As if trying to figure out the impact of the central banks' balance sheets and China's record debt creation on stocks wasn't enough of a complexity (actually it really isn't that complex) for a market where fundamentals haven't mattered in 5 years, there is also the issue of ETF basket creation, best known for the daily 3:30 pm ramp when ETFs catch up with their underlying components in a rising market, giving it all a procyclical turbo boost.
It is here that SocGen reports that in the past fortnight, there was record equity ETF creation, mostly focusing on the S&P 500. To wit:
In the last two weeks, ETFs listed in Europe posted record fortnight net share creations year-to-date, reaching $5.2bn, i.e. twice as high as the YtD fortnightly average. This boost was primarily driven by record creations on equity ETFs ($3.5bn vs $1.3bn on average YtD) while fixed income and commodity indexations held up well, above YtD averages ($1.3bn share creations on fixed income ETFs and $350m on commodity ETFs).
Primary market: signals from ETF creations & redemptions
Equity ETFs: record creations were mainly driven by US equity indexations which claimed $1.7bn net creations on the period. One ETF in particular, Vanguard S&P 500 UCITS ETF (VUSA LN), gathered nearly $1.1bn over the period which was not the result of an isolated asset allocation decision. In addition, iShares S&P 500 UCITS ETF (CSSPX LN) showed strong creations, partially driven by switches out of another iShares ETF providing the same exposure but suffering from higher management fees (IUSA LN). The other ETFs in the category contributed positively to total creations, signalling broad demand for US equity indices. Actually US equities look expensive in terms of P/BV ratios. However, in the context of an accelerating US economy as expected by our macroeconomists, there may be reasons to remain confident in US equities as long as there are no sharp US rate hike or external shocks. In the eurozone, most regional and all country ETFs recorded net creations on the period, in contrast to UK and Swiss ETFs. Our equity strategists have been bullish eurozone equities for a number of reasons including structural reforms, reflation policy and the ECB’s accommodative stance.
Secondary market: signals from ETF premiums & discounts
Signals from premiums and discounts broadly match the primary market ones but we noticed some divergences with regards to US equities, which somewhat mitigated the apparent strong investor demand for US equity indexations:
- Lower market price relative to NAV than average on Japanese equities, Small Caps and HY corporate bond ETFs corroborated the redemptions or the modest creations observed on the primary market.
- Similarly, higher-than-average premiums on eurozone equity ETFs were in line with the net creations on the primary market.
- By contrast, US equity ETFs traded at a discount to NAV over the period, contrasting with the strong creations observed on the primary market.
What does it all mean? Simple: every structural element of this market has been geared to continue the "blow off top" mode, in self-fulfilling and recursive momentum "strategy" higher, newsflow and fundamentals be damned, until it no longer works. And with Yellen Capital LLC still seeing no bubble anywhere except in the stocks that have been the best performers since her FOMC appearance, it also means another thing: celebrate the collapse of the US middle class by BTFATH. Because when the music ends, it won't really matter considering that both the Fed and all of its central bank peers are already "all in".