After having the most volatile week year to date, European markets have today opened up 0.5/0.6% on light volumes with most of Asia closed for holidays.

The recent correction has been so far similar to the one we had in May with the S&P12-month Forward Price/Earnings rerating from 17.4x to 16.2x.

Technically, as far as the Eurostoxx50 is holding the 200-day moving average it is ok and we are possibly set to be in a range for the next days between 3300 and 3400 (chart)


  • Trade-War: there is a continuous escalation with Trump saying on Friday that “is not going very well with China” and “not ready to make a deal”. CNBC is also reporting that the September talks with China have been cancelled. There are very little doubts that we will see a deal signed soon.

PBOC officials warned of currency-war risks with the US after an abrupt escalation of trade tensions. Former deputy governor Chen Yuan said at a China Finance 40 forum that the US labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts. Former governor Zhou Xiaochuan said at the gathering that conflicts with the US could expand from the trade front into other areas, including politics, military and technology.

IMF’s annual report warned of a 0.8% hit to Chinese growth if US raises its 10% tariff rate to 25%, the kind of scenario that could see China implement more aggressive support measures.

  • Chinese new stimulus: Bloomberg is reporting today that Chinese policymakers are refraining from large-scale stimulus measures amid weakening economic momentum, preferring instead to keep them in reserve in case US trade war morphs into a currency war.


  • Italian political situation: on Friday, Italian Index lost 2.3% and the Btp/Bund spread has widened. The Italian market has given up a good part of positive Ytd performance with a correction of around 8% from July highs. Banks and financials in general have paid the highest price of this uncertainty as usual in these market phases. The most relevant risk in the short is that the tone during this political phase will be loudly against Europe, respect of budget constraints and so on.

This morning, press is reporting that the majority of MPs opposes early elections. Senate leaders to meet today to set date for No Confidence vote asked by Salvini; Lower Chamber leaders will meet 13/8.

On Friday Fitch has confirmed the BBB rating with negative outlook while Moodys’ is expected to publish the update in September.

Some interesting notes on Market

In terms of flows, last week investors rushed to money markets (+US$103bn, the highest since last December), switching away from equity funds (-US$24bn, the heaviest redemption since December). Inflows into bond funds remained intact but were significantly below trend (+US$3.6bn, Ytd avg: +US$9.3bn) mainly due to sharp high yield bond withdrawals (-US$4.0bn, the largest YTD). Injections into gold (+US $1.6bn, a two-and-a-half year high) were robust.

Obviously, last December saw a massive sell off with a huge capitulation towards the end of the year. Again, this is not a perfect timing indicator, but it shows, that sentiment has hit extremes and will go even more extreme on any further sell off. The most obvious interpretation from this data is, that markets are not about to start a big correction, even if a recovery might take a few days and weeks to unfold and lows get tested again.

Despite the correction in equity, credit and commodity markets over the past month there still appears to be a disconnect between rate and risky markets with rate markets still signaling more elevated growth and recessions risks and with equity and credit markets pricing in more optimistic scenarios.

The more than 150bp fall in 5-year US Treasury yields from last November’s peak points to more than 70% chance of a US recession over the next year given a typical 210bp decline in previous US recessions.

In contrast US equity markets appear to be currently pricing in only a 15-20% chance of a typical US recession and discount only a small decline in earnings. Similarly, the US HY credit market appears to be currently pricing only a 10-15% chance of a US recession over the next year.