Market has strongly bounced yesterday with world-wide participation. We have seen in Europe a widespread short-covering and some long re-positioning.

Technically, we have reached the first targets for the short-term bounce and we have started to reduce the weight on the EEE fund but we are tempted to hold on as the market seems to have some further breath and capacity to go higher.

In the 3 days following President Trump’s tweet of last Thursday, the S&P 500 dropped intraday over 8% and investors across the globe lost over $5 trillion (~170x more than the cumulative tariff amount of ~30 billion collected since onset of trade dispute). Is such market reaction perfectly justified?

The S&P500 on Monday dropped below January 2018 levels, and Small caps below October 2017 levels.

With the close of yesterday, the S&P has not only closed the gap opened on Monday but has matched the closing price of last Friday recovering above the 50 & 100 moving averages.

It is important today to keep hold of these averages if it wants to go higher.

Despite a 40% drop of volatility in just 3 days, it is interesting to note that Gold has broken higher above the psychological resistance of 1500$.

This morning, Asian closures were mixed with China down 0.5/1% depending on the Index.

Chinese PPI (production price index) moved into contraction overnight, a bit of a warning sign as if Chinese factory prices are experiencing deflation and simultaneously the CNY is weakening this just means that they will soon be exporting deflation to the resto of the world.

Since last night we also had two further negative news:

  • Trade War: The White House is holding off on a decision about licenses for US companies to restart business with Huawei after Beijing said it was halting purchases of US farming goods.
  • Potential new Italian elections: Salvini calling for an early election. With the League at nearly 40% in the polls and 5-star a constant thorn in his side, it seems rational for him to call a new vote. Not sure if this is going to happen but would for sure lead to a period of protracted uncertainty.

The next step is for President Mattarella to check whether there’s any majority still willing to back a reshuffled version of the current cabinet or a different one. This process has no maximum duration.

If the President does find someone who’s able to win a confidence vote in parliament, then things could potentially continue until the next scheduled vote in 2023. But, if not, or if the confidence vote is lost, he must dissolve the parliament and call a new election. This date has to be between 45 and 70 days from when the decree to call a new election is issued. In practice, it often takes about 60 days. As it has to be a Sunday, the earliest date could perhaps be October 13th or 20th.

 

Two further interesting notes.

We have now nearly reached 16trln$ of negative-yielding bonds (only last week was 14trln$). Half of the world’s bonds, about 30trln$, yield less than zero after inflation.

Demand for equities from Pension funds: The below chart shows the estimated demand from asset reallocating pensions, while not all of this flow likely materializes (i.e. not all $7 trillion of the AUM behind this model necessarily relocates every month, so the true demand is likely smaller), it shows that directionally they are turning buyers.

Despite the awaited positive bounce of markets, the macro picture is not normalizing yet.

The likelihood of a US recession in the next 12 months rose to 35% in an August survey of economists, from 31% forecast previously, as global trade tensions fuel economic uncertainty. Gross domestic product expansion is forecast to slow to a 1.8% annualized pace in the third quarter, from 3.1% in the first three months of the year and 2.1% in the second quarter.