Last week, the S&P500 dropped -0,8% (14,4% YTD) and the Nasdaq100 -1,1% (18,7% YTD). The US small cap index sold off most by -2,4% (14,1% YTD). AAPL was clipped off -4,1% (19,8%) with the perspective of a full-blown US/China trade war seen impairing the firm’s Chinese growth potential. There was more underlying volatility than the 1% S&P 500 weekly fall suggested above. The index dropped 2.4% on Monday after China rebuffed D. Trump’s advice to the Chinese President and “his many friends in China” not to retaliate. Indeed, less than 2 hours after D. Trump tweet, China officially announced counter tariffs on USD60bn US goods, also saying it could cancel Boeing orders and start selling some Treasuries... the so-called nuclear option. This sent the S&P reeling into a hard 2.4% decline for the day. On Tuesday however, (with his reaction function still glued to the stock market ticks) D. Trump switched tone saying that the trade war was “merely a squabble” and that “we will make a deal with China. It will happen much faster than people think”. The market proceeded to recover one more time. On Wednesday, China’s Vice Premier responded with less stoicism than expected, saying that the Chinese people “will never flinch, nor surrender to tariffs”. Talking to CCTV, he said “if you want a trade war, we will fight you till the end”. The video was viewed more than 3.3 million times and the market quickly gave back at the open much of what it had recovered on Tuesday. Had the market taken Monday’s levels, things would have deteriorated very fast and this was the moment chosen by D. Trump to take another rabbit out of his hat, announcing a truce on the European car export front saying that he will wait another 6 months before taking a decision … and possibly still impose new tariffs. With that short circuit activated, equity markets recovered within seconds, taking the S&P out of the vicinity of Monday’s lows and jolting European indices into an outperformance for the week. A 6-month delay meant little else than a small reprieve, especially as the qualification of “national security threat” was maintained to qualify car exports to the US. Nerves stayed on edge throughout the week, also on mounting confrontation risks with Iran after Europeans pulled out last Monday from the US military fleet heading to the Middle East. US House Speaker N. Pelosi felt sufficiently alarmed to warn the US President that he lacked Congressional authorization to start a war with Iran. Trump does not have much to win from a hot war with Iran (by proxy or otherwise) but he is ill advised on the matter (Bolton) and markets may still be one false flag away from such an eventuality. The decision on Thursday to ban Huawei in the US also revived not only trade but digital war fears with China (as the US is not only engaged in a trade but technological leadership war with China), contributing to send global equity markets and EM in particular into another decline on Friday. Economic data from Brazil were weak as well, suggesting the country likely contracted in Q1. The CBOE Volatility Index closed unchanged at 15.96 despite the wild intraday gyrations described above. Eurostoxx50 gained 2,2% (15,3%), outperforming the S&P500 by 3%. Semis were the heaviest hit sector last week with XSD shedding -7,6% (19,9%, Z-score -2,3). Bank shares did particularly poorly as well with KBE (SPDR S&P BANK ETF) dropping -3,5% (15,6%). Diversified EM VWO sold off by -3,9% (5,2%), suffering a heavier toll from rising tensions on the US/China trade front. Indian shares (EPI) were stable (-0,3%) nonetheless while Russian shares (RSX) managed to eke out a small 1% gain (12,7% YTD) amidst a difficult context for EM markets. The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,8% (3,5%) and EURUSD dropped -0,7% (-2,7%) while the MSCI EM currency index (measuring the performance of EM currencies vs. USD) dropped -1,1% (-0,2%), breaking its 200dma. BRL shed -3,6% (-5,6%, Z-score -3,1) while CNY dropped -1,3% (-0,6%, Z-score -2,0). Only RUB bucked the trend of lower EM currencies last week gaining +0.8% (+6.7% YTD) as oil remained well supported (and RUB increasingly backed by Gold). In other DM FX, EURGBP gained 1,5% (-2,4%, Z-score 2,2) as FX markets became unsettled about the UK political stalemate and the perspective of B. Johnson achieving his goal of moving to Downing Street. Could it be that the UK will get B. Johnson as Prime Minister (he is favourite in the betting polls), then a new referendum, then no Brexit after all? JPY and CHF strengthened last week each by 0.6% vs. EUR on risk aversion. AUDUSD dropped -1,9% (-2,6%, Z-score -2,1) as risk appetite dropped (commodities were mixed but not decisively weak enough to justify AUD underperformance) and on local political concerns. The news this Saturday that Australia's ruling conservative coalition led by Prime Minister S. Morrison made a "miraculous" comeback and is now set to form the next government will likely support AUD early this week. Government bond yields dropped sharply. 10Y US Treasuries yield fell -8bps (-29bps) to 2,39% with 2-year notes doing as well despite lingering concerns about China and other foreign creditors starting to balk at US funding needs, as suggested by recent Chinese officials’ only thinly veiled threats and hard data from the TIC report last week which showed a further waning in foreign appetite for US bonds. Talks of MMT (more QE), expectations for lower Fed Fund rates (a 25bps cut is now baked in for the end of the year according to Fed Funds future as of Friday) and nervous equity markets served as a more than offsetting force. 10Y Bunds dropped -6bps (-35bps) to -0,10%. Swiss 10-year govt bond yield dropped back to -40bps. On the credit side, US High Yield (HY) Average Spread over Treasuries climbed 11bps (-133bps) to 3,93%. US Investment Grade Average OAS climbed 2bps (-40bps) to 1,32%. In European credit markets, EUR 5Y Senior Financial Spread climbed 2bps (-29bps) to 0,81% and 10Y Italian BTP yield dropped -2bps (-8bps) to 2,66%, underperforming Bunds after the League warned it could/would, as is already expected, overpass EU limits on deficit and total debt ratios. Gold dropped -0,7% (-0,4%) although major Gold Mines (GDX) bucked the small gold price decline rallying +2,3% (-1,6%) thanks to a last 30min rally on Friday. Silver dropped -2,6% (-7,1%, Z-score -2,7). Bitcoin was left alone rallying 13,0% on the week for a YTD 93,4% gain (despite a 7.4% decline on Friday). Crypto currencies staged a come back for all the reasons that should have provided support to precious metals (the only stable form of money since 5’000 years), namely the absence of yield on bank deposits for major currencies, 10 trillion worth of government securities yielding negatively, rising prospects of QE having to be relaunched or maintained. This will happen at the same time as the unwind of globalisation forces (“tariffs”) and a possible outbreak of competitive devaluation forces (“currency wars”) might rekindle inflation and in many places above its comfort zone. This is not to speak about rising geopolitical risks and those associated to mounting social unrest, part of which will be linked to the growing difficulty of governments to fulfil their social contract obligations without resorting to debt and deficit monetisation (now that the road to policy normalisation has become mostly impracticable). It is surprising that only crypto currencies were able to benefit in this context, perhaps simply because they are largely unregulated and considered as sufficiently immaterial not to be repressed. The ECB just issued a paper (in its occasional Paper Series, No 223) on crypto assets where it said that the regulatory monitoring of the crypto space might be difficult at the local country level but remains necessary at the global level, if anything on consumer protection and anti-money laundering grounds. The note also establishes a clear distingo between the benefit of distributed ledger technology (DLT) which has a great future and the asset layer which in the case of XXXcoins is “intangible” (i.e. and in our view, intrinsically worthless and a sole object of greater fool speculative frenzy). WTI Crude rallied 1,8% (38,2%) on supply concerns and rising risks of a confrontation with Iran. Only RUB was supported by oil prices gains among EM currencies last week which were most negatively affected by the trade war mongering of D. Trump. Important Disclaimer © Copyright by BentinPartner llc. 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