Yesterday the market has somewhat retraced with global Indexes trading in a tight range (Eurostoxx and Dax still holding the support of 200-day moving average). This morning markets are indicated small down.

World equity indices are where they were 20 months ago despite falling bond yields, structurally lower growth and shrinking Price/Earnings estimates.

Similarly to December, the dispersion between stocks has hit Ytd lows, meaning that active managers were on the sidelines. This also mean that index flows have more impact on markets.

Market resilience in the face of conflicting and baffling messages on trade highlights the fact that positioning is light.  And while equity flows are expected to be positive over the next two weeks, keep in mind that low natural liquidity and limited active manager engagement could mean overreactions on both the upside and downside.

Once again, we would stress that the Bond vs Equity performance in August has been extreme with with US Treasuries vs. Equities posting one of the largest 1-month moves in the last several years. This could pose some substantial weight into equities over month’s end rebalancing for the next few days.

US 30y Treasuries yields plunged to 1.93%, the lowest ever in history. This is below the yields of 3mth US Bills, which are trading at 1.95%. This truly is an amazing time to be alive and witness one of the biggest global bond bubbles in the making.

Last night, Treasury Secretary Steven Mnuchin said issuing ultra-long U.S. bonds is “under very serious consideration” in the Trump administration, possibly setting up a move that would mark a historic revamp of the $16 trillion Treasuries market.

As a further example, yesterday Austria’s yield of long-term 100Y reached 0.61%. The current debt to Gdp ratio is above 70% and Austria has defaulted 7 times since 1800.

Over the next weeks we will also have very important central bank meetings from the ECB and Federal Reserve. Given how much is priced into the policy path for both central banks, and the market’s faith that central bank action can offset fundamental weakness, we think these meetings are more likely to pose risks than support the market.

Fed Funds futures are now pricing in 4.6 Fed rate cuts by the end of next year, the most yet. That would bring the US benchmark rate within a percentage point of zero.

  • On Trade-War, it is interesting to note how the latest US tariffs have an impact on imports from China showing the difference between implemented and proposed.

The first two rounds of US tariffs hit only 45b$ of US import volumes while list 3-4A-4B would hit more than 400b$, with the combined list 4 bringing a cautious approach also on the US admin’s side as they’d impact consumers directly (phones, toys and list 4A includes Apparel and other Electronics)

Yesterday we had some further rumours of ongoing talks but nothing has been officially confirmed and the Renminbi hasn’t stopped depreciating vs the USD.

  • On Italy, the Ftsemib Index continues to have a decent outperformance as Italy seemed to make positive progress towards a new more centrist government…perhaps Italian debt will soon be trading negative as well?

Following their respective consultations with the President of the Republic Mattarella, the Five Star Movement and the Democratic Party (PD) have formally agreed to support a new cabinet with Conte, once again, as Prime Minister. Headlines indicate that Mattarella has summoned Conte for a meeting this morning and that he’s widely expected to give him the official mandate. Several PD ministers will likely join the new cabinet too.

In the next days there might be a confidence vote for Conte.

If finalized, this would be a positive development from a market point of view as it would deliver more compliance with the EU rules, a less expansionary budget and the cancellation of a planned VAT rate hike for next year.

  • Brexit, the situation is starting to heat-up ahead of the 2nd of September reconvention of UK Parliament. Yesterday the Queen has accepted the PM’s proposal to suspend Parliament just days after summer recess until the later date of October 14th meaning that there will be very little time for opposition parties to bring legislation to stop the Prime Minister taking the UK out of the EU without a deal on October 31st.

Suspending the Parliament might well trigger an election.

That’s lead to Sterling falling as much as 1% at one point this morning and has proved a timely reminder post the G7 optimism that Brexit is far from solved.

The timetable below shows what’s likely to be the busiest political days in the run up to the Halloween deadline.

Sep 3rdUK Parliament Reconvenes
w/c Sep 9thUK Government seeks Parliament suspension
Sep 14 – 17thLiberal Democrat Party Conference
Sep 21 – 25thLabour Party Conference
Sep 29th – Oct 3rdConservative Party Conference
Oct 14thUK Parliament reconvenes
Oct 17 – 18thEU Council Meeting
Oct 21 – 22ndMPs vote on UK Government’s “overall program and approach to Brexit”
Oct 31stArticle 50 Extension Ends


  • Germany, two German states, located in the former Prussia, are set to vote for their State Elections on Sunday: Saxony & Brandenburg. This will be an interesting event from an headline point of view as AfD (Alternative fuer Deutschland) has been polling head-to-head vs Merkel’s CDU and could even come out as the 1st party.

We should expect newspaper headlines on the ongoing rise of AfD and “their ability to get up to 25-30% of the German votes”. However, we should also consider that while legacy parties have been under pressure, don’t forget that moderate forces such as the Greens have consistently gained share (like AfD) over the past 3 years.

  • Ad finally a note from Michael Burry, the one betting against mortgage securities before the 2008 crisis which led to the movie called “The big short”.

Now, Burry sees another contrarian opportunity emerging from what he calls the “bubble” in passive investment. As money pours into exchange-traded funds and other index-tracking products that skew toward big companies, Burry says smaller value stocks are being unduly neglected around the world.