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Trend Status Update

S&P500 dropped 2.2% last week (up 9.4% YTD) and the Nasdaq -1.9% with banks taking the brunt of weakness, shedding 3.1%. As with most risk off sessions, high beta sectors dropped most and biotech sank -5.4% on the week. Last week’s US equity market sell off came in response successively to Wednesday’s weakness in Chinese shares (see comment below), Thursday’s dollar strength that followed the ECB meeting and Friday’s paltry February job gains (20k). For as weak as this report was, wage growth which had been stubbornly slow for the past several decades, kept improving which was obviously good for workers and consumer confidence alike. Average annual earnings grew 0.4% from January to February and 3.4% year-over-year. This job report came in the face of a stronger-than-expected ISM non-manufacturing index as manufacturing ISM came weak, creating a noticeable dichotomy that should not be expected to last... European shares also dropped with the German DAX signing off the week with a drop of 1.2% (YTD +8.5%). Even as European shares outperformed, the latter part of the week saw a big risk off session on Thursday with the ECB sketching a rather bleak picture by revising its 2019 GDP (from 1.7% to 1.1%) and inflation (from 1.6% to 1.2%) forecasts. Friday brought a catharsis of selling in a move that was precipitated by an unusually weak January US job report. Next to launching a new tranche of subsidized loans (TLTRO), which was expected and logical (considering the EUR400bn TLTRO maturing soon), the ECB also delayed its first post-crisis rate hike into 2020. This was taken as bound to dent banks’ profitability further and for as long... Perhaps the ECB will consider at some point to adopt the Swiss approach of tiering the remuneration paid (or taken rather) from banking reserves with differentiated terms so as to reduce the pain to savers and banks. EM equities were mostly lower, especially towards the latter part of the week as the Shanghai Composite was slammed 4.4% Friday (reducing YTD gains to 19.1%) after a surprisingly steep February exports drop of 16.6% and as some cold water was shed on the US/China trade deal. The Dollar index gained +0.8% (+1.2% YTD) last week. Besides an adverse reaction for bank shares, the ECB dovish stance also drove the euro lower across the board on Thursday and Friday. Market participants often seem keen to sell the euro on ECB meeting days. Last Thursday was no exception and hence no surprise. The 1.3% decline in EURUSD surprised us nonetheless without shaking our expectations for a continuation of the dollar long unwind started this year. After all, the ECB with its dovish pronouncements only joined ranks with previous signalling by the BoJ of even more extreme easing measures (BoJ started talking about targeting negative long term rates after the current 0% and said explicitly it did not feel constrained by market risk or balance sheet risk considerations to purchase more ETF’s of Japanese shares) and of the Fed which not only turned tail on precious tightening expectations but also started hinting at the possibility to cap bond yields. At the end of the day, we could be entering a new era of extreme monetary policy easing in which the euro does not stand to lose the most because the eurozone is in a current account surplus situation and because the euro remains under-owned in international reserves. The currency that stands to lose most from this new “unconstrained” monetary situation is the one geared for the most fiscal profligacy and which starts from an (increasingly vulnerable) position of strength in world reserves, namely the dollar, from current levels, in our view. 10y US Treasury yields dropped 12 bps to 2.63% (down 5bps ytd). German 10y Bunds rallied even more and bonds from the periphery outperformed with Italian BTP’s shedding 23bps to 2.50%. Whether cause or coincidence, most of Italian BTP’s outperformance occurred when Italy said it would embrace the Chinese Belt and Road initiative to the chagrin of D. Trump and the ‘official’ voice of Europe as well. As Europe finds it increasingly difficult to deny or bear, growth in Europe won’t come from the US regime of tariffs and sanctions that is increasingly crippling its export business to the US and other countries with whom the US arbitrarily decided Europe should not be trading with (Russia, Iran and China to some extent with attempt to ban Huawei). China is no angel and many of the US reproaches are totally valid but our hunch is that US/European negotiations will be harder than the US/China ones, meaning Europe will have no other choice than to look increasingly East for its salute. Credit markets (HY) underperformed in last week’s “risk-off” episode with HY underperforming by about 20bps of yield as of last Friday. Gold recovered +0.4% (+1.2% YTD) and solver +0.6% (-1.2% YTD). In an unbridled and debt laden world, the one currency standing to win most will ultimately be the one that cannot be printed by fiat and which starts from a position of weakness. It is a (very) long game but the ultimate outcome, in our view, will be (beyond farmland perhaps) for physical gold to go sharply higher vs. every other fiat currency (irrespective of what happens today, tomorrow, next month or next year). The weakness caused in electronic/paper metals before each gold and silver futures expiration is a hard-skinned seasonal factor but one that won’t succeed forever at capping the price of physical metals motivating our preference for a barbelling approach between risky assets (stocks) on the one hand and traditional and soon only relevant strategic hedges. Those will not be government bonds charging negative real yields in near all cases or near 0%, sub 0% nominal rates in too many cases as well. The Goldman Sachs Commodities index was little changed (+2.7% YTD). 

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