Markets are set to open small down. Yesterday we had subdued trading with markets barely moving and hiding the underneath sectorial pain. The rotation was important as we had a further underperformance of Utilites (Bond yield rising) and defensives (very heavy Index sectors like Pharma and Food) vs an outperformance of Banks (positive correlated at yields), Autos and in general Value sectors.

Let’s get into numbers to provide an idea of the move: Cyclicals vs Defensives relative trade is up 7.5% in less than a week. The Eurostoxx yesterday was flat but the Index for the heavily shorted names was up 3.5% and the “Momentum Index” was down 5.7%!

All 3 legs of consensus positioning were wrong!: Defensive down, Cyclicals up and crowded Tech down

This is very bad news for Hedge Funds as their long exposure to growth-stock is the highest since at least 2016 and their shorts have rallied over last week

 It is also interesting to spot that last week we had tons of paper flooding the Bond market, are companies using the extreme bullishness as an ultimate window?

It was an all-time record for debt issuance (78.3bn$) and there is still plenty of demand for debt paper and if corporates are issuing debt and they might be able to use some of these proceeds to do some buy-backs.

However, it is worth to keep in mind that the Q3 blackout period will start soon as shown on the table below:

In the meantime, the expectations for the ECB meeting are rising and yesterday we had an article from Suddeutsche Zietung stating the ECB is evaluating an emergency measure that would allow them to buy individual stocks or Indexes. No further details given but as you know, we would not get too excited ahead of Thursday as the market had a decent run into it.

The Euro has somehow strengthened vs the USD on the news that the German government’s 2020 budget and financial planning through 2023 foresees balanced budgets with no new debt.

The UK anti-no deal Brexit bill has become law yesterday. The results of the government past week defeats translate into Johnson being required to find an agreement with EU or seek delay of the exit by October 31. In addition, the Parliament rejected the request for an early general election for the second time. Interestingly, another important member, UK speaker of the House, John Bercow announced his resignation. Now the Parliament is shut down for five weeks, while Johnson will be force to negotiate with EU officers at the next meeting in Brussels on October 17.

Profit warning for Citi as investment-banking revenues, Equities and Fixed Income, are expected to drop in Q319. This adds to Deutsche Bank that recently warned investors the bank could struggle to meet its mid-term revenue target due as its turnaround plan faces challenges from slowing economies and lower interest rates.