Yesterday we had a quick daily reversal with the Eurostoxx down nearly 3% intraday from high to lows and decent volumes.

The spark of the move was given by Trump deciding to reinstate tariffs on steel and aluminum from Argentina and Brazil, mainly because both states cheapened their currencies too much, harming US farmers. Both Brazil and Argentina were exempted from 25% steel and 10% aluminum tariffs last year when Trump was attempting to avoid a trade war with those countries.

10 minutes after Trump has sent a new tweet: “”U.S. Markets are up as much as 21% since the announcement of Tariffs on 3/1/2018 – and the U.S. is taking in massive amounts of money (and giving some to our farmers, who have been targeted by China)!” which fueled more sell orders generated by some heavy buyers of Puts on S&P.

Chinese authorities are considering to ban some senior US officials, executives from China in retaliation to the recent approval of the HK pro-democracy bill.

The US department of trade representative is currently assessing to impose taxes on $2.4 Billion of French good, mainly wine and cheese. This move is coming into retaliation to the proposed France’s digital service tax which discriminates against US companies such as Google , Apple, Facebook, Amazon etc. For the same reason Trump is also considering to tax a still-undefined amount of goods from Turkey, Italy and Austria. Here the problem seems to be more European than Country-specific; the European Union has long debated about tax evasion from Dublin/Luxembourg-based US tech giants.

In terms of flows, yesterday after we have seen few buyers of 16,000 contracts of Put 2980 January with 32mln$ premium and a delta impact of 1bn$. The Vix has bounced 14% from multi-year lows but what was more surprising was the bounce on Yields with US 10Y up 3% (1.83%) and German 10Y bouncing from -0.36% to -0.28%.

The Macro picture yesterday was mixed.

Very bad set of data yesterday in US. The November ISM Manufacturing came lower at 48.1 vs 49.2 consensus, contracted for a fourth straight month, with new orders matching the lowest readings during the expansion and subdued production. In addition, the ISM’s survey indicated a deeper decline in factory employment, while the order backlogs dropped to its lowest level since January 2016. Also, ISM employment at 46.6 vs 48.2 consensus, and ISM price paid 46.7 vs 47 consensus. All very weak data, as mentioned before the risk is that the weakness is going from production to consumption.

Batch of more optimistic data in Japan and Europe on average.

More and more, the economic outlook depends on the outcome of the Chinese-US trade war. Interestingly, Japan capex spending increased in Q3 up 7.1% vs 5% consensus in a sign that entrepreneurs’ confidence is improving. In Europe, almost all manufacturing data were higher than expectation in November, Italy 47.6 vs 47.5 consensus, France 51.7 vs 51.5 consensus, Germany 44.1 vs 43.8 consensus (still far below expansion level), UK 48.9 vs 48.3 consensus, Eurozone aggregate 46.9 vs 46.6 (still below expansion). On the other side, Netherlands slipped into contraction in November, 49.6 vs 50.3 prior, with its PMI to lowest level since June 2013 amid declining output and the quickest reduction in new orders for  over 7 years.

As expected, Hong Kong‘s Economy is quickly slumping to record lows with retail sales by value down 24.3% YoY, the fourth straight month of >20% loss, sales by volume down 26.5%, a record low in Hong Kong’s history, and 45% less of tourism which is literally killing the economy. Recession is now a very likely outcome.

It seems that Japan is currently preparing a massive fiscal stimulus program of as much as JPY 10 Trillion ( $90 billion), the highest in more than 5 years. The highest worries are related to the increasing portion of government debt. So far, Japan has the highest public debt in Developed markets. As we said over time, the solution to get out of the debt trap, is raising more debt. Is this sustainable?

A better Macro narrative and Central Bank continuous intervention is positive for equities in general; however, with markets up 10% in the last three months and with tactical sentiment metrics elevated there is a valid question as to whether much of the good news is already in the price.

If we go back analyzing the Gold performance we obviously note that the optimism about a trade-deal and very high positioning has made the gold lose 3.8% in November (the most since 2016 as shown on chart) and has started with a weak note even in December extending a retreat from a six-year high set in September.

As extensively discussed in our previous updates, precious metals are becoming a powerful tool for Central banks.

Since the Great Financial crisis, 2008, there has been a renewed interest in gold from reserve managers. At the end of H1 2018 Central banks collectively owned US$1.36 trillion of gold, around 10% of global FX reserves among which China and Russia are some of the most important net buyers. Interestingly, gold demand has skyrocketed since the most recent crisis (chart).

According to some researchers, when the debt pyramid growths in excess and become unstable, bubbles burst. And it seems that we are on the right path as the world has never been so in debt and forecasts are for even more debt in the next decades, as we already seen.

From the riskiest to the safest asset as shown below, investors will climb down the ladder increasing holdings towards the ultimate store of value, gold. Among its main properties, it preserves its purchasing power overtime and is a global means of payment. That’s why Central Banks are accumulating tons of gold in their balance sheets.

In addition, several Central Banks among which Germany, Austria, Holland are repatriating gold mainly from the Bank of England and Federal Reserves. Most of them also enhanced the entire vaulting infrastructure building new military bases and upgraded their gold stashes to current industry standards (i.e London Gold Bullion) to be able to trade frictionless if necessary.