2% YTD) while the Nasdaq100 rallied 5,9% (16,1% YTD). The US small cap index rallied 4,3% (8,0% YTD). AAPL gained 0,8% (15,6%).
The Equally Weighed SP500 rallied 2,7% (10,9% YTD), underperforming the S&P500 by-1,3%. The median SP500 YTD return closed the week at 10,7%.
Cboe Volatility Index sold off by -26,0% (33,0% YTD) to 16,56.
The Eurostoxx50 rallied 2,2% (9,9%), underperforming the S&P500 by-1,8%.
Diversified EM equities (VWO) rallied 2,2% (8,2%), outperforming the S&P500 by -1,8%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies was unchanged (4,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (1,7%).
10Y US Treasuries rallied -6bps (-23bps) to 3,65%. 10Y Bunds dropped -2bps (12bps) to 2,15%. 10Y Italian BTPs rallied -11bps (-19bps) to 3,51%, outperforming Bunds by -9bps.
US High Yield (HY) Average Spread over Treasuries climbed 0bps (-1bps) to 3,22%. US Investment Grade Average OAS dropped -2bps (0bps) to 1,05%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (-7bps) to 0,61%.
Gold rallied 3,2% (25,0%, Z-score 3,1) while Silver rallied 10,0% (29,1%, Z-score 2,2). Major Gold Mines (GDX) rallied 10,4% (29,3%).
Goldman Sachs Commodity Index gained 1,8% (-1,7%). WTI Crude gained 1,4% (-4,2%).
Overnight in Asia…
S&P500 unch.
D. Trump is safe after his Secret Service detail opened fire at a man who was wielding an assault rifle at his West Palm Beach, Florida, golf course Sunday, in what the Federal Bureau of Investigation called an apparent assassination attempt, Bloomberg reported. “In the bushes where this guy was is an AK-47-style rifle with a scope,” two backpacks and a GoPro camera, said the local county sheriff. “The Secret Service agent that was on the course did a fantastic job.”
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