Paying someone to borrow is most likely neither viable nor sustainable and Treasurers around the world seized the opportunity last week when corporate issuance exploded from Apple and Wirecard to Deere & co and Walt Disney. They were able to sell a total of USD140bn (a weekly record) at historically low borrowing costs. A sub-par below investment grade European credit (telecom operator Orange) was also able to find buyers for bonds yielding less than 0%...which likely all by itself qualified the current period as being of maniac bubble nature. The ECB will decide next week on what additional accommodation to provide. A restart of the ECB QE program met sufficient recent opposition (from Germany and now France and Austria) to have become unlikely for now, even if this is what will be ultimately be necessary to make those negative bond yields sustainable, assuming they are desirable and meet any useful economic or policy purpose (see last week’s weekly observations for why they most likely are not). In an address to the European parliament which was part of her nomination process to the ECB Presidency, Christine Lagarde called on European governments to more closely cooperate over fiscal policy in order stimulate the European economy. Former ECB President JC Trichet in a Bloomberg interview conveyed the very same urging message. For this coming Thursday, ECB policy makers will likely deliver a stimulus package that will include a rate cut, a pledge to keep rates low for longer and some compensation to mitigate the effects of the aggravation they suffer from negative interest rates (possibly a long awaited tiering system similar to the one adopted by the SNB a while back). This is expected and will not prevent buyers of grossly overpriced bonds to suffer from the costly pull to par of zero-coupon bearing bonds over time. Lines are moving slowly in Germany and we expect calls for a fiscal stimulus to ultimately be heard which will be one more reason to expect the nonsense of negative 10 to 30 years yield to have a limited lifespan.

Over the past week, the S&P500 gained 1,9% (19,3% YTD) while the Nasdaq100 gained 2,0% (24,2% YTD). The US small cap index gained 0,5% (11,9% YTD). DIA (SPDR DJIA TRUST) gained 1,7% (15,1%, Z-score 2,1). Sector wise, Industrials, Energy and Banks were the strongest last week with the top spot taken by XSD (SPDR S&P SEMICONDUCTOR ETF) which rallied 4,2% (41,7%) in a Pavlovian response to easing trade tensions. BOE Volatility Index sold off by -16,1% (-41,0% YTD) to 15, leaving behind the risk scare of the summer, supported by some easing trade war rhetoric, HK and Brexit fears as much as continued expectations for more easing by Central banks later this coming week and month. The Eurostoxx50 gained 1,9% (18,8%), matching the S&P500. Diversified EM equities (VWO) rallied 2,8% (8,4%, Z-score 2,2), outperforming the S&P500 by 1,0%. Within the EM space, China did best, supported by short covering and some additional easing by the PBOC on Friday which cut the reserve requirement by -0.5% in advance of the expected ECB and Fed rate cuts expected over the next two weeks. CSI300 Chinese equity index (ASHR) rallied 4,2% (29,5%, Z-score 2,2), supported by China’s factory activity unexpectedly expanding in August as production edged up. Activity in the Services sector also expanded at the fastest pace in three months in August, causing the biggest hiring in one year. Not everything was rosy as bonds in China’s most indebted property firm, Evergrande Group (sitting on USD113.7bn debt) continued to tumble after profits declined 45% in H1. This may have been the reason behind PBOC’s decision on Friday to cut reserve requirements, releasing USD126bn additional liquidity, more than the two previous RRR cuts enacted in January and May. Both the US President and China’s XI realized the importance of saying they are talking to each other for financial markets stability and that is what they did as well. Indian shares (EPI) gained 0,3% (-6,4%). Russian shares (RSX) rallied 4,4% (23,0%). The Dollar DXY Index (UUP) was flat over the past week (5,2% YTD) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) recovered 0,8% (-0,4%). Last week, USDBRL dropped -2,0% (4,7%); USDRUB dropped -1,4% (-5,2%); USDMXN dropped -2,6% (-0,6%); USDZAR sold off by -2,6% (3,2%, Z-score -2,2). In Britain, the parliament voted on Wednesday to prevent Prime Minister B. Johnson from taking Britain out of the European Union without a deal while rejecting the next day his call for snap elections two weeks before the scheduled exit (October 31st). The most likely scenario is now a vote to let him go and ask the EU for a three months extension. This also gave some respite to GBP last week. Bond investors received a wakeup call on Thursday as to what can happen to 10, 30 or even 100 years core government bonds when yields rose 14bps intraday, suffering their biggest one-day spike in a decade prior to recover half those losses on lingering easing expectations. For the week, 10Y US Treasuries yields rose +6bps (-112bps) to 1,56%, similarly to 10Y Bunds which climbed +6bps (-88bps) to -0,64%. However, 10Y Italian BTPs rallied -12bps (-187bps) to 0,88%, out-performing Bunds and catching up on the race to the seemingly floorless bottom on interest rates. US High Yield (HY) Average Spread over Treasuries dropped -8bps (-141bps) to 3,85%. US Investment Grade Average OAS dropped -1bps (-40bps) to 1,32%. EUR 5Y Senior Financial Spread dropped -4bps (-53bps) to 0,57% while EUR 5Y Subordinated Financial Spread dropped -12bps (-101bps) to 1,23%. Gold dropped -0,9% on the week (17,5%) while Silver dropped -1,1% (17,3%), erasing the spike of the early part of the week in high volumes on Thursday and Friday which played a salutary role in cleansing some of overextended near-term bullish sentiment. Major Gold Mines (GDX) dropped -4,0% (35,0%). Bitcoin (held by defiant and bolder youngsters perhaps) still managed to rally 7,6% (181,9%). Goldman Sachs Commodity Index gained 0,2% (6,8%). WTI Crude dropped -0,3% (24,5%). CPER gained 2,0%, erasing its losses for the year (-0,1%).

Below is free preview of our tactical FX model overlay positioning and key market snapshot from last Friday.

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