After an initial selloff, US stocks (Teckstocks) recovered to close slightly +0.3% for the S&P and small caps index (while the Nasdaq closed unchanged) on Friday while European shares closed slightly lower on lingering concerns about trade ahead of the G7 meeting. A more hawkish ECB and stronger euro also took some gas out of the dollar on Friday allowing some EM relief as the Turkish lira BRL rallied respectively 3.9% and 5.3%. Last Friday’s COT report showed a very minor reduction in net long EURUSD to +89.2k (-3.8k). CHF short was the second largest position of the report on which we cannot read too much except that it is unusually large. The only meaningful element of the report was perhaps a purge of remaining long MXN into a net short of -11.1k as sentiment on Nafta continued to sour. CAD positioning was unchanged. Nothing good came from the G7-1 meeting this Saturday, as was widely expected. The US President skipped a meeting with French President Macron, arrived late to some events, tried to steal the show with an unexpected press conference where he vowed to “scrap all trade barriers and tariffs” (and likely as well trade agreements) and left early, heading to his meeting with the North Korean leader in Singapore... that will take place... on Tuesday. Then, the US on Saturday backtracked, refusing to sign a G7 declaration calling for a reduction of tariffs and other barriers to trade, as President Donald Trump continued to lash out at so called close allies, calling “Justin” weak and dishonest. "PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, 'US Tariffs were kind of insulting' and he 'will not be pushed around' Very dishonest & weak. Our Tariffs are in response to his of 270 per cent on dairy!" Trump posted in another tweet. J. Trudeau retorted that he said nothing different in private than in public. Let’s say nobody caved in to D. trump over the week end and he did not like it... Trudeau, who responded last night to Trump's initial tweet, has yet to respond to the increasingly aggressive rhetoric from Trump's top advisor, Navarro who said there was a special place in hell for him... The problem with worrying (about US stocks) is that it does not really pay off… Markets seem to behave as if they do not take these kinder garden quarrels nor their authors too seriously. US stocks’ most recent leg up was fueled, despite all lingering worries, by the last US job report even as International equity markets weakened slightly. The US job report was so good that D. Trump could not resist leaking it, referring the US economy as being the best ever... at the same time as he complained to the rest of the world that it is being taken advantage of by all round unfair trade practices. There were still a few unusual market events late last week including a mini flash yield crash on Thursday, more underperformance from EM markets (except on Friday) and perhaps some signs of fatigue from tech stocks. For US stocks, the short-term story might still be that if Trump gets his way, it will be all good news for the US and mostly bad news for the rest of the world ... until something breaks, on the dollar or the bond market. Personally, I think Trump is playing with fire... discrediting himself, his advisors (only there to say yes to the boss, to trade insults, then ... to pathetically ask for insulted people to excuse themselves) and the US administration to the rest of a world looking at them in awe... It might start to haunt them at some point as to who will need so many dollars in international reserves to conduct trade if Trump’s logic is pushed to its limit. Also, if US trade imbalances narrow by as much as D. Trump hopes for, then there will also be a price to pay with much less dollars to recycle in the US bond markets (the deal is that Europe and Asia export more goods and the US exports more capital (bonds and stocks) allowing to square the balance of payment). This could also put to the test the “live on credit” life style of US consumers and the profligate ways of the US government (unless the Fed changes tactics and restarts a QE program). This could accelerate a trend towards rising bond yields which has already been quickstarted by a tightening Fed in response to tight labor markets and the premise of rising inflation. The Fed will meet on Wednesday and the ECB on Thursday with the Fed expected to tighten one more time and the ECB to communicate on ending its asset purchases. If stocks hold, then bonds might fold ... a little... The crypto market came under heavy pressure over the week end with bitcoins falling 10% over the week end on news that the US Commodity Futures Trading Commission (CFTC) launched a probe into four major crypto exchanges.
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