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Houston We Have a Problem (too)...

US stocks suffered a major setback yesterday, falling for the sixth consecutive day. The S&P500 shed -3.1% (wiping out the year’s gains at -0.8% YTD) and the Nasdaq dropped -4.6%. The day had started well with Boeing's beating and sparking a pre-open rally in Dow futures but a deluge of mostly downbeat earnings raised investors’ fears over corporate profit growth. All major US indices now trade below their 50dMa and 200dMa, including most sectors. The biggest losses for the day (pot stocks that got smashed by -10% as well) were Biotech (-7.4%) and Semis again (-6.8%). Banks and energy shares also dropped more than the S&P. Texas Instruments shed another 8% after missing on revenues and warning on the risks of the trade war on its forward guidance. Momentum, Value and Dividend growth Factor ETF’s fell sharply without much differentiation. VIX spiked above 26. The very reason why stocks are correcting now (mixed earnings coupled to overvaluation of US stocks and early signs of economic weakness) questioned the “buy the dip mentality” instilling caution and fear in investors’ mind. This selloff came as a surprise after China managed to lend support to the market instilling hopes that perhaps Chinese shares had found a bottom with the help of verbal intervention and the promise of additional fiscal easing. Some doubts about the permanently positive US economic discourse came with another -5.5% decline in MoM new home sales, and with median sales price decreasing 3.5% y/y to $320,000 which were as many signs that the US housing market is slowing. Also contributing to sour sentiment yesterday were news that suspicious packages targeting leading Democrats and others were discovered in what was dubbed an act of “terrorism”, Bloomberg reported. European shares had a decent opening yesterday (EUROSTOXX DAX CAC SMI ) but relapsed into weakness on US downside momentum. Europe had its shares of worries yesterday which drove the BTP/Bund spread 9bps higher. We continue to believe that the issue is one of behavioural problem more than substance. Italians find Europe’s bureaucrats arrogant while the Commission is under the impression that its authority is being questioned by the rudeness of the Italy’s insurgent coalition (obviously taking off one’s shoe to clean it on the EU letter just sent by Europe and expecting a handshake after that from P. Moskovici was stupid and will not help resolving the issue. “Brussels can keep sending its silly letters until Christmas. Our budget is not going to change. The gentlemen speculators will just have to get used to it, because we will not retreat,” said Lega strongman, Matteo Salvini. The debate about the excessive Italian budget deficit comes “as EU projections show that France will overtake Italy in terms of having the largest public sector debt at the end of the year.” UBS Chief Economist P. Donovan noted yesterday, reminding that France was also the first country to break the EU budget rule. The euro closed mostly weaker yesterday (EURUSD EURJPY EURGBP EURCHF). Crown Prince MBS vowed “justice” for Dissident Khashoggi. He promised to do all …euh…legal “things” to bring perpetrators of a “heinous crime” to justice… D. Trump said on Monday that the US would increase its nuclear arsenal until other nations "come to their senses," threatening an arms race days after he said he would withdraw the US from a Cold War nuclear treaty. V. Putin said if the US withdraws from the INF treaty, Russia will have to respond. US 10y Treasury yield (bond yields snapshot) dropped 6bps yesterday while 10y German Bund yield dropped 3bps mostly in response to higher risk aversion after stocks fell. US High Yield Credit spreads (HYG) underperformed in the equity selloff. Fed tightening expectations have started to recede with expectations on the number of rate hikes for 2019 falling to 1.72% (from 2.10% last week) as D. Trump reiterated his criticism of Fed Chair Powell for his rate hike inclinations. Precious Metals were generally strong yesterday. Gold in EUR gained nearly 1%. Oil fell to its lowest level in two months as the sell-off in U.S. stocks deepened and as American crude inventories rose more than expected.

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