It appears that it was more than just the "severe snowstorm" that spooked stocks yesterday (and certainly today). As Nomura's Charlie McElligott writes this morning, a perfect storm (if not of the snow variety) converged and risk-off catalysts abound as "Growth-Scare" murmurs gain further steam, driving not only the Dow Jones nearly 500 points lower, but also a robust UST bull-flattening as duration is grabbed and as Spooz break-below their 100dma. The Dow has broken below the Fib 38.2% retracement, tested and failed to break its triangle from the February crash, and is at its lowest in almost 6 weeks. The Dow is down 450 points, breaking to the downside of the "triangle formation"...
While the S&P 500 has broken back below its 100DMA...
# So what's causing this? Here are the details from McElligott:
- Trump / China tariff-hype ‘realizes,’ trade wars” meme ensues
- PBoC decision to piggyback the Fed’s hike with their own +5bps reverse repo borrowing-rate increase adds to Asia-ex Japan sentiment swoon
- An idiosyncratic placing of mega-long momentum name Tencent Holdings which saw the stock close -5% and dragged-down HSI (a 9.9% weighting) and will negatively impact EEM (largest holding at 5.9%)
- While Fed and PBoC hike, the data continues to soften as “growth slowdown” fears mount: Japan PMI miss; French Composite PMIs dropped to a seven-month low; German Composite PMIs missed for the second consecutive month while all three IFO measures of German sentiment fell for March as well; EZ Composite PMIs grew at the slowest pace in 14 months with misses in Manu and Service
- Then there was the just announced resignation of Trump's head Mueller-probe lawyer, John Down, which has reignited Trump impeachment jitters, and suggests that the president is becoming increasingly nervous what Mueller can and will do next.
# Turning back to Fed, the Nomura derivatives guru reiterates his belief that there was a “high bar” for the market to interpret this meeting as a “hawkish hike” was spot-on.
- Powell then actually delivered a de facto “dovish” message, as the optically “hawkish” ’19 / ’20 dots and terminal rate views were based off of “unprecedented at best” economic projections from the Fed, which Powell himself downplayed as low-confidence forecasts with negligible “predictive” power
- Equities instead focused on the near-term “tangibles”: by communicating “3 dots only” in ’18; by focusing on a willingness to “overshoot on inflation”; by not committing to press conferences at every meeting; by talking-down the neutral-rate etc, equities instead heard a “dovish pivot” from the HH version of Powell and didn’t get that “growth confirmation” I believe that many were actually looking-for
- Remember, equities bulls have remained of the view that we can handle higher interest rates if “growth” is driving a higher “neutral rate” in conjunction, so in that sense, his lack of “growth conviction” was interpreted as a disappointment
- However what the equities audience DID hear was a very pro-cyclical / pro-inflation “dovish” message which helped facilitate the extension of the rally in crude and S&P sector leadership from Energy, Materials, Industrials and Financials
- This move in “Deep-Value Cyclicals”, in conjunction with the idiosyncratic Tech sector negative drivers which are being exacerbated by asymmetrically ‘crowded’ positioning, created a number of outlier “factor” moves below the index-level.
# Putting it all together, this fits with the long-term view McElligott has been espousing: a medium-term (3-6m) “cyclical melt-up” as inflation “realizes” (higher commods and breakevens while “Value” outperforms “Growth”) before ultimately forcing the Fed to “tighten” at a pace which exceeds market expectations, driving higher UST term premium and “spilling-over” into higher cross-asset vol / lower risk-assets / wider spreads by end of year.
Additionally, some observations on the short-end/funding markets, where tactically-speaking, the “short-squeeze” potential remains a focal-point going-forward, as hawkish Fed expectations were not met, which in conjunction with the scale of the short-positioning and ongoing “softening” in global data COULD set the table for bull-steepening.
Furthermore, today’s “disappointing” LIBOR set (was pricing 1.6 yday, fixed today at 1.45--below mkt expectations) may further add to this “squeeze” pressure, especially as recent foreign buying “could embolden” further purchases in the front-end, as well as “lead to the re-emergence of domestic real money buying”
Today we see this acceleration of the rates rally getting folks pretty nervous, along with the USD rallying back near flat, in turn pressuring / reversing some of yday’s gains in corresponding “short USD” trades. The good news is that EU and Japan equities longs have been very reduced; the SPX / NDX exposure however remains very high within the macro universe, albeit hedged.
Tactically within equities, the rally in fixed-income should continue the equities ‘pain-trade’ that is the MTD rally in ‘duration-sensitives’, while ‘growth’ feels tired and crowded right now.
With mega-underweights Energy (best two-month seasonality since ’94 = March and April) and Utilities leading S&P performance against Tech’s fade, this has been a rough two-week stretch for equities funds, especially heading into the April “momentum unwind” seasonality.
Finally, some troubling observations on April seasonals from McElligott, who notes the April performance of ‘momentum’ when it comes into the seasonality with top decile of performance (currently we sit at this +14% band)...
As both longs and shorts get hit hard...