The market started with a very positive tone with Equity Cyclicals up along with Yields.

European Financials were well-bid with possibly some short covering as Commerzbank was up 6%, Deutsche Bank +5% and as we know, investors are well underweight the sector.

Overnight we had some bad news on the situation in Iraq as the tension between US and Iran is escalating, after a top Iran general was killed in US airstrike on Donald Trump order, prompting Iran president and executives to call for severe retaliations for the killing. Geopolitical issues in Middle East do strongly affect oil price, which jumped up to 3% on output shortage fears yesterday.

Gold has also continued to perform well (+6% from the lows made at the end of November) targeting the highs of last September at 1550$.

Spanish Prime Minister Sanchez, has reached a deal to form a coalition government with far-left party Podemos. Importantly, the Socialist Party and Podemos still don’t have a majority in parliament, meaning they need the support of other smaller parties. Vote of confidence expected over the weekend and next Tuesday where Sanchez should lose the first vote (absolute majority) but win the second round (relative majority).

The first 5-days are often seen as an indicator for the year. When the first 5 days are higher, the S&P has been positive 82% of the time at year end with an average gain of 13.6%.

Mixed bunch of Macro data yesterday in Europe, with December Manufacturing PMI a touch ahead in Germany, Spain and France, while Italy missing on consensus. Overall, the Eurozone Manufacturing PMI came better than expectation, 46.3 vs 45.9 consensus, confirming the improving outlook in Europe (although still below 50 for 11th month, with Euro-zone orders falling in December and the rate of job losses the sharpest since the start of 2013).

The ability of the wider economy to avoid sliding into a downturn in the face of such a steep manufacturing contraction will remain a key challenge for the euro zone as we head into 2020.

In UK, more weakness ahead, with December seeing the fastest drop in manufacturing output since July 2012, with new work continuing the downward trend every month since May. Moreover, manufacturing employment was reduced for the ninth straight month.

In US, jobless claims plunged to a four-week low in a very tight labor market. The manufacturing data in December came broadly in line with consensus while confidence among U.S. consumers climbed to the highest level in five months as Americans grew more optimistic about the economy and their personal finances.

As a reminder, today US ISM for December along with FOMC minutes release.

The Citi European economic surprise index has reached the highest level since the beginning of 2018 after an impressive rally since the end of September.

In terms of positioning, it is worth to note that Investors bought over the last 2 weeks of 2019 31bn$ notional of US S&P futures, equivalent to 4% of total open interest driven primarily by adding new longs.

This represents the biggest 2-week of buying of S&P futures by Asset Managers over the recent years!

In Europe, over last year, a record 107 billion € flowed into the region’s ETFs, while European equity mutual funds, most of which are actively managed, shed about $100 billion, according to EPFR Global and BAML/ Competition among ETF issuers in the region is heating up, with Goldman Sachs Asset Management debuting products last year and Vanguard Group slashing fees.

Coming back to Bonds, it is interesting to spot an interview on Bloomberg of Person which manages one of Sweden biggest pension funds, the only country which has taken the historic step of quitting negative interest rates. He expects a slow march towards more normal interest rates and see corporate debt markets showing some unhealthy signs after years of ultra-low interest rates. Pension funds have been one of the main causalities of negative interest rates and they have had to move to riskier and less liquid assets but they are now warning of bond bubble.

It will be certainly interesting how the Bond will cope when Central Banks will stop buying bonds and reinstate market pricing.

In the meantime, the Barclays Global-aggregate market value of Bond Market is reaching a new all-time high.

Finally, with markets continuing to rise to new highs, volatility in the Euro Stoxx 50 Index is approaching a level that’s preceded rebound spikes twice in the past two years. When the V2X Index fell near to single digits in January 2018, it tripled by mid-February. In April 2019, it almost doubled in a similarly short span.

At the same time, the CNN Indicator is showing an extreme greed at 96, the highest over the last few years from a level of 12 just 1 year ago.