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Three themes under the surface

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Under the surface the past week has been choppy, but there has been continued focus on three things. Two are interlinked, namely trade and monetary policy, but first we consider technology.

Antitrust scrutiny rattled Big Tech on Monday. Regulators split up oversight in apparent preparation for probes into whether firms' practices harm competition.

The Federal Trade Commission will look at Facebook and Amazon and the DOJ – the Department of Justice – will examine Google. The Justice Department will also oversee Apple, as Reuters reported.

Google parent Alphabet fell to a five-month low and Facebook plummeted 7.5%, the most since July. Amazon and Apple also fell.

But before we get too bearish on tech let’s remember this: talk of antitrust is suddenly fashionable, but efforts by the government to break up companies have been rare, time consuming and not always successful.

The government case against IBM went on for 13 years before being dropped. The pursuit of AT&T lasted a decade until the company was broken into the seven Baby Bells. The government chased Microsoft for 12 years, from the first FTC investigation.

One reason for the slow pace is that if you are big enough to be drawing antitrust heat, you’re big enough to have a lot of lobbyists, lawyers and employees in congressional districts all around the country.

So we do not think this is the end of Tech, but we do think that the risk premium in the stocks will remain elevated for now.

So we had a scary Monday.

However on Tuesday everything turned around with a more than 2% gain in the S&P 500 Index, driven by what was seen as a hint by Fed Chair Jerome Powell that the central bank may be moving in the direction of a rate cut.

We think this is warranted since we expect global industrial production momentum to soften again in the third quarter after a short lived bounce in the first two quarters of this year. And, as we said last week, prolonged uncertainty on trade could see momentum fall back to zero by October unless we get a trade truce before then. This is what we mean by the linkage between trade and monetary policy.

As our favourite Fed watcher Tim Duy noted in his blog, the Fed has little choice but to bail out President Trump should his trade policies threaten the economy.

With that in mind, we believe that the less the market believes in a trade truce, the more it will believe in stronger reflation from both the Fed and China. This we think is the main reason that gold has rallied so strongly, up 2% this week.