Sunday, May 24, 2020
Please
find below our latest Weekly Trend Update Report covering major
asset classes and currencies.
Have
a nice evening.
Marc
Bentin
Bentinpartner GmbH
Trend
Status Update
XLI (INDUSTRIAL SELECT SECT SPDR) rallied 7,4% (-21,6%), XLE (ENERGY
SELECT SECTOR SPDR) rallied 6,9% (-35,9%), KBE (SPDR S&P BANK ETF) rallied
8,4% (-38,9%), suggesting some revival in the cyclical value segment.
Most of the gains came from early in the week on
expectations for more liquidity provisions and fiscal support, comforted by hopes (and mostly hype) that Moderna was about to deliver a vaccine (which was
downplayed on Thursday). The Federal Reserve’s balance sheet increased to $7.09
trillion for the week, up from $6.98 trillion the week before. Democrats and
Republicans cooperated to deliver the initial $2 trillion CARES Act (supplemented
by $484 billion in funding for small businesses). Negotiations have now moved
to the HEROES Act that would provide in a few weeks’ time $3 trillion (worth
15% of GDP) in additional relief funding, answering the call for more fiscal
support by the Federal Reserve last week.
While Senate Republicans have not expressed much interest in the bill,
senior White House officials have indicated that D. Trump would support the
distribution of further stimulus checks and N. Pelosi expressed confidence over
the week end for a bipartisan support. Treasury Secretary Mnuchin also explained
how the distribution of money will work next time.
Cboe Volatility Index sold off by -11,7% (104,4% YTD)
to 28,16.
The Eurostoxx50 rallied 5,0% (-21,3%), outperforming the S&P500 by
1,8%, jolted by the EUR500bn Franco-German plan for joint issuance (more than
the amount, it was the principle of joint issuance that was cheered) aimed at
aiding post-coronavirus economic recovery.
Diversified EM equities (VWO) gained 1,0% (-18,8%), underperforming the
S&P500 by -2,2%. ASHR (XTRACKERS HARVEST CSI 300 CH) dropped -1,4% (-9,3%).
Larry Kudlow said nobody can invest confidently in Chinese companies and
that the U.S. needs to protect investors from the country’s lack of
transparency and accountability. ‘We have learned that Chinese companies are
not transparent,’ Kudlow said. ‘They do not meet the norms, the regulations.’
Kudlow pointed to potential lawsuits related to the coronavirus, saying ‘until
that stuff is sorted out, nobody really can invest with confidence in China.’
The discussion to restrict Chinese shares trading on US exchanges intensified
as well, bringing the trade war to the financial scene. China is no saint and
does not even claim to be a democracy. But for an international investor seeking long
term appreciation and diversification, it would be a mistake, in our view, not
to be invested in China’s markets for its currency, stock and bond markets are
bound to appreciate over the coming years if not in absolute then in relative
terms to the rest of developed markets as the world seeks to diversify away
from Western and US markets to accommodate the emergence of a more multipolar
world likely to sever its dependency and excessive reliance on the USD for
conducting trade (the petrodollar is being challenged as well) and managing
world reserves (60% + invested in USD). There will be efforts to torpedo Chinese
markets that will lead Chinese stocks to delist from US markets, going to Hong
Kong, Singapore, London, Frankfurt or Paris. There will be efforts to force US
pensions out of them on political ground and that is ok. But it will make
little difference in the end.
There will be efforts to keep the weights of CNY in the SDR low at each
quinquennial reweighing (the SDR is a basket of USD, EUR, JPY, GBP and CNY used
as an allocation by some key supranational organisations but not only). The
last reweighing of the SDR was made mostly at the expense of the euro, rather
than out of the USD which was at least in some ways, politically motivated. Ditto
for international equity and bond indices. There is and will be pressures to
keep the weight of Chinese assets disproportionately low to their economic
importance. That might be an increasingly difficult posture to hold in the
future as well as China’s economic power and importance keep climbing.
Financial repression will take many forms and this will be one of them;
preventing or discouraging investors to go where the potential for gains
outside of zero yielding government bonds and even US stocks will be the
highest. Governments are “sacrificing” savers on the altar of necessity to
remain solvent (you cannot run debt/GDP ratio in excess of 150%, pay a decent
interest and stay solvent, as Japan running on a 250% debt/GDP ratio and 0%
interest rates, has learned a long time ago. Those free of political
constraints should also be invested in China on pure investing considerations,
in our view. At the very least, they should be mindful that L. Kudlow who is
never shy of financial prognostication is most reliable as a contrarian
indicator (his bearish call on gold being his major and least prescient calls).
His duty is understandably to be a cheerleader but as an advisor, he will be
wrong again in the future.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7
currencies dropped -0,7% (3,9%) while the MSCI EM currency index (measuring the
performance of EM currencies vs. the USD) gained 0,3% (-5,9%).
The euro strengthened following the agreement by A. Merkel to concede
some joint issuance for the EUR500bn covid fund.
EURUSD gained 0,7% (-2,8%). EURCHF gained 0,7% (-2,4%). EURJPY gained 1,1% (-3,7%).
EURGBP gained 0,3% (5,9%).
The dollar weakened selectively
vs. certain EM currencies. USDBRL dropped by -5,5% (37,5%). USDRUB sold off by -2,6%
(15,5%). USDMXN sold off by -5,1% (20,1%, Z-score -2,3). USDZAR
sold off by -5,2% (25,9%, Z-score -2,3).
10Y US Treasuries dropped 2bps (-126bps) to 0,66%. 10Y Bunds climbed 4bps
(-30bps) to -0,49%. 10Y Italian BTPs rallied -27bps (19bps) to 1,60%,
outperforming Bunds by -3bps.
US High Yield (HY) Average Spread over Treasuries dropped -77bps
(344bps) to 6,80%. US Investment Grade Average OAS dropped -24bps (87bps) to
1,88%. The full action of the Fed program in the corporate sector was in full
display on LQD last week , rallying 1,7% (2,1%) having now
recouped most of a 25% loss. Risk reversals went from -30 at the peak crisis to
just over the 3-year average of -2.2 at the close of last week. Official investment flows and % of AUM growth
YTD climbed to +30%). The Fed challenge
will be to sustain the effort and keep underwriting an entire corporate debt
index as M. El Arian suggested here, while still praising, like W. Buffet, the decisive
action of the Fed in a time of crisis. Now, besides the urge to copycat the
Fed’s action (a strategy that many advocate including Blackrock mandated by the
Fed), it might be a less desirable investment to buy an entire asset class populated
by an ever larger percentage of fallen angels (see Economist article) and zombie companies vs. owning a barbell of
solid cash flow producing equities, some high yields, EM market debt (in local
currencies), Gold and silver, in our view.
In European credit markets, EUR 5Y Senior Financial Spread dropped
-16bps (43bps) to 0,95%.
Gold dropped -0,5% (14,3%) while Silver rallied 3,6% (-3,6%), continuing
to outperform and breaking higher. Major Gold Mines (GDX) sold off by -2,8%
(21,4%).
Some of the world’s most-prominent investors raised alarm bells over the
looming threat of inflation, and turning to gold for protection. Hedge fund
managers Paul Singer, David Einhorn, and Crispin Odey
are among those bullish on gold… So are large asset managers like Blackrock (which
are also implementing the Fed’s asset buying program).
No surprise that we stumbled last week however. It is a pattern that each
approaching future expiration is a near term challenge that needs to be
overcome before prices can move higher.
Goldman Sachs Commodity Index rallied 4,6% (-37,6%). WTI Crude rallied 13,0%
(-45,5%). XLE (ENERGY SELECT SECTOR SPDR)rallied 6,9%
(-35,9%).
As a conclusion to this week’s letter, we would like to refer our
readers to a most interesting essay from R. Dalio on
the “Big Cycle of the Life of an Empire” covering 500 years of monetary history in just a
few pages. It is straightforward to see what part of the cycle we are in and
what might come next, even if history does not repeat itself and just rhythms.
This is particularly insightful reading in support of the discussion above on
the opportunity (or not) to keep at least a foot in China as an investor.
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.
US
Recession Risk Radar
A comprehensive list of economic
indicators to compare the current situation with previous recessions.
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
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portfolio insurance technique.
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