Last week was all about Monday’s oil price spike which was halved by the end of the week and more importantly perhaps about the clogging of US money markets plumbing. Last Friday, Simon Potter, the former head of the NY Fed's open markets desk for many years opined that the measures taken last week (with rolling overnight repos) won’t suffice and that fresh debt purchases will be needed in line with the prediction of J. Powell during the post FOMC press conference on Wednesday. Rather than renewing these repos every day (currently $75 billion), the Fed could restart QE and that is what might happen in November, if not earlier. In the meantime, last week’s melodrama on the Fed losing control of money markets for a few days will have established the point that resuming QE is a technical necessity going beyond the need to cave in to Trump’s pressure and desire to “let go” on the fiscal side without sufficient foreign demand for US Treasuries and as US banks’ balance sheet is already bloated with Treasuries. Goldman predicted in a weekend note that 15bn/month rate of permanent purchases to increase the size of the balance sheet by $150bn is in the pipeline to restore the reserve buffer and eliminate the current need for rolling o/n repos. It is interesting to note that last week’s repo’s (which have been rolled for several days) correspond to an unwind of 10% of the QT (or balance sheet unwind) enacted by the Federal Reserve since 2014. The ECB may have restarted its asset purchase program officially but the Fed has de facto already started doing the same. Over the past week, the S&P500 dropped -0,9% (19,4% YTD) while the Nasdaq100 also dropped -0,9% (23,7% YTD). The US small cap index dropped -1,2% (16,1% YTD). CBOE Volatility Index climbed 11,5% (-39,7% YTD) to 15,32. NFLX sold off by -8,0% (1,2%, Z-score -6,8). Stock markets (but not only) closed on the soft side after the quadruple witching last week torn between the IPO debacle of “We work” (which triggered comments from Fed's Rosengren on financial risks), the associated hard selloff in “We work” bonds) and the announcement that a planned China trip to Arkansas had been cancelled. The Eurostoxx50 gained 0,7% (21,5%), outperforming the S&P500 by 1,6%, initially supported by expectations of fiscal stimulation in Germany on which A. Merkel threw a bucket of cold water on Friday, saying Germany will stick to a zero deficit. Diversified EM equities (VWO) dropped -1,6% (8,9%), underperforming the S&P500 by-0,7%. Indian shares (EPI) continued to recover, adding 0,7% (-3,2%, Z-score 2,7) in contrast with Chinese shares which corrected on the week as ASHR (XTRACKERS HARVEST CSI 300 CH) sold off by -3,9% (26,5%). The Dollar DXY Index (UUP) gained 0,4% (5,4%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) also dropped -0,4% (YTD 0,0%) with USDCNY gaining 0,2% (3,1%) and USDZAR rallying 2,4% (4,1%). The dollar closed higher last week, supported by the clogging problems in US money markets (without sufficient liquidity around, the last resort is to buy USD in the FX). The difference between the general collateral repo and Fed funds normalized on Friday, both standing at 1.90% but the current 2-week repos remained above 2.5%, a few days before quarter end which may continue to bite the leveraged community. As we suggested last Friday, the Fed will likely bring a more long-term fix by resuming QE, so that this dollar supporting move might fade away. Still and for now, the time may have come to retrench a little on risk assets and currencies (sufficiently not to want to stick with short bets on safe haven currencies) with selective exceptions. EUR received no love on Friday from German Chancellor A. Merkel saying that Germany remains committed to running no deficit. 10Y US Treasuries rallied -17bps (-96bps) to 1,72%. 10Y Bunds dropped -7bps (-76bps) to -0,52%. 10Y Italian BTPs climbed 4bps (-182bps) to 0,92%, underperforming Bunds by 5bps. US High Yield (HY) Average Spread over Treasuries dropped -2bps (-167bps) to 3,59%. US Investment Grade Average OAS dropped -1bps (-45bps) to 1,27%. In European credit markets, EUR 5Y Senior Financial Spread climbed 8bps (-47bps) to 0,63%. Gold rallied 1,9% (18,3%) while silver rallied 3,1% (16,1%) with gains concentrated on Friday amidst a “risk off” session. Major Gold Mines (GDX) ripped higher, adding 7,7% (36,0%). Goldman Sachs Commodity Index rallied 3,3% (10,3%) in a move that starts to be noticeable while WTI Crude rallied 5,9% (27,9%), shedding by half Monday’s rally consecutive to last Saturday’s attack on Saudi oil production which temporarily halved the country’s production. Over the week end… Labour party leader Corby said that if elected in a new election, he would ask for a new referendum on Brexit…without saying how he would vote (in an effort to catch the votes of all those now reconsidering Brexit while preserving the part of his base that also wants to leave). The choice would then be for the UK people to vote for the best solution between Remaining with Corbyn or Leaving…without him…until la better solution is found. Secretary of State Mike Pompeo continued on Sunday to accuse Iran of committing a "state-on-state act of war," saying the Trump administration has irrefutable evidence that shows an attack last week on oil facilities in Saudi Arabia was organized and directed by Iran. On Friday, Mr. Trump ordered the Pentagon to deploy additional troops, as well as missile systems, to Saudi Arabia and the United Arab Emirates. The administration said the move was in response to the oil plant attacks, and the Pentagon called it "defensive in nature." In the meantime, Iran vowed major a war even if the US conducts “limited strikes”. Trump’s strategy is not to engage war with Iran… 

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