BentinPartner Weekly
During a tumultuous week, most US stocks eked additional gains despite a minor setback for large Mag7 stocks which was largely compensated by rotation into small caps.
US Macro data were market friendly last week with the monthly inflation rate dipping in June as the consumer price index declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years, supporting US Federal Reserve chair Jay Powell views expressed during his Congressional testimony that the central bank had made “considerable progress” in its mission to beat back inflation.
That said, rent inflation remained a pressure point for small businesses, according to new data from the Bank of America Institute. The average monthly share of rent in total payments through May was 9.1%, up significantly from the 2019 average of 5.9%. On the topic of inflation, JPM CEO J. Dimon issued another warning despite recent signs of easing. ‘There has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world,’ Dimon said… ‘Therefore, inflation and interest rates may stay higher than the market expects.”
Talking of JPMORGAN, the equity rally last week was also supported by a rally in bonds and strong earnings of banks which jumped 4.3% last week (up 13.3%). That said on Friday, after producing its largest ever quarterly profit, JPM could not extend its 20% gain for the year and closed the publication day with a 1% drop as part of the quarterly profit originated from an exceptional USD7.9bn item without which earnings for the year would have been inferior to last year due to increased provisions. Still, investment banking and trading revenues gained respectively 25% and 9.5% with the retail bank adding 450’0000 accounts, the 50th consecutive quarter of increase in accounts opening…
Signs of weakening global growth and easing inflation pressures sent commodities in retreat last week with oil dropping -1.7% (+19%) while copper dropped -1.3% (+ 18%). Soft commodities were also weaker with wheat and corn compounding to their year-to-date losses.
While US inflation news were mostly positive, Eurozone wage growth picked up last month, prompting speculation that the ECB could struggle to cut interest rates as much as investors expect (which helped EURUSD last week as well).
Similarly, BoE’s chief economist said that key drivers of UK inflation were showing ‘uncomfortable strength’, underscoring the continued uncertainty over the outlook for interest rates. While nonetheless saying that it was a question of when, rather than if, the BoE Monetary Policy Committee would be reducing rates, he nonetheless pointed out that annual rates of services inflation and wage growth were still running at close to 6%.
In Japan, the inflation picture felt aggravated with Japan’s households seeing inflation at record levels over the coming years, an uptick that should support the case for BoJ to raise interest rates in the near-term as the yen’s rapid depreciation ramps up pressure on the cost of living. According to a recent survey, households expect price levels to rise at an annual clip of 8.7% over the next five years, the highest in comparable data back to 2006.
French yields dropped -8 bps to 3.15% and French to German 10-year bond spread was unchanged at 65 bps following the elections. Still, a hung parliament in France is likely to complicate policymaking there, credit rating agency S&P Global said, warning that more debt or a sustained slump in economic growth could trigger another rating cut.
A global survey by UBS found that 37% of central bank managers said that the risks from global sovereign debt levels were among their main concerns for the global economy this year (up from 15% last year). Government debt globally hits a record $91.4tn this year, exceeding 100% for the first time since the depths of the pandemic.
At the same time, the Goldilocks economy narrative prevailing so far enabled low-rated corporate loans to draw inflows for the first time since 2021 with investors, so far this year, pouring $12.2bn a day into mutual and exchange-traded funds focused on those loans (after a combined $27 billion in outflows for 2022 and 2023).
This is happening as “excess premium for less-liquid investments dropped below 100bps, less than half the return it should offer, Mohit Mittal, chief investment officer of core strategies at Pimco wrote, also noting deteriorating covenants traditionally protecting investors in private credit.
Watchdogs are also growing more concerned about the ‘substantial’ risk to investors in the private credit market after it emerged that almost 40% of funds don’t have skin in the game. The decision by so many managers to avoid putting their own capital into the vehicles creates an ‘incentive misalignment,’ the BIS wrote in its annual report.
This is conveyed some sense that we may stand in bubble territory on several fronts (including those investment in AI’s which will only generate return in years to come for many of them) and the question might still be when it will pop. It was not last week for sure… as the idea remained somehow to buy Nvidia, get rich, and live happily ever after, analysts suggested.
Turkey confirmed its outlier status so far this year with Turkey's Borsa Istanbul National 100 index gaining 2% (+ 48.1%).
Elsewhere in China, the securities regulator announced more curbs on short-selling and pledged tighter scrutiny of computer-driven programme trading in an effort to support the stock market.
The United States and its allies vowed to deliver Ukraine additional defence systems Patriot missiles during a NATO summit, also delivering their most serious rebuke against Beijing as they called China a ‘decisive enabler’ of Russia’s war against Ukraine through its ‘no-limits partnership’ with Russia. In response to NATO communique, China sent a record 56 warplanes across the Taiwan Strait early on Thursday.
Over the past week, the S&P500 gained 1,0% (17,8% YTD) while the Nasdaq100 dropped -0,3% (20,8% YTD). The US small cap index rallied 6,1% (6,2% YTD, Z-score 3,2). AAPL gained 1,9% (19,7%).
The Equally Weighed SP500 rallied 3,0% (6,8% YTD, Z-score 3,0), outperforming the S&P500 by 2,0%. The median SP500 YTD return closed the week at 3,6%.
Cboe Volatility Index dropped -0,2% (0,1% YTD) to 12,46.
The Eurostoxx50 gained 1,3% (14,3%, Z-score 2,6), outperforming the S&P500 by 0,4%.
Diversified EM equities (VWO) rallied 2,1% (10,9%, Z-score 2,3), outperforming the S&P500 by 1,1%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,7% (5,9%, Z-score -2,4) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,3% (-0,6%).
10Y US Treasuries rallied -10bps (30bps) to 4,18%. 10Y Bunds dropped -6bps (47bps) to 2,50%. 10Y Italian BTPs rallied -14bps (9bps) to 3,79%, outperforming Bunds by -8bps.
US High Yield (HY) Average Spread over Treasuries dropped -7bps (-16bps) to 3,07%. US Investment Grade Average OAS climbed 1bps (-8bps) to 0,97%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (-9bps) to 0,58%.
Gold gained 0,8% (16,9%, Z-score 2,1) while Silver dropped -1,4% (29,4%). Major Gold Mines (GDX) rallied 5,2% (23,1%, Z-score 2,2).
Goldman Sachs Commodity Index sold off by -2,1% (5,7%). WTI Crude dropped -1,1% (14,7%).
Overnight in Asia…
S&P future +5 points; Hong Kong -1%; China -0.1%
Asian markets are mixed after Chinese retail sales slowed, rising 2% (vs. 3.4% expected) while industrial production rose 5.3% yoy in June, better than the 3% expected.
US Secret Service is facing harsh public scrutiny and investigations as the assassination attempt of former President Donald Trump thrusts an agency with a checkered past into the center of a political firestorm, Bloomberg reported. A sniper secret service officer informed the public that he had the gunman 3min in sight holding a gun on an unsupervised rooftop before receiving the authorization to take him down.
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