BentinPartner Weekly
Global markets’ action was not for the faint-hearted so far in August with last week standing out as greed overcame fear on Wall Street.
Nothing was more emblematic than the Nikkei’s wild gyrations which after trading at a record high mid-July, shed more than 26% at the August 5th lows, only to recover 20.0% in the subsequent eight sessions and surging more than 9% last week.
The VIX so called ‘fear gauge,’ also broke two records with the fastest-ever spike of 25 points, followed by the fastest ever comeback.
Serving as a catalyst for risk appetite returning with a vengeance and equity markets storming back last week were well contained inflation reports (CPI increased 0.2% Mom and 2.9% Ytd vs. 0.2% and 3% expected respectively while core inflation met expectations) and news that retail sales activity were not as moribund as feared (July retail sales came at 1% MoM vs. 0.4% expected and Walmart raised its sales guidance for the full year, buoyed by consumers buying necessities and seeking deals even as they curtail spending elsewhere). Also reassuring on the state of the US economy, NFIB Small Business Optimism rose 2.2 points to a stronger-than-expected 93.7, the high since February 2022 with the “Expect Better Economy” component jumping to the strongest reading (-7) since November 2020.
This offered a convenient goldilocks narrative amidst solidifying expectations that the Fed will quickStart an easing cycle at its September FOMC meeting (something that will likely receive further confirmation during this week’s Jackson Hole symposium).
More importantly, share buy-backs came as the major driver overwhelming all others last week and already the week before following “Black Monday 2.0”. As we suggested last Thursday, Goldman noted that not only the CTA’s (acting on price only) are covering shorts (hedges) but a frenzied buyback activity has also been buying the dip, coinciding with a rapid recovery. 775 firms have announced buyback plans since January, poised for the highest number in at least 11 years, Goldman also reported. This also explains why US markets have been again leading other markets in the recovery.
It would be convenient to say as well that the JPY carry trade has come and gone (blowing itself off without doing too much damage). While this seems true for speculative FX positioning (the COT report showed speculative non-commercial traders switching from being net short to net long JPY last week), twenty years of ZIRP and QE leverage does not vanish or get purged in a week. Lots of investors especially in Japan are financing foreign assets i.e. bonds and stocks by borrowing JPY (or just selling it) and won’t get carried away with a 5% drawdown on their funding leg which means that the serial bubbles that have resulted from excessive liquidity (and share buybacks…) are for the most part (except in China perhaps) well alive and not really showing signs of lasting fatigue, especially as investors await another wave of liquidity injections and stimulus by the Federal Reserve and other Western Central Banks.
Elsewhere in China, Bloomberg noted that China’s bank loans to the real economy contracted for the first time in 19 years, a grim milestone that underscores why weak domestic demand has emerged as a major hurdle to the economy’s growth and recovery, also noting that Chinese households and businesses are rushing to repay debt as investment returns dwindle and real borrowing costs.
Based on price action and as an “opinion” contrarian at times (especially those of China haters), I am tiptoeing back into Chinese stocks, barbelled with Nvidia shares (holding my nose and closing my eyes as price action also dictated last week). Comments out of Beijing last week suggested additional stimulus will be forthcoming, perhaps explaining last week’s pop in industrial metals prices (and stock prices).
Government bonds were steady last week (while HY rallied) with the market still pricing nearly 100 bps of cuts by the December 18th FOMC meeting in four months, all around a historic election.
The rally in precious metals price was impressive last week with gold blowing off past 2500 as soon as the resistance at 2470 (previous all-time highs) was breached, as we suggested might happen last week.
What gold is sniffing is anyone’s guess but I reckon it has much to do with unsustainable debt levels that keeps being accumulated around the world that will not end well (i.e. with either default, restructuring, inflation, financial repression or all of the above occurring in one form or the other) and some looming dollar weakness (there was a lot of that last week with the dollar index currently opening below last week’s low at 102.2 (from 102.4).
“Gold in the hand” is the only asset that is nobody else’s liability and at some point, this will have incredible value, in our view.
The fact that the latest price spike materialized with little participation from the retail public (judging from outstanding, ETF holdings that have only just started rebuilding after 2 years of a relentless decline despite solid gold price gains) could be very promising, especially in a context where the “modern” form of gold (cryptos) is not delivering, at least not for the moment.
Over the past week, the S&P500 rallied 4,0% (16,6% YTD) while the Nasdaq100 rallied 5,5% (16,0% YTD). The US small cap index rallied 3,0% (5,9% YTD). AAPL rallied 4,5% (17,4%).
The Equally Weighed SP500 rallied 2,5% (8,2% YTD), underperforming the S&P500 by-1,5%. The median SP500 YTD return closed the week at 7,9%.
Cboe Volatility Index sold off by -27,3% (18,9% YTD) to 14,8.
The Eurostoxx50 rallied 3,6% (9,9%), underperforming the S&P500 by-0,4%.
Diversified EM equities (VWO) rallied 2,7% (8,8%), outperforming the S&P500 by -1,3%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,6% (4,9%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (0,5%).
10Y US Treasuries rallied -6bps (0bps) to 3,88%. 10Y Bunds climbed 2bps (22bps) to 2,25%. 10Y Italian BTPs dropped -1bps (-7bps) to 3,63%, outperforming Bunds by -3bps.
US High Yield (HY) Average Spread over Treasuries dropped -20bps (-4bps) to 3,19%. US Investment Grade Average OAS dropped -8bps (-2bps) to 1,03%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -8bps (-6bps) to 0,62%.
Gold rallied 3,2% (21,6%, Z-score 2,3) while Silver rallied 5,5% (21,8%). Major Gold Mines (GDX) rallied 7,4% (24,1%, Z-score 2,2).
Goldman Sachs Commodity Index was unchanged (0,8%). WTI Crude dropped -0,2% (7,0%).
Overnight in Asia…
S&P500 +7 points; Nikkei -1.1%; CSI300 +0.4%; Hong Kong +1.1%
AP reported that international diplomacy was trying to prevent the war in Gaza from spreading into a wider regional conflict on Friday, with the British and French foreign ministers making a joint trip to Israel while internationally mediated cease-fire talks in Qatar were expected to enter their second day. They also promised they would participate to a joint task force to strike Iran if Iran was to strike Israel.
Just as U.S. Defense Secretary Lloyd Austin ordered a guided missile submarine to the Middle East, telling the USS Abraham Lincoln aircraft carrier strike group to sail more quickly to the area, two weeks after Iran vowed to retaliate for the killing of a senior Hamas leader, the biggest surprise has been that the attack still hasn’t happened. As good chess players Iran has made the wait part of the strategy …and the retaliation.
BBC reported Ukraine has set up a military administrative office in Russia's western Kursk region, where its surprise incursion into Russian territory continues… Gen Syrsky said the office would ‘maintain law and order’ and ‘meet the immediate needs’ of the population in the area. Gen Syrsky was seen telling a meeting chaired by Ukrainian President V. Zelensky that the office has been created ‘on the territories controlled by Ukraine’. Russian Defence Minister Andrei Belousov has said Moscow will send reinforcements to ‘safeguard’ the population in the region.”
Israel and Hamas blamed each other this morning for impeding a cease-fire and hostage deal as the top US diplomat arrived in Tel Aviv to press for an agreement. The aired proposal proposal resembles a previous three-phase plan unveiled in May by US President Joe Biden, calling for a suspension of hostilities, the swap of hostages for prisoners, some withdrawal of Israeli forces and the return of Palestinian civilians to return to the northern Gaza Strip.
Wall Street is betting that Federal Reserve Chair J. Powell (and other central bankers) will confirm that interest-rate cuts are coming at the central bank’s annual conference in Jackson Hole, Wyoming.
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