donderdag 1 juni 2017

RBC: "The Entire World Is Long Tech, Short Energy, And Now It Gets Interesting"

With stocks suddenly looking quite shaky after today's various data misses and bank revenue warning, here is a timely warning from RBC's head of cross asset strategy, Charlie McElligott, who warns that the "best is behind us" theme remains intact with data, both ‘hard’ and ‘soft’–kind fading from highs, driving curves flatter, and with the same ‘stalling’ is playing-out globally as well, some of the most concentrated trades are suddenly at risk. But with volatility perhaps set to make a return, the RBC analysts has some good news: "here is where it gets interesting", and presents some ways to trade what the inevitable unwind of the trade where the "entire world is long tech, short energy." From RBC's Charlie McElligott;
# HOW WE GOT HERE / WHERE WE'RE GOING; The status-quo is AGAIN being perpetuated week-to-date (USTs bid / curves bull-flattening, $/Y dipping potentially on account of the massive and painful ‘PBoC engineered squeeze’ in Chinese Yuan shorts, crude fading, ‘Growth’ and ‘Defensives’ leading within equities while ‘Value’ / cyclicals and ‘Size’ / small caps are clubbed, all while S&P remains unbreakable due to ‘goldilocks’ easy conditions with lower rates and USD). But stick with me here, because we are nearing a potential ‘acceleration’ / melt-up of the current trade (pushing Mark Orsley’s TYN 127/128 Call Spread to protect against a move to 2.0% in the 10Y) into what could set us up for a reversal ultimately thereafter, one that could finally see capitulation in rates drive a tactical reversal opportunity, where ‘value’ equities would likely outperform ‘growth’ and ‘anti-beta,’ as rates then would have ‘runway’ to again grind higher into underpriced Fed.
*) HOW WE GOT HERE:
- Fading ‘inflation expectations’ pulling nominal rates lower (today’s Euro Area ‘flash’ HICP inflation showing weaker core inflation )...


- ‘Best is behind us’ theme remains intact with data, with both us ‘hard’ and ‘soft’, kind fading from highs, driving curves flatter. The same ‘stalling’ is playing-out globally as well. US DATA FADE... 


GLOBAL ‘BEST BEHIND US’...


- Slowing economic trajectory into a “tighter” global regime: Fed staying ‘on message’ with regards to hiking / tapering path, Chinese deleveraging efforts (impact specifically charted below) and ECB pivoting ‘less dovish’ Is creating ‘policy error’ concerns...


- Inability for rates to move higher / curves to steepen sees ‘Cyclicals’ / ‘Value’ stocks (Energy and Financials) continuing to be punished relative to the ongoing ‘risk barbell’ equities leadership of ‘Growth’ (‘secular’ stories not dependent upon accelerating economic backdrop) and ‘Defensives / Bond-Proxies’ (‘low volatility and benefit from the move lower in rates...

*‘VALUE : GROWTH’ RATIO CONTINUES TO EVIDENCE INVESTOR PREFERENCE FOR ‘SECULAR’ STORIES OVER ‘CYCLICALS,’ FADING ALONGSIDE UST 2s10s CURVE AND 5Y INFLATION BREAKEVENS...


*‘VALUE : GROWTH’ RATIO SYMPTOMATIC OF THE ‘PERPETUALLY EASY’ FED POLICY...


# HERE IS WHERE IT GETS INTERESTING. I’ve been speaking about the numerous signs of stress / big multi-manager book ‘blowouts’ from such ‘value’ sectors as ‘Energy’ and ‘Financials’ for a while now, which is occurring in conjunction with major pain in ‘mean-reversion’ strategies (looking to capture the spread of the ‘overshoot’ in, for example, Q1 laggards vs Q1 leaders) and general ‘equity market neutral’ strategy performance of late, while “Growth” sectors like ‘Tech’ and ‘Consumer Discretionary’ continue running wild...


It is my view that there has been a significant amount of quant funds playing this “growth” / “value” mean-reversion QTD…nibbling in Energy and Fins (which again yday were the two worst performing sectors in the S&P), say against shorts in Tech and Cons Disc (two of top four S&P sectors yday). And as per the performance dynamics within each, they’re upside down on both the long- and short- legs...


*Q1 / Q2 ‘MEAN REVERSION’ STRATEGY TURNING SLOPPY DUE TO GRINDING MOVE LOWER IN RATES, AS ‘VALUE’ AND ‘SIZE’ CONTINUE TO FADE AGAINST ONGOING ‘GROWTH’ AND ‘ANTI-BETA’ U.S. EQUITIES LEADERSHIP, NEARING THE INFLECTION...


But everybody in the equities-universe it seems is aware of this dynamic, and fundamental folks are increasingly nervous about the potential for a reversal in mega ‘pain trade’ style, because it seems the entire world is ‘LONG TECH AGAINST SHORT ENERGY’, people are ready to pounce on this trade. The trick is that this performance dynamic likely only reverses via HIGHER NOMINAL RATES, but as per the earlier-mention, rates are only going LOWER right now, as ‘real money’ has missed the move (aren’t long enough) while the leveraged community still remains biased ‘short’ (and are thus being squeezed). In both cases, this means ‘buyers are higher’ in USTs (overseas real money is ready to CHOMP if we break through 2.17 / 2.18 level, which could see the next move down to 2.00 level). In addition to these ‘flow’ / performance-dynamics, Mark Orsley sent a quick note late Friday afternoon highlighting this potential for a further rates breakdown on account of the technical picture (bullish inverse head-and-shoulders in TYU7), as well as analogs showing the trend of lower rates following Fed hikes, as such, Mark advocated a smart TYN 127/128 Call Spread to protect against a move to 2.0% in the 10Y that gives you nice payout leverage and will capture the ‘compressed vol’ reality with solid call skew.
A move to 2.0% would break us down to the low-end of my thematic multi-month ‘macro range trade,’ and would almost certainly drive capitulatory flows from the last of the leveraged fund ‘rate shorts’ to holdout longs in equities cyclicals. At this point though, a full rates capitulation is likely where you want to begin legging into some tactical opportunities to reverse the trade (buy certain thematic components of ‘reflation’), as the market continues to underprice US monetary policy. This could then send crowded ‘secular growth’ sectors LOWER (source of funds) as underweights in ‘value’ likely then squeeze higher. Again though, there is a ‘sequencing’ dynamic here, as this is only going to occur with a reversal HIGHER in rates, which requires the full breakdown LOWER first....