After a stellar quarter for US equities, stocks have unexpectedly slumped on the first day of Q2 despite "whispers" of pent upmutual fund reallocation into risk assets that would take place today. So why are stocks lower, besides "more sellers than buyers" and "money going back to the sidelines" of course? For a comprehensive assessment of what is going on below the surface, here is RBC's Charlie McElligott (who as a reminder warned on Friday about the Double Whammy in the April Effect) looking today's rates reversal, the shift to "anti-beta" leadership and the "momentum factor" reversal, all of which explain the bad start to the second quarter.
# RATES REVERSAL, 'ANTI-BETA' LEADERSHIP AND 'MOMENTUM FACTOR' REVERSAL WITHIN EQUITIES NOT GOOD START TO Q2
- Kind of the start to Q2 that I was exactly highlighting in Friday’s note, i.e. rates reversing fueled by softening ‘soft’ data vs ‘prices paid’ overshoot, helping to ‘kick off’ a reversal within equities ‘momentum’ longs as ‘growth’ names fading,’defensives’ lead and ‘reflation’ is again hammered.
- Early focus on the big ‘Prices Paid’ beat in today’s ISM (highest absolute, since ’11), with S&P futures at lows on the session following the release indicating ‘bad inflation’ concerns when weighed against signs of ‘slowing growth’ (Street Q1 GDP downgrades, Atlanta Fed GDPNow downticking, Markit comments on Q2 post Manu PMI release) and weakening ‘soft data.’ This harkens back to the post Dec Fed concerns around ‘stagflation’ potentials and / or ‘hiking faster than we’re growing’ fears, Fed “policy error.”
- Firmer USD (“policy divergence” and start of new Japan fiscal year highlighted below) is meagerly attempting to keep US rates from breaking dangerously lower (recent move lower fueled by the leveraged fund short-squeeze in USTs turning now to interest in establishing LONGS), but this week’s heavy econ calendar will also have fundamental impacts...
- Today’s US data update is showing us that the much-focused-upon ‘hard vs soft’ data dynamic is showing signs of a ‘true-up,’ with the scale of ‘soft’ data survey beats reverting modestly lower (also see the ‘forward looking’ quote below from Markit’s Chief Business Economist“, the loss of momentum seen in February and March bodes ill for the second quarter”).
- As per Friday’s note, on watch for signs of April’s ‘momentum reversal’ in equities, which would have large negative impact on buy-side performance as per the heavy overweight in ‘growth’ and the factor crowding in ‘market’, long books are very ‘high beta’ right now.
# RIGHT NOW, WE SEE ‘MOMENTUM’ MARKET-NEUTRAL DRAGGING LOWER.
- Current glimpse at session-performance shows us leadership from ‘defensives’ / ‘low volatility’ / ‘anti-beta’ which certainly isn’t helpful for the buy-side majority. Initially the ‘new safe haven’ of ‘growth’ held, although as Tech slips further back on the S&P sector performance tables, we see ‘momentum’ fading as well. Bringing up the rear we see ‘cyclicals’ / ‘value’ getting properly hammered as the aforementioned ‘duration sensitive’ sectors rally, as ‘reflation’ takes another hit.
- To see ‘anti-beta’ outperform against a buy-side universe so ‘long beta’ (‘market’) isn’t a ‘feel good’ indicator for the start of Q2…especially with ‘reflation’ / ‘value’ dragging lower as well and most-notably performance bell-weather ‘momentum’ fading too...