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Buy The Dip Or Sell The Rip?


After a 'strong' opening, the US rally fizzled out with D. Trump announcement that he would impose 25% tariffs on all Chinese exports if the upcoming Trump/Xi meeting does not yield results. China’s ailing currency, weak stock markets and the growing risks of debt bubble dynamics (a lot of Chinese debt and borrowing is backed by shares posted in collateral) remain a concern and Monday’s 3% decline in the context of last week’s intervention was barely reassuring. China might accept some more currency weakness to let some steam off but this could also easily trigger a vicious circle that would only fuel more tariffs in response. At home, US indices faced renewed pressure on Fang shares which were already down before some EU Digital Tax headlines made things worse. IBM’s decision to pay 30bn (all in cash with debt issuance) for Redhat and strengthen its cloud presence, was seen by some analysts as a sign of panic for a company that desperately tries not to become the next GE. The VIX curve has inverted one more time and shifted upwards above 20, all the way to June next year suggesting firming expectations for higher volatility. With all the gap ups and down, false breakouts, bull and bear traps seemingly caused by algo traders running wild, the Vix rose above the volatility of European shares yesterday. US stocks managed to bounce off the lows in the last minutes of trading. Too low volatility (option selling), too tight credit spreads (yield chasing) and too much leverage applied on strategies relying on past correlation patterns (such as diverging expected return between stocks and bonds that may not hold) in the face of a programmed decline in liquidity is just one big trade which is showing signs of gradual unwind. 

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