Markets have moved very little yesterday with the US shut for Labor day and are likely to trading in a tight range even today.

With the bounce of the latest days, European markets have recovered 60% of the downward move we had since from the 23rd of July with the S&P in US has recovered just 50%.

We believe that we should witness over the next days a consolidation given last week’s melt up was mainly driven by month’s end flows and CTAs.

The newflows we had over the weekend was not good, sentiment is still awful and positioning reflect this. Unless there is a convincing break in the economic data this week (ISM, Durable good orders, PMI, Non Farm Payrolls) market should trade side-ways to lower.

US and Chinese officials are struggling to agree on the schedule for a planned meeting this month, the Renminbi has continued to weaken reaching a new low at 7.18.

September is historically a tough month for both equities and fixed income. For stocks, one theory is that this is linked to a heavy corporate conference season, where guidance is updated (and often revised down). Stocks start to do better again from mid-October, historically speaking.

For fixed income, September usually sees supply pick up markedly, which means it also tends to be worse-than-average for credit and government bond returns.

This month we will also have the crucial 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.

On Italy, the situation is that Conte will present the new Government plan and the slate of Ministers to Mattarella by Wednesday, with a confidence vote likely on Friday. Greater clarity on the members of the government and the policy programme is likely to come in the next few days; the main risks ahead are the deputy prime ministers (with the likelihood being that none will be appointed) and the vote on the M5S Rousseau platform.

The latest polls show League at 32.6 (-2.8% vs previous week), PD 22.9% (-1.2%), M5S 18.6% (+0.6%). Polls also suggest that the majority of Italians would be against snap elections, while support for the new government remains quite low and is well below 50%.

On Brexit, it is going to be an important week as it’s setting up to be a real conflict in Parliament. Voting likely to begin today to try to prevent a No-Deal Brexit but lots of uncertainty regarding the path forward.

The market seems to have taken the view that a General Election is the most likely outcome over the coming months with Parliament preventing a no-deal exit on 31st October.

Yesterday we had a very weak UK PMI Manufacturing (the slowest since 2012) confirming that the economy is suffering this political uncertainty.

A final note on two interesting and diverging indicators:

  • High risk for US recession

It’s not just the inverted yield curve that’s signaling a US recession, the widening divergence between the confidence measures of the Conference Board and the University of Michigan may be too. The gap between the two gauges grows ahead of recessions because the Conference Board emphasizes employment and is more backward-looking, while the University of Michigan is slightly more forward-looking with its emphasis on personal finances.

  • Bottoming of European macro data led by Baltic Dry Index?

Global manufacturing PMIs are bottoming (black line) and an interesting signal could be given by the recent spike on the Baltic Dry Index (blue line).