Old ghosts (Halloween approaches)

With no US official data (the US shutdown continues), markets navigate through political (US-China trade war noise) and micro newsflow as the Q3 earnings season kicks off. The start of the week saw risk assets retrace part of last Friday's sell-off, boosted by some signs of US-China negotiations and strong earnings from the AI sector (ASML, TSMC) and from the US big banks. But the mood turned risk-off on Thursday, with bad news from US regional banks reviving global credit fears and triggering spillovers into both Asia and Europe this morning.Wtd, European equity indices are flat, with today’s move erasing gains from the start of the week. Equity volatility has sharply increased (VIX @28 +7pts wtd, V2X @ 24), credit spreads are back to last Friday levels (iTraxx XOver @281bps), while bonds rally significantly in a traditional flight to quality move and are breaking key levels in the US. Gold shines more than ever with a stunning +8% wtd and is now above $4,330/oz!With high valuations, heavy positioning, and almost no realized volatility over the past few weeks, equities were clearly vulnerable to negative newsflow. Now, if last week's US-China trade tensions were the “surprise” catalyst (a tail risk that almost evaporated), this week is more macro/micro-driven, with fears of some credit cracks in the US economy. With increasing macro/recession risk, bonds regain some hedging power, and rate cut expectations are boosted (-56bps for Dec 26 for the Fed). If our macro call is correct, this sell-off episode could turn into a buying opportunity.