BentinPartner Weekly
US equities posted another solid week of gains that pushed most US indices further into record territories while ending a particularly strong month of November which saw the SP500 gain 5.9% and the Russel2000 11% in a post-election frenzy (Tesla gained 1/3 over the period) amidst fairly loose financial conditions that saw HY spreads (cost of High Yield bonds) drop to a record low last month despite record debt issuance before climbing 10bps last week.
There were indeed (despite rising equity markets) signs of trouble for some of the carry trades last week with EM currencies and equities dropping sharply (especially vs. JPY on the FX side) caused by D. Trump’s economic saber rattling and forthcoming heavy-handed protectionist agenda. Brazil in particular, suffered from budget concerns (sending yields 57bps higher to 13.44% on the week while the currency dropped 5% to an all- time low) as President Lula readies to increase budget spending to fulfill his pledge of improving living standards for poor Brazilians. Pressure was also high on Mexican assets, although losses were contained following a pleasant meeting between D. Trump and Mexico’s President Claudia Sheinbaum.
In the meantime, and as noted by Michael Hartnett from BoA over the week end, US markets continued to both outperform and act as a magnet for international equity investorswhich have invested USD1.1trn into US equities vs. only USD230bn for the rest of the world, over the past five years, with this year being no exception and actually witnessing a trend acceleration as market expectations are that Trump’s policies to exacerbate the US economic decoupling.
We will see how Trump’s threat delivered over the week end to impose 100% tariffs on BRICS countries trying to de-dollarize and join the new BRICS currency, will ultimately play out. Flows into US treasuries do not play ball currently which raises the odds of QE returning next year. It also raises the chances of lower US interest rates than what is currently priced, albeit most likely, towards a higher floor than European rates, which ultimately could be slashed all the way back to zero or even below according to comments from the SNB President made last week in response to persistent CHF strength.
Bond markets were solid, especially in Europe where 10y Bund yields dropped 30bps in Germany, 38bp in Italy and -23bps in France where the French political situation and ongoing budget discussions put the Bund/OAT spread under some upwards pressure. In our view, the “opposition” party of M. Le Pen is unlikely (because it has no interest to do so) to reject the budget today as this would topple the government and send local financial markets in disarray (while fresh elections cannot be called either) which should help further ease last week’s tensions seen on the OAT /Bund spread and bank shares.
The backdrop for lower yields in Europe remained further signs of economic deterioration and the expectations of more ECB rate cuts, now widely supported by ECB board members, including for this month and possibly by as much as 50bps.
In the interview to the FT last week, ECB President C. Lagarde suggested “a “cheque-book strategy” with D. Trump in which Europe would offer “to buy certain things from the United States”, such as liquefied natural gas and defense equipment. “This is a better scenario than a pure retaliation strategy, which can lead to a tit-for-tat process where no one is really a winner,” the ECB president said.
To this we can add the US “reindustrialization” occurring at the expense of Europe. This context is likely to remain fairly supportive for USD and US capital markets (especially stocks) leaving Europe at a severe disadvantage not to speak about Europe’s shaken competitiveness related to the consequences of the war in Ukraine which the US will most likely and soon stop funding, without necessarily being able or willing to stop it.
More rate cuts are expected from the Federal Reserve as well but at a slower pace and towards a higher floor, which might fuel additional expectations of euro weakness against the USD but also increasingly against JPY.
JPY rallied strongly late last week after Japanese headline yoy inflation rose to 2.8% while the consumer price ex food and energy rose to 2.2% (picking up from 1.8% last month outpacing economists’ expectations) as Japanese companies were seen passing over rising labor costs into higher services prices at the fastest pace in 32 years, according to BoJ data which support the case for raising interest rates.
Gold and precious metals slumped last week as US stocks powered ahead while bitcoin also strengthened, having another try to overtake 100k (near term when bitcoin goes up gets, traders tend to arbitrage some for bitcoin as the more modern “safe haven”).
Over the past week, the S&P500 gained 1,5% (26,8% YTD) while the Nasdaq100 gained 0,9% (24,5% YTD). The US small cap index rallied 3,2% (20,5% YTD). AAPL rallied 3,9% (23,3%, Z-score 2,7).
The Equally Weighed SP500 gained 1,9% (18,9% YTD), outperforming the S&P500 by 0,4%. The median SP500 YTD return closed the week at 17,8%.
Cboe Volatility Index sold off by -19,9% (8,5% YTD) to 13,51.
The Eurostoxx50 gained 0,3% (9,4%), underperforming the S&P500 by-1,2%.
Diversified EM equities (VWO) gained 0,4% (10,9%), underperforming the S&P500 by-1,1%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,1% (10,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (0,5%).
10Y US Treasuries rallied -23bps (29bps, Z-score -2,3) to 4,17%. 10Y Bunds dropped -15bps (6bps, Z-score -2,2) to 2,09%. 10Y Italian BTPs rallied -23bps (-42bps, Z-score -2,4) to 3,28%, outperforming Bunds by -8bps.
US High Yield (HY) Average Spread over Treasuries climbed 8bps (-57bps) to 2,66%. US Investment Grade Average OAS was unchanged (-19bps) to 0,86%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-5bps) to 0,63%.
Gold dropped -2,7% (28,1%) while Silver shed -2,3% (28,7%). Major Gold Mines (GDX) dropped -1,3% (21,4%).
Goldman Sachs Commodity Index dropped -1,8% (0,5%). WTI Crude sold off by -3,0% (-5,1%).
Overnight in Asia…
S&P future -10 points; Hong Kong unch; Nikkei +0.7%; China +0.5%
Asian shares are mostly higher, supported by stronger Chinese PMI data over the week end (51.5 vs. 50.6 expected and 50.3 last), showing recent policy measures starting to have an impact.
Coming just weeks before his son was set to appear for sentencing hearings, as he faces the potential of lengthy prison sentences, and after saying that he would not, President Biden pardoned his son Hunter, essentially clearing him for any wrong doing committed over the past 10 years (2014 was a special date), and in particular his criminal convictions on tax and gun charges.
Earlier last week, President Biden also recommended President Zelinski to draft 18-years old Ukrainian “sons” to send them facing a near sure (risk of) death fighting a war that is already lost (unless Nato readies the Ukrainian war to broaden into the wider WW3-type confrontation).
Notre Dame’ Cathedral reopened its doors to the public, just five years after a devasting fire. This could be (one of) the most memorable achievement of E. Macron’s Presidency, right in line with his promised timing.
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