Sunday, April 12, 2020
Please
find below our latest Weekly Trend Update Report covering major
asset classes and currencies.
I
wish you all a happy week end and peaceful Eastern.
Marc
Bentin
Bentinpartner GmbH
Trend
Status Update
Over the past week, risk appetite responded to the avalanche of
liquidity, backstop and fiscal stimulus measures announced in the US, China,
Europe, Japan or pretty much everywhere else. On Thursday, in an historic
moment, the Fed went full circle, announcing that it would also start buying
junk bonds or rather ETF’s invested in them as part of the backstop measures
aimed at fighting the corona recession /depression.
The next step would be for the Fed to step in and
buy cash equities directly (a la Japan). For now, this may not be necessary
given that equity markets act as a derivative of credit markets and that the
option of propping up the S&P and Nasdaq futures markets remains in the
arsenal (cfr. Christmas 2018). Yesterday’s measure,
for as necessary as it might have been, looked to us like crossing the Rubicon
of monetary policy orthodoxy and sealing the fate of free markets all together.
This may be a temporary feature, just like the confinement that half the world
lives in, but we doubt it and sit in the camp of those looking for the Fed
balance sheet to hit 10-12trn at some point in a not too distant future
(currently USD6trn).
Just ten years ago, the Fed’s balance sheet stood around USD800bn. Ten
years later, at the beginning of the year, it was USD4.5trn. Over the past 5
weeks alone, it increased by another USD1.5trn and expectations are now for the
Fed’s balance sheet to reach USD10trn-USD12trn in a not too distant future.
The rubber will likely meet the road when the actual components of the
HYG and JNK ETF’s that squeezed on Thursday in response to the Fed’s latest
policy move (similarly to LQD, a couple
of weeks’ back) will start defaulting in line with what should be expected in
consequence of an economic recession, sharp degradation of earnings and still
unsustainably low oil prices (many HY bonds are shale oil producers that are
dead in the water at current oil prices). By the time this happens, if the Fed
keeps buying these specific ETF’s, without buying the underlying debt (which it
might ultimately have to do as well, hence our call on the Fed’s balance
sheet), these funds will start trading at a big premium to Nav. As of the close
on Thursday HYG and JNK traded already at a premium of 4.7%.
What happens next, we will find out, but I invite readers to read the
note below from Degussa written by somebody knowledgeable about what happened
in the 30’s in Germany. The hope is indeed that history does not repeat itself
and only rhythmes.
http://news.degussa-goldhandel.de/marketreport/newsletter/86SH26KSO9.pdf
(Excerpts are reproduced below)
“...when market forces have the space to restore
the economy to equilibrium. However, neither politicians, bankers,
entrepreneurs, nor employees want this to happen. This gives a Carte Blanche to
governments and their central banks – supported by a public who is becoming
increasingly fearful of job losses and personal ruin – to go ahead and do away
with what little is left of the free market system.
To escape the bust, the free market system is
transformed into a Befehlswirtschaft: A system in
which the means of production remain formally in private hands, but in which
the state, and the special interest groups running state, are really in the
driver’s seat by dictating and controlling goods prices, interest rates and
wages, labour conditions and incomes, and even nationalising and managing banks
and entire industries etc. This was the model the German National Socialist
erected in the late 1930s: The state dictated what was to be produced by whom,
when and where, and at what costs.
History does not repeat itself, but sometimes, it
rhymes. The Western world is increasingly, and quite rapidly so, bidding
farewell to the idea of the free market system – driven by the attempt of
fending off the inevitable bust as a consequence of a decade long debt binge
caused and made possible by central banks’ fiat money regime. While this may
indeed keep away the bust for quite some time, it will weaken output and
employment gains. Peoples’ standard of living does no longer improve at an
acceptable clip, or it may even decline; and with it comes impoverishment and
perhaps even social unrest.
These are the very ingredients that facilitate the
rise of the totalitarian state. So the unpalatable
truth is that without allowing for a bust, a big crash, the fiat money system
and with it all the forces working towards the aggrandisement of the state are
here to stay and will predictably get worse. The hefty price of upholding the
current boom and the economic and social structure it has brought about is the
end of the free market society as we knew it.”
CBOE Volatility Index sold off by -18,1% (202,4% YTD) to 41,67.
The Eurostoxx50 rallied 7,6% (-22,2%), underperforming the S&P500
by-2,9%.
Diversified EM equities (VWO) rallied 4,5% (-21,7%), underperforming the
S&P500 by-5,9%. CSI300 Chinese equity index (ASHR) gained 1,2%
(-9,9%), still leading for the year. Indian shares (EPI) rallied 10,4%
(-31,2%). Russian shares (RSX) rallied 7,5% (-24,8%).
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7
currencies dropped -0,7% (3,8%) while the MSCI EM currency index (measuring the
performance of EM currencies vs. the USD) gained 1,2% (-5,4%).
The Euro strengthened as the dollar weakened. EURUSD gained 1,3%
(-2,5%). EURCHF gained 0,1% (-2,6%). EURJPY gained 1,2% (-2,6%). EURGBP dropped
-0,2% (3,8%).
Acting as a reliable “risk on/risk off” indicator, AUDUSD rallied 5,9%
(-9,6%) while AUDNZD rallied 2,1% (0,2%).
EM currencies staged a powerful turnaround, independently from oil still
trading on shaky ground but in full expectations of an historic oil production
cut deal between OPEC++ (including the US and other G20 oil producing
countries). USDBRL sold off by -2,8%
(26,9%). USDRUB sold off by -3,7% (19,1%). USDMXN sold off by -6,8% (23,2%). USDINR
was unchanged (6,9%). USDCNY dropped -0,8% (1,0%). USDZAR sold off by -5,7%
(28,3%).
10Y US Treasuries underperformed with yields rising 12bps (-120bps) to
0,72%. 10Y Bunds climbed 9bps (-16bps) to -0,35%. 10Y Italian BTPs climbed 4bps
(18bps) to 1,59%, outperforming Bunds by 4bps.
US High Yield (HY) Average Spread over Treasuries dropped -134bps
(449bps) to 7,85%. US Investment Grade Average OAS dropped -49bps (120bps) to
2,21%, boosted by the Fed’s decision on Thursday to add the purchase of High Yield
bonds (or at least ETF’s trading them) to its backstopping list.
In European credit markets, EUR 5Y Senior Financial Spread dropped
-36bps (43bps) to 0,95%.
Precious metals continued to power ahead, making new highs vs. GBP, EUR
and JPY, ending the week with Gold vs. CHF just 1.5% away from its own all time
high. Gold rallied 4,7% (11,8%) while Silver rallied 8,2% (-12,8%) with silver
outperforming (for a notable change). Major Gold Mines (GDX) stormed higher
gaining 15,6% (-1,1%).
Goldman Sachs Commodity Index rallied 3,0% (-38,6%). WTI Crude sold off
by -10,1% (-62,7%), awaiting the details …of an historic deal this week end or
later next week.
Over the week end…
Negotiators are still racing to clinch a historic
deal to cut oil supply. The Kremlin warned of “unmanageable chaos” if
negotiations fail. Mexico was asked to make an effort. Trump intermediated and
offered a compromise that was rejected by Saudi Arabia. Talks between Saudi
Arabia and Mexico continued through the weekend. A 10% reduction in worldwide
crude output remains likely and unprecedented but would barely dent the surplus
that continues to build as the virus lockdown spreads, Bloomberg reported. WTI slid more than 9% on Thursday -- as
a deal looked likely -- settling below $23 a barrel. Markets were closed on
Friday.
Trump Doubled Down On Threat To "Hold" $500 Million From WHO
US equity markets will trade on Monday. Europe will
reopen on Tuesday.
Trend Score Card
Click here for
technical annotations.
US
& International Equities
Check out US and International Stocks’ Technical Trend
Status.
Sector
Trend & Momentum
Check equity sectors’ trend and performance …and
when they break out!
Fixed
Income
Check out 10Y US Treasury and Bund yields, their trend,
expected Fed rate moves and speculative positioning in 10-year Treasury Futures.
The
Dollar
Check out where the Dollar stands Trendwise and Breakoutwise vs.
G7 and EM counterparts.
Precious Metals
Check out where precious metals
stand Trendwise
and Breakoutwise.
Get a sense of options (cumulative open interests on calls and puts) and
futures traders’ sentiment (non-commercials open positions).
Check out how precious metals, the dollar and the Stock
market correlate with each other and speculative futures positioning on
Gold and the Dollar.
Why Trend Following Matters and How It Can Help
You?
A disciplined and
rule-based trend following investment approach can serve as an effective
portfolio insurance technique.
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