ACTV - Weekly Commentary: Potential Catalyst And The Q1 2024 Z.1

2024-06-15 05:56:00 ET

Summary

• Global risk-off is gathering momentum, and there's now a clear and present potential de-risking/deleveraging catalyst.
• Unlike the fleeting UK debt crisis, French election results have the potential to reverberate throughout the European debt markets and beyond.
• Ten-year Treasury yields sank 20 bps this week, despite a more hawkish leaning 'dot plot' and Powell press conference.

Ominous. Global risk-off is gathering momentum, and there's now a clear and present potential de-risking/deleveraging catalyst. The NASDAQ100 gained 3.5% to close the week at an all-time high. Nvidia surged another 9% this week, increasing y-t-d gains to 166%. Nvidia's market capitalization added about $270 billion this week to $3.244 TN. Broadcom rose 23%, with Micron and Apple jumping 8%. At this point, the U.S. equities Bubble has dodged so many bullets that there's no longer a fear of guns.

June 10 - Financial Times (Leila Abboud): "Emmanuel Macron has an oft-repeated catchphrase he uses behind closed doors with ministers and advisers: Il faut prendre son risque, you must be willing to take risks. The president of France has done that in spades by calling for snap elections after his centrist alliance took a drubbing on Sunday from Marine Le Pen's far-right Rassemblement National... In doing so, he has again shown the daring that has marked his political career since he was elected as a little-experienced outsider in 2017. 'I have confidence in the French people to make the right choice now to enable the country to face the great challenges ahead of it,' he said… The bet could also backfire spectacularly if the two-round vote on June 30 and July 7 forces him into a power-sharing government… with the RN. It would be the first time under the fifth republic founded in 1958 for the president and prime minister to hold such diametrically opposite views on how the country should be run."

No need to listen to me when I contend that these elections have potentially momentous ramifications. But I wouldn't dismiss market alarm. Things are going haywire in the European bond market. The spread between French (3.17%) and German (2.36%) 10-year government yields surged 29 this week to 77 bps, the largest widening in data back to the year 2000. This was the first double-digit spread gain since the 11 bps widening in Covid crisis June 2020. Spreads widened significantly throughout peripheral European bonds. Italian spreads to bunds widened 23 to 157 bps, the largest weekly gain since December 2022. Greek spreads widened 24 bps, Spain 21 bps, and Portugal 19 bps. Amazingly, France's yields ended the week within three bps of Portugal.

France's CAC40 equities index was hammered 6.2%, with bank stocks under heavy selling pressure. BNP Paribas sank 12% this week, with Credit Agricole down 11.0%. Worry was not limited to France. The Italian All-Share Banks Index was slammed 9.0%, while the European STOXX 600 Banks Index slumped 5.5%. European (subordinated) bank CDS surged 31.5 to a six-month high 135 bps. This was the largest increase since the U.S. bank crisis week of March 17, 2023. European high yield/"crossover" CDS surged 42 to 332 bps, also the largest jump since the banking mayhem.

No reason to let a bout of European political turmoil get in the way of a historic stock mania. But I'll nonetheless note that U.S. bank CDS suffered their largest weekly price gains in two months (4-5 bps). High yield CDS jumped nine Friday to a six-week high 347 bps, the largest daily increase since April. Investment-grade CDS gained 2.6 Friday to a six-week high 53.8 bps, the biggest daily rise since April 15th. U.S. bank stocks (BKX) dropped 2.6% this week (2-wk loss 4.2%), the largest weekly decline since the week of April 12th.

June 12 - Financial Times (Sarah White, Adrienne Klasa and Leila Abboud): "Marine Le Pen's big-spending, populist plans to help poorer and working class voters with tax cuts and promises to lower the retirement age may have been easy to tout when her French far-right party was in opposition. Now the Rassemblement National is waking up to the reality that those economic pledges may be difficult to enact if it takes power following snap elections - and could turn into a 'Liz Truss-style' liability on the campaign trail. Rivals from president Emmanuel Macron's centrist party have already pounced, warning that a debt crisis like the UK gilt market turmoil in 2022 could ensue if they end up in a power-sharing situation with the RN… Analysts have even said it could be worse: the impact from the RN's spending would be twice as painful as what might have happened under Truss, blowing out France's deficit to economic output ratio by an extra 3.9 percentage points a year, according to consultancy Asterès."

June 14 - Reuters (John Irish and Elizabeth Pineau): "France is facing a 'very serious' moment as parliamentary elections loom, said President Emmanuel Macron on Friday, with financial markets rattled by the country's far-right and far-left political blocs currently leading polls… 'We are at a very serious moment in the history of our country. There are major issues at stake, with wars, and with unprecedented economic challenges,' said Macron… A first series of opinion polls have projected that the RN, which has promised to cut electricity prices and VAT on gas and increase public spending, could win the election and be in a position to run the government. A poll conducted for Le Point magazine, published on Friday evening, forecast National Rally as in the lead in the first round of the parliamentary election, narrowly ahead of a coalition of left-wing parties called the 'Popular Front'."...

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