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US Stocks stalled yesterday with the S&P dropping -0.7% and the Nasdaq -1.1% after some rate lock on a large issuing schedule of corporate bonds sent yields higher. Accelerating losses for EM markets and slightly weaker retail sales data also did not help while economists noted that persistently higher fuel costs this year risks eroding a sizeable portion of the tax benefits and dampen growth. Car sales barely increased last month, data showed yesterday. VIX rallied from a through at 12 to 15. The damage in stocks remained contained compared to the one inflicted onto bonds and precious metals which dealt diversified portfolios and risk parity portfolios a severe blow yesterday. European markets outperformed on further dollar strength. Gold dropped 1.7% as the dollar rallied and interest rates climbed. The dollar rallied because too many investors remain short, because of an ever-rising interest rate differential between the USD and other G7 currencies and because of the stampede out of EM markets. Turkey, India, Argentina, Mexico all had idiosyncratic reasons of their own to fall yesterday, which translated into some broad liquidation in the EM space where investors hold large overweighed in search for yield. Exposing his own definition of macroeconomics and central bank independence, Turkish President Erdogan said that cutting rates would bring lower inflation because borrowing costs would decline.“ Of course our central bank is independent,” he said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future." Sure enough, FX markets begged to differ. The dollar rally remains the root big surprise of the past couple of weeks and the path of least resistance remains for more dollar strength, in our view for the reasons that we tried to outline yesterday. Gold weakness was for the most part a dollar story as well and that is why we’d rather buy our time holding it against EUR. The Gold Demand Trends Report-Q1 2018 published by the World Gold Council indicated a considerable jump in quarterly gold purchases by world central banks with net gold purchases by central banks surging 42% over the previous year, led by Russia and Turkey.

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