European markets were quite weak yesterday and for the first time in a while we had decent volumes (on the sell-side).

Yesterday pure risk-off movement with the reflation underperforming the flight-to-quality trade. Among the main detractors, Banks -1.25%, Auto -1.2%, Basic resources -1.1% and Oil -0.7%. While Value was dumped, Defensives were bid with Food&Beverage +1.1%, Consumer Staples +50bps and Healthcare flattish. In China, Tencent (-2%) continues recent weakness after disappointing Q3 earnings, where profit fell 13% and costs rose 21%.

 Bunds and US Treasuries rallied amidst decent volumes to print fresh highs for the week; yield curves bull flatten (long rates decreasing faster than short) with most long end yields in US/Europe decreasing 4-5bps. It seems that the short end of the US rates curve has already priced the Powell pause. As a result, any significant move higher in yields will require much more hawkish messaging from the Fed.

Global Central Banks are having the most synchronized global easing cycle in a decade with the majority of CBs participating. The only difference vs the past is that this time the stock market is at an all-time high! Chart showing the share of Central Banks cutting rates in %.



So far, 2019 continues to feature one of the most bearish credit rallies in years. Lower CCC-rated bonds remain on track to deliver its worst risk-adjusted performance vs the BB segment since the early 1990s. It seems that the “flight to quality trade” (buy higher quality US credit) has strongly outperformed the “down in quality trade” (buy lower quality US credit). It makes sense due to recent global slowdown, trade war etc… The bid to quality is also visible in the meaningful spread decompression, whereby IG (Investment grade) spread had outperformed their HY (High yield) peers.

Performance CCC (low quality) vs BB (higher quality)


Addressing the Joint Economic Committee of Congress, Powell remarked that current policy is appropriate as long as economy stays on track, baseline outlook is favorable but noteworthy risks remain. It seems that the Fed will hold in a wait and see stance, as sluggish growth abroad and mute price pressures in US indicate no rate hiking in the pipeline (hiking is slowing down inflation), while solid consumption, income and job market in US, along with resilient core of financial sector and elevated risk appetite on markets call for no rate cutting neither.

Macro-wise, several key Macro data in China this morning. Overall China further weakened in October, with Industrial production +4.7% vs +5.4% consensus, Retail Sales +7.2%% vs +7.8% consensus and Fixed Assets ex rural +5.2% vs 5.4% consensus, the slowest pace of growth since 1998. Also in Japan, sluggish Macro data, with Q3 GDP QoQ +0.1% vs +0.2% consensus, Q3 GDP Annualized +0.2% vs +0.9% consensus.

A spark of light in Europe this morning instead , as Germany Q3 GDP QoQ increased 10bps vs -10bps consensus, avoiding a technical recession.

Yesterday we got the German inflation up 10bps in line with consensus while UK inflation hit 3-year low in October as CPI +1.5% vs 1.6% YoY, the smallest increase since November 2016, after a new energy price cap came into force. October producer prices weaker as well. Euro-area industrial production increased 10bps vs -20bps consensus in September, a positive and reassuring data, which brings the YoY number at -1.7% vs -2.3%, the smallest decline in four months. US Core consumer prices unexpectedly cooled in October at 2.3% vs 2.4% consensus, driven by a deceleration in rents. Also, average hourly earnings, adjusted for price changes, fell 0.2% in October YoY. Overall US inflation still subdued but as widely discussed, the Fed is in a wait and see mode.

Just a quick check on the latest UK Election Polls: YouGov/Sky general election poll: Tories 42% (+3), Labor 28% (+2), Lib Dems 15% (-2), Brexit Party 4% (-6)

On a final note, interesting to spot the gap in confidence between “smart money” and “dumb money”, one of the widest seen, at 61%! When the spread has been wide in the past (not this wide), the S&P had over the following 3 months only 15 days of positive returns with an average negative performance of -2.5%