Some positive market hopes have started to fade just few hours ahead of the long awaited meeting in Washington starting tomorrow. The headlines we got yesterday were definitely not conciliatory from both sides.

China: to halt Nba broadcast, to backlist US retaliation.

US: US administration is moving ahead with discussions around possible restrictions on capital flows into China with a particular focus on investments made by US government pension funds. Trade tensions extending beyond economics to include national security aspects. Trump also banned travel Visa by Chinese Officials tied to Muslim abuses (scandal of video-surveillance companies). We don’t believe that they are creating the basis to start trade talks and reach a deal.

On the other side, in Germany they have announced that there is no need for stimulus package and talks of Fiscal reform are still far.

Fed. According to Powell, following the massive spike in repo rates a couple of weeks ago, the Fed doesn’t want to incur into this risk anymore. The temporary extra liquidity operations, whereby around $75Bln are injected into the short-funding markets each day, are extended through October. In addition, the Fed will be resuming balance sheet growth, probably buying short term-securities (T-bills,etc.), to increase liquidity in the repo market. Although Powell, remarkably said that this not a new Quantitative Easing, Fed balance sheet must expand also to fund the enormous US deficit (higher under Trump due to fiscal tax expansion). Yesterday we saw a bull steeping of the US Treasury curve, with T-Bills rallying on the news. Current Fed Fund rate sees 83% of 25bps cut at the next October 30 meeting.

Brexit: Strong volatility on Sterling yesterday, down 80bps, after some British officials announced that a Brexit deal is extremely unlikely as Germany wants Northern Ireland to remain part of European Union’s custom union, something which is not under discussion for Johnson. Just to remind you Johnson has 9 days to secure a Brexit deal or seek an extension or push for a no-deal (it would start a legal case due to Benn Act).

Turkey said its military will cross the border with northeast Syria “shortly”, aiming to push back Kurdish militants days after the U.S. said it wouldn’t stand in the way. Troops supported by the Free Syrian Army intend to launch the offensive.

The market has obviously reacted negatively.

We warned about the poor market breadth over the last few days with very poor volumes and most stock on MSCI World struggling to surpass their 2018 market peak.

Profit-wise, over 70% of the market has an EPS forecast that is lower today than at any time during the last couple of years. The equity market is clearly running out of economic momentum.

Macro-wise, the pickup in German Industrial production is not enough to avoid a recession (Q3 GDP number will be released on November 14th). The fiscal stimulus vs further bad data is nicely hedged. China Caixin PMIs see Services at 51.3 vs e52 / prior 52.1, the lowest number in 7 months. No surprise to see the evident manufacturing weakness feed into broader economy.

After falling (MoM) in July, US producer prices rebounded in August offering some hope, but September has now massively disappointed with a headline tumble of 0.3% MoM (+0.1% exp). This is the biggest headline drop MoM since Sept 2015

Finally, it is interesting to spot the recent data on CFO survey as they couldn’t be more bearish. This is happening simultaneously along the most Insider selling (from management of companies) in two decades and Ceo confidence falling the most since 2009. It is very loud the message we get from the companies!

CFO survey YoY change