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US stocks closed mixed with the Nasdaq dropping -0.8% and small caps gaining 0.3% whilst European markets closed marginally higher, mechanically supported by a broadening EUR correction. Tesla shares broke down again as Goldman recalled the harsh reality of the company’s financing needs on Thursday. More than anything else, the continued outperformance in small caps seems driven  by dollar strength as most of these companies  are domestically focussed. EURUSD continued to trend lower but more noticeably, EURCHF underwent an abrupt gap down, possibly serving as the proverbial canary in the mine signalling beyond seemingly quiet equity markets, some unusual heating dynamics. Among the root causes of the developing malaise lies the USD squeezing under the impulse of renewed weakness in EM markets (currencies, stocks and bonds were all noticeably weaker) with signs of dollar liquidity stress also visible from renewed tensions on the HK peg. MXN, BRL dropped -1.2% while ZAR dropped -1.6%.  In Europe, weakness in Italian markets were the highlight on Friday. Italian banks and bonds noticeably underperformed on Friday as Monte Pachi shares dropped -3.5% (after shedding -8.9% on Thursday) while Italian BTP’s yields rose +11bps vs. 10y Bund yields dropping -6bps, suggesting safe haven flows from the former to the latter. This risk aversion in Italy drove core EUR government bond markets into a major reversal just a few days after a technical deterioration sent bunds lower linked to rising expectations that the ECB will have to end QE by year end... and take rates away from negative territory early next year or face the risks of falling behind in its mandate to keep inflation anchored. Geopolitical developments late last week included a swift deterioration in diplomatic relations between Turkey and Israel, and European leaders becoming more vocal and increasingly determined to fight the US stance on international trade. The last threat seems geared to force German companies to stop working on the Russian gas pipeline or face a trade war on the German car industry as a way to force Europe to buy gas from the US rather than from Russia, to boot at a 20% premium to Russian gas. Most of the issues facing Europe were summarized in this article from Russia today. The link here points at some interesting week end reading . 

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