Confronted with a trifecta of Presidential interventionism on the Fed, a weakening global growth and disappointing inflation data, global markets ran ahead of the Fed’s decision and the initial market response to a 25bps cut, coupled to Fed President J. Powell saying during the post FOMC meeting press conference that this would not be the beginning of a long series of rate cuts, the initial market response was a hard selloff (-1.7% on the S&P500) in risk assets on Thursday along with a mirror like rally in bonds. The dollar also rallied. Once this initial disappointment dissipated, equity markets started to consider this would be another one-day selloff only worth buying and a furious short covering rally ensued on Friday on the heels of a worse than expected US job report. The publication was sufficiently bad to revive expectations that the Fed would still oblige the President’s wishes for an additional cut in September. For some reasons, just as US equities had recovered nearly all of their post rate cut announcement disappointment, D. Trump announced that come September 1st, an additional 10% of tariffs would be imposed on China’s remaining USD300bn worth of exports to the US. This “one two” punch took the market off guard and a fierce selloff ensued that led to the sea of yellow below. Perhaps D. Trump was not long puts but just trying to rehearse the end of May scenario where he unexpectedly talked about introducing fresh tariffs against Mexico, precipitating a market selloff that forced the Fed to promise a rate cut for July that minutes of its latest meeting had all but excluded. The short and long story of it all could that the future of US interest rates are most likely “0” and to be dictated by the Oval Office rather than the Federal Reserve through a combination of Fed bashing and market impacting tweets, forcing a less than subtle conduct of monetary policy leading to a possible revival of a “beggar thy neighbour policy” on the part of other major central banks. It is now widely expected (it was before the Fed meeting already) that the ECB will further trim rates at its September meeting to be followed (according to Goldman Sachs) by the BoJ soon thereafter… 

Over the past week, the S&P500 sold off by -3,1% (17,1% YTD, Z-score -2,7) closing just 0.1% above its 50dma while the Nasdaq100 sold off by -4,1% (21,5% YTD, Z-score -2,6). Within tech, AMZN sold off by -6,2% (21,4%, Z-score -2,4), perhaps not unrelated to J. Bezos cashing in USD1bn worth of shares. FB also dropped -5,4% (44,2%, Z-score -2,5). The US small cap index sold off by -2,9% (14,0% YTD, Z-score -2,1), the first US index to trade under its 50dma. CBOE Volatility Index (VIX) rallied 44,8% (-30,7% YTD, Z-score 2,4) to 17,61. The Eurostoxx50 sold off by -4,3% (14,7%, Z-score -3,5), underperforming the S&P500 by-1,2%. Emerging markets were not spared last week and Diversified EM equities (VWO) sold off by -4,7% (6,6%, Z-score -3,0), underperforming the S&P500 by-1,6%. The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,2% (4,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -1,2% (0,8%). USDZAR rallied 3,4% (3,1%, Z-score 2,7). USDRUB rallied 3,0% (-5,9%, Z-score 3,2). USDCNY gained 0,9% (0,9%, Z-score 3,9). Elsewhere in FX, safe haven currencies such as CHF and JPY had a strong bid. EURCHF dropped -1,3% (-3,0%, Z-score -2,3) with the SNB reported to have intervened to smooth things out. EURJPY sold off by -2,1% (-5,9%, Z-score -2,9). 10Y US Treasuries rallied -23bps (-84bps, Z-score -3,0) to 1,85%. 10Y Bunds dropped -12bps (-74bps, Z-score -2,0) to -0,50%. 10Y Italian BTPs dropped -3bps (-120bps) to 1,54%, underperforming Bunds by 1bps. US High Yield (HY) Average Spread over Treasuries climbed 33bps (-129bps, Z-score 2,7) to 3,97%. US Investment Grade Average OAS climbed 7bps (-47bps) to 1,25%. JNK (small duration High Yield) dropped -0,9% (7,1%, Z-score -2,3). In European credit markets, EUR 5Y Senior Financial Spread climbed 9bps (-44bps, Z-score 2,0) to 0,67%. The precious metals sector was the only one gaining last week. Gold rallied 1,5% (12,3%) while Silver dropped -1,2% (4,6%) and Major Gold Mines (GDX) gained 1,8% (31,7%). Bitcoin rallied 5,7% (183,0%). Global Gold demand rose by 8% in H1 according to the World Gold Council, the highest since 2016 led by Central banks that bought a record 374 tonnes, the highest official purchase ever in the first half of a year. Goldman Sachs Commodity Index sold off by -2,2% (7,3%). WTI Crude dropped -1,0% (22,6%). DBC dropped -2,3% (4,5%). CPER sold off by -4,4% (-2,0%, Z-score -2,9) in response to the trade tensions revival.

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