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Weekly Trend Status Update

Over the past week, major US indices dropped by the exact same amount of -2.4%, providing another hint of the algo dominance in today’s trading activities. S&P500 shed -2,4% (10,1% YTD, Z-score -2,1), as did the Nasdaq100 -2,4% (12,8% YTD). Most of the tech heavy weights accounting for most of the equity market momentum traded lower and some of them below their 200dma; AAPL shed -2,6% (11,0%), FB dropped -1,9% (35,4%), AMZN -2,2% (18,2%) and GOOG -3,3% (6,6%) on the week. The US small cap index also shed by -2,4% (8,9% YTD). CBOE Volatility Index rallied 10,6% (-26,4% YTD) to 18,71. The weakest sectors were XLP (CONSUMER STAPLES SPDR) -3,7% (9,5%, Z-score -2,5) XLE (ENERGY SELECT SECTOR SPDR) sold off by -4,3% (2,5%, Z-score -2,5) in response to the associated sharply lower oil prices.

With the S&P500 closing just above its 200dma on Thursday, market participants were expecting the saving grace of a supportive Presidential tweet on Friday and what they got instead was the surprising exact opposite of D. Trump unveiling a one-two punch promising to impose tariffs on goods imported from Mexico “until Mexico halts the flow of undocumented immigrants”, overturning much of what investors thought they had understood of the US Administration near term strategy. Beyond compromising the ratification of USMCA (due to be submitted to Congress within days), the shock came from the fact that trade and border security are two separate issues that could represent a misuse of presidential tariff authority, bringing to the forefront a notable degree of incoherence and possible irresponsibility. The decision was made despite the opposition both Treasury Secretary Mnuchin and Trade representative Lighthizer while Kudlow was undergoing surgery… which unsettled markets even more. The “Trump put” may still be alive but more people are now searching for the strike.

Not helping sentiment on Friday were further signs of tit for tap escalation from the Chinese authorities which after threatening to weaponize “rare earths” also said on Friday they were putting together an “unreliable entities list” of foreign companies and people. China, the world’s largest soybean buyer also announced last week that it was putting on hold purchases of American supplies. Last week the US also called on China to curb the development of its state-owned enterprises…a demand that China saw as an “invasion” on its economic sovereignty, according to the state news agency.

China made a large cash injection into the banking system last week which enabled Chinese stocks to gain slightly despite some pressure building in a corner of the Chinese lenders’ offshore debt following the first government seizure of a bank (Baoshang bank with USD83bn in assets) in two decades.

The Eurostoxx50 dropped -1,8% (11,0%), outperforming the S&P500 by 0,6%.

In a fairly surprising manner in a “risk off environment” and with commodities selling off as well, Diversified EM equities (VWO) rallied 2,1% (6,7%), outperforming the S&P500 by 4,6%. CSI300 Chinese equity index (ASHR) gained 1,1% (19,1%). Indian shares (EPI) rallied 3,1% (6,6%). Russian shares (RSX) gained 1,1% (15,4%).

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies was largely unchanged -0,1% (3,4% YTD) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,1% (0,2%). The dollar performance last week was equally underwhelming with no safe haven bid emerging for the dollar neither vs. G7 nor vs. EM currencies and despite a sharp decline in commodities and oil in particular. USDRUB gained 1,5% (-5,6%). The notable exception was the MXN which suffered from D. Trump’s bombshell announcement. USDMXN rallied 3,0% (-0,2%, Z-score 3,7).

Bond markets drew safe haven flows, supported by rapidly changing rate cut expectations as 10Y US Treasury yields dropped -20bps (-56bps, Z-score -2,6) to 2,12%. 10Y Bunds dropped -9bps (-44bps) to -0,20%. 10Y Italian BTPs underperformed with their yield climbing 12bps (-7bps YTD) ending the week at 2,67%. Whilst the probability that the Fed will cut two or more times by the end of 2019 has now risen above 50%, not all news were negative on Friday after consumer confidence was reported to have jumped in May, near an 18 years high, possibly boosted by exports and a build up of inventories before more tariffs would come into effect. The Italian spread widening was in response to the Italian government calling for an easing in EU “failed” fiscal rules which Italian Deputy PM Matteo Salvini said need to be rewritten with the focus on cutting unemployment, not capping budget deficits. Most economists will now agree that he is right but that he may just be the wrong person to convey the message. This could be a sensible approach at the time when the US gears up for MMT.

Similarly, to equity markets, US High Yield (HY) Average Spread over Treasuries climbed 40bps (-93bps, Z-score 2,3) to 4,33% and US Investment Grade Average OAS also climbed 7bps (-28bps, Z-score 2,1) to 1,44% in a week that saw credit markets underperform significantly as well.

In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (-19bps) to 0,91%.

Gold performed as a safe haven last week and recouped 1,6% (1,8%, Z-score 2,4) while silver eked out a minor 0,2% gain (-5,8% YTD). Major Gold Mines (GDX) witnessed a turnaround as well rallying 5,6% (2,4%, Z-score 3,3).

Goldman Sachs Commodity Index sold off by -3,5% (7,1%, Z-score -3,0) as WTI Crude got crushed by -7,6% (17,8%, Z-score -2,9).

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