Volatility is still high. Yesterday we have seen a 1.9% intraday reversal on the S&P and a similar move across all Indexes. We first had a dip when the September US ISM Non-Manufacturing Index came at 52.6 vs 55 consensus/ 56.4 prior. Along with a very weak ISM Manufacturing at 47.8 vs 50 consensus/ 49 prior, both manufacturing prints have strongly raised concerns around the health of US economic outlook.The market has however (surprisingly) bounced on expectations of the intervention of Federal Reserve. The probability of a cut has doubled in three days, have a look at the chart showing the chances of a Fed fund rate cut in October… it is almost certain which means that is now priced by the market. Powell will speak today at 7pm.


The first Index to have reached a first support was the Dax yesterday (Cash market closed, futures open) which has briefly touched the 200-day moving average. However, as we have shown yesterday, it looks a bit premature to have a convincing buy signal and we would wait for a potential further downside.



As we mentioned in the email of yesterday morning, Systematic Investors have for sure partially reduced their weight on equities judging from the entity of sell-off and instrument (mainly futures driven). However not all strategies are that quick and in particular, CTA will start to sell if market will stay at current prices as they rely on moving average which are a bit slower than other strategies. This is the estimate of selling for the next days…quite important. We should therefore see some more supply over the next days.



On Brexit, Boris Johnson proposal for a new Brexit deal found some friction in the European Union. Now the UK Prime Minister has one week to revise his Brexit deal and convince Tusk and colleagues to accept his plan. The plan would keep Northern Ireland in EU single markets for goods but see it leave the customs union. No clarity what would happen to the physical borders between Ireland and Northern Ireland. The Saga continues.

Trade-War. Market headlines are not mentioning anymore the important meeting that US and China will have in Washington next week. They both have incentives to make a deal, but it remains unclear whether either side will be willing to make the concessions necessary to reach an agreement. Any potential deal during the 13th round of trade negotiations will hinge, in large part, on the true policy objectives of US President Donald Trump towards Beijing. If he wants to isolate and contain China, then he may walk away from a possible agreement, as he has done before. China may also be unwilling to make sufficient concessions to meet US demands, having themselves walked away from the outline of a potential deal in May because it was seen as infringing on the nation’s sovereignty.

Macro-wise, we are constantly look at different data to have an anticipated hint of the official macro data. The AAR (Association of American Railroads) reported that the overall rail traffic volumes for US rail carriers fell 7.4% YoY last week. This is the 35th contraction out of the last 36 weeks.


Similarly, another interesting point is given by the latest update of the SIA (Semiconductor Industry Association) which is showing that worldwide sales (3-month average) of semiconductors fell 15.9% YoY in August.


Today’s Macro numbers:

  •  10:00 Italy Deficit to GDP Q2
  • 14:30 US Change in Non-Farm Payroll (key data for inflation/easing)
  • 14:30 US Change in Manufacturing Payroll
  • 14:30 US Unemployment rate
  • 14:30 US Trade Balance

A final consideration on volatility and markets. VIX closed above 20 yesterday, the chart underneath illustrates how the distribution of S&P future is for the following days. We should still expect volatile markets.


It is also worth to show you a gain a great chart which suggest that VIX usually follows the US 10Y vs 2Y Treasury spread with a 3-year lag. Something to keep in mind for the future.


The S&P has outperformed the inverted VIX Index by a wide gap. All in all, we should expect more volatility ahead.