Yesterday was another very volatile day with 2 main events (in chronological order):

  • US consumer prices accelerated in July in a broad-based advance (+0.3% from the prior month, and 2.2% from a year earlier). Both gains exceeded the median estimates of economists, while the broader CPI advanced 0.3% on the month and 1.8% annually. This was “bad news” for Bonds as is the hottest pace of inflation since November 2012 and  could limit the already discounted capability of the Fed cutting rates.
  • 2 hours after CPI data, Trump has tweeted a new important message on Trade-War saying the he will delay tariffs on some items until the 15th of December following some first phone conversation since he threatened the tariffs at the beginning of this month. Trump said the latest conversation with China had been “productive” and that “they would really like to make a deal.”

The net effect of the news was positive for Equity markets and negative for Bond with Yields bouncing from very oversold levels.

On currencies we have seen some strengthening for the USD (+0.4% vs €), Yen has weakened and Renminbi is trading just above the important 7.0 level.

Gold briefly traded below 1500 and Crude Oil has bounced 4%

Is it all good now and market can continue to bounce?

Yes, we are getting more positive but let’s not get carried away. The 2-year Treasury yield is only the highest in six sessions and still below 1.7%, while the S&P 500 is only back to where it was on Friday.

We will need more clarity on the other tariffs planned to go live on the 1st of September. The move announced made yesterday involved the splitting of an almost $300 billion list of products from China into two separate ones. Lots of agricultural products, antiques, clothes, kitchenware and footwear remained on the list to be hit on the 1st of September with a total value of more than $110 billion. However, categories such as smart-phones, laptops, and children’s toys (worth about $160 billion) would only be subject to tariffs after the 15th of December, the Christmas shopping is save!

In terms of valuations, the S&P currently offer an interesting dividend yield of 2% higher than the US 10-year Treasury yield for the 1st time since October 2016.

On Macro-side, this morning we had 2 important data:

  • China July activity, weaker than expected with a miss on each metrics, confirms that the global slowdown (trade war etc.) and political pressures (HK clashes etc.) are weighting on the most powerful countries. Industrial production came at 4.8% vs. 6% consensus, the lowest data in the last 17 years, Retail sales decreased to 7.6% vs. 8.6% consensus and Fixed Assets/Property investment missed on expectation (low confidence). Among the weakest sectors, Auto remains a notable drag in the region while Real estate decelerated for the third straight months (yesterday’s weak credit growth data confirms the slowdown).
  • German GDP out this morning at -0.1% QoQ, following a 0.4% expansion in Q1, further confirms that the German industrial sector tipped the economy into contraction (Auto one of weakest sector here as well).

An interesting stat to be closely followed about the market is the percentage of shorts on Free Float.

As you might remember in our latest newsletter we mentioned that during the month of July we had a record 28bn$ covered in Europe taking the short base to record-lows.

So far, in August, there were new selling flows for 8.5bn$ of which 7bn$ alone last week (largest week of additions since Q4 last year).

Is there scope for new additions? Yes we think so, the current Eurostoxx 600 short interest is just 1.5% of FF while on Eurostoxx 50 1.0%.

If we analyse some Sector data, we can find that the European Auto sector has been the one where we have seen the largest increase in shorts. 2.3bn$ was covered in June+July but over the last 2 weeks we have seen already 2bn$ of new shorts taking the short base to 15% of FF, the highest since July last year.