Over the past week, the S&P500 rallied 4,5% (15,1% YTD) and the Nasdaq100 gained 4,1% (17,4% YTD). The US small cap index rallied 3,4% (12,7% YTD). CBOE Volatility Index sold off by -12,9% (-35,9% YTD) to 16,3. After the heavy selloff seen on Monday after D. Trump said he would introduce fresh tariffs against Mexico, US stocks roared back, starting on Tuesday after Fed officials said (in response) they were closely monitoring the recent escalation in trade tensions and indicated they could respond to any economic deterioration by cutting interest rates. ‘We do not know how or when these trade issues will be resolved,’ Fed Chairman Jerome Powell said… ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.’ The market read as a sure bet several rate cuts are forthcoming. In his opening remarks before the “Conference on Monetary Policy Strategy, Tools, and Communications Practices:”; the Fed Chair went as far as suggesting the term “unconventional” should be retired when referring to tools that were used in the crisis. “We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare. We now have a significant body of evidence regarding the effectiveness, costs, and risks of these tools, including those used by the FOMC and others tried elsewhere. Our plans must take advantage of this growing understanding as assessments are refined.” Last Friday the equity market rally accelerated after the US job report missed on most counts with NFP only rising by +75’000 (vs. 175’000 expected) while average hourly earnings rising slightly less than expected (by 3.1% vs. 3.2% expected yoy). A couple of days earlier growth in May US manufacturing had slowed to its weakest pace in two years (ISM fell to 52.1 from 52.6 the previous month). The Eurostoxx50 rallied 3,0% (14,4%), underperforming the S&P500 by -1,5%. Diversified EM equities (VWO) were dragged by tariffs’ talks, adding only +0,6% (7,3%), underperforming the S&P500 by-3,9%. Russian shares (RSX) rallied 3,1% (19,0%) while the CSI300 Chinese equity index (ASHR) only gained +0,4% (19,6%), continuing to lead so far this year on the score box. It seems that the further reported outflows concerned mainly US listed ETF’s, more subject to US driven China bashing whilst the Hong Kong Shanghai Connect did not reflect the same genuine pessimism. Foreign investors are mostly slated to buy more Chinese shares, bonds and CNY for months and years to come, to keep pace with rebalancing benchmarks. This may not fundamentally change with D. Trump’s Twitter feed except for occasionally offering them the possibility to rebalance towards more Chinese shares cheaper. On Friday, “China’s central bank governor said there’s ‘tremendous’ room to adjust monetary policy if the trade war deepens, joining counterparts in Europe and the U.S. in displaying readiness to act to support the economy”, Bloomberg reported. PBOC Governor Yi Gang also signalled that he’s not wedded to defending the nation’s currency at a particular level, and stressed that the value of the yuan should be set by market forces… adding that the currency has been weaker recently due to ‘tremendous pressure’ from the U.S. side but the impact will be temporary.” It is unlikely, in our view, that China would want to follow up on the trade war front by devaluing its currency (unless forced to by somewhat constrained Chinese investors themselves) while its objective is to move along with the further internationalisation of the renminbi. The most recent Chinese reserves data published overnight climbed to 3.1trn from 3.09trn and did not suggest mounting pressure in that respect. China’s trade surplus also unexpectedly increased to USD41.65bn (from USD13.8bn in April and USD31bn expected by the survey), another report showed overnight. Last week, “Russia and China took another step away from the US dollar after the two countries agreed to develop bilateral trade” with V. Putin telling journalists that *Russia and China intend to develop the practice of settlements in national currencies, adding that the states have signed intergovernmental agreements on expanding the use of the yuan and ruble in bilateral financial operations. The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,1% (2,3%, Z-score -2,1), showing a statistically significant move in response to the Fed’s more pressing dovish stance conveyed last week, while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (0,5%). Speculative net short positions in EURUSD as per last Friday’s COT report declined by 12.1k, remaining a relatively elevated 87.6k. Speculators also remained net short -44.4k contracts of JPY (from -55.6k), showing a weekly decline that left speculators with still a large speculative long USDJPY position which suffered performance wise, along with all other USD pairs last week. The ECB last week while outlining the details of the new TLTRO long term conditions also left the door open for more action, should the situation not evolve according to plans, including with the possibility of more rate cuts. This did not offset the power of the Fed’s signalling that the question is no more whether it will cut rates but when, with the markets jumping to the conclusion that it might start to cut as early as June 19th. The yield on 10Y US Treasuries dropped -4bps (-60bps) to 2,08% while 10Y Bunds dropped -6bps (-50bps) to a fresh record low of -0,26%. 10Y Italian BTPs rallied -31bps (-38bps, Z-score -2,7) to 2,36%, posting a strong outperformance vs. Bunds despite all lingering worries about Italy’s fiscal drift. US High Yield (HY) Average Spread over Treasuries dropped -26bps (-119bps) to 4,07% (after climbing +40bps the week before) but there was no improvement in the lesser quality credit segment with US High Yield (HY) Caa Average Spread over Treasuries climbing +2bps (-161bps) to 8,28% last week. US Investment Grade Average OAS inched down -3bps (-31bps) to 1,41%. In European credit markets, EUR 5Y Senior Financial Spread dropped -10bps (-30bps) to 0,81%. Precious metals had a good week with Gold rallying 2,7% (4,6%, Z-score 2,0) while Silver rallied 2,9% (-3,1%, Z-score 2,1). Major Gold Mines (GDX) rallied 6,0% (8,5%). Gold was allowed to breathe overnight on the “breakthrough” of D. Trump not following up on imposing new tariffs against Mexico which had caused a mini panic early last week including with several key central banks scrambling to signal more easing is forthcoming. China reported that it bought another 16tons of Gold in May, increasing its purchases since November to 74tons. Goldman Sachs Commodity Index gained 0,5% (6,9%) while WTI Crude rose by 0,9% (18,9%) but CPER dropped -0,6% (-0,5%). 

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