The market had quite a decent intraday reversal yesterday with all the main European indexes losing 1%/1.5% intraday. There was no particular reason for the reversal but as we have been warning over the last few days, it is obvious that markets are overbought and we shouldn’t be surprise to see some weakness after such a strong rally. The Dax was up 1.2% at a certain point when German BDI Industry Association said that they expects manufacturing production to decline by 4% this year.. unfortunately, the link between market performances and macro data is quite wide at the moment.

A pro-freedom bill aimed at supporting protestors in Hong Kong, was passed at the US Senate yesterday night. Now the US House should approve the law before President Trump would be allowed to sign it. Eventually, China threatened to retaliate and urged US to stop meddling in Hong Kong affairs. This might be the trigger for the next escalation in the trade war Saga. Bear in mind that the location for signing the first phase of the deal has not been defined yet.

GBP a bit subdued after yesterday’s Johnson vs Corbyn debate. Overall both candidates clashed over several issues among which Brexit (Corbyn’s position less clear) and NHS (Healthcare). Overall opinion polls are giving 51% chances of victory to Johnson, although it seems that it is still completely open as anything can happen. And markets don’t like uncertainty….

Some concerns about the strength of US consumer spooked the market yesterday after two major retailers trimmed forecasts. More properly, Kohl’s and Home Depot slumped by double digits, as soon as the second profit warning of this year was announced. Kohl’s now sees FY adjusted EPS $4.75 to $4.95 versus $5.15 to $5.45, estimate $5.19. Same-store sales, a key measure of Home Depot’s performance, gained 3.6% last quarter, against 4.6% growth consensus. Investors are concerned that consumer spending is not as strong as expected (the main component of US GDP). Also some competitors were slashed such as Macy’s -10%, Nordstrom -7% (all retailers).

Biggest sell-off in Oil since October 14th with WTI losing 3.3% on global slowdown fears, higher inventories in America and Russia unlikely to agree to deepen production cuts further at the next OPEC+ meeting in Vienna, December the 5th.

The PBOC yesterday warned that downward pressures on economy keep increasing and they had to intervene in open market operations for the second day in a row (120bn yuan (18bn$) via the 7-day reverse repo after 180bn yuan injected the previous day) and cut interest rate on 7-day repo to 2.5% from 2.55% to shore up investor confidence and the market has responded very well despite the ongoing tensions in Hong Kong. The PBOC is also working in order to boost bank’s ability to supply more credit.

The actual combined effect of FED, ECB, PBOC and BOJ since October is very powerful now and is helping the markets to continue the climb higher to new highs every day.  The balance sheet of the major central banks rose to levels never seen before, with the Bank Of Japan at 100% of the country’s GDP, the ECB at 40% and the Federal Reserve above 20%.The chart underneath shows a projection from Citigroup for total Central Bank purchases in 2020 and 2021, the current situation seems just the beginning of a new trend higher that will last for most of 2020.

We saw some recent stats on global debt which got us scarred. Global debt will hit $255 trillion by the end of 2019. Just for your information, 2018 US dollar GDP accounted for $20.5 trillion, while China dollar GDP around $14 trillion. Over the last 9 months, global debt surged by $7.5 trillion, of which China and US accounted for 60% of the increase (US deficit to increase further). Eventually, Emerging market debt hit a new record high of $71.4 trillion (220% of EM GDP).

The big increase in global debt over the last decades, $70 trillion ish, was mainly driven by government debt for mature economies and the non-financial corporate segment for emerging markets (around $30 trillion each). Global government debt, circa $115 trillion, is something we should really think about, since now accounts for almost 50% of global bond markets. Indeed in focus the recent warning of IMF, as $19 trillion, almost 40% of the global corporate debt, are at risk of defaults in case of a massive crisis.

No wonder why 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!

The FED from 2018 to 2019 has reduced the balance sheet by 4.5tln$ in just 18 months (40bn$ per month) while over the last 2 months (because of “Non QE” on Repo’s tensions) has re-expanded the balance sheet above 4trln$ (120bn per month). The FED intervention has caused the acceleration in US money supply over in recent weeks and it is likely to continue as the FED will inject liquidity into the system for the next 6 months.

Chart showing the share of Central Banks cutting rates in %.

If this monetary experiment has proven anything it is that lower rates and higher liquidity are not tools to help deleverage, but to incentivize debt. Furthermore, this dangerous experiment has proven that a policy that was designed as a temporary measure due to exceptional circumstances has become the new norm. The so-called normalization process lasted only a few months in 2018, only to resume asset purchases and rate cuts.