Deutsche Bank: "The Probability Of A Negative Shock Is High"

Tyler Durden's picture

For the second week in a row, Deutsche Bank's strategist Parag Thatte has a somewhat conflicted message for the bank's clients: on one hand, he writes that positive economic surprises continue "but are getting less so", and although the divergence between hard data surprises and sentiment is diminishing the bank is somewhat confident that a "pullback in the very near term is unlikely" (here DB disagrees with Goldman Sachs). However, Thatte is increasingly hedging, and notes that because a "rally without a 3-5% sell-off that is typical every 2-3 months is now running over 4 months and is in the top 10% of such rallies by duration", he cautions that "the probability of seeing a negative shock is high" especially since Q1 buyback blackout period has begun.

Here are the key observations from the Deutsche Bank strategist:

  • The equity market rally has been going uninterrupted for a long time, driven by the unusual resurgence of positive data surprises. Strong data surprises drove equity inflows and fund positioning, adding to the steady support from buybacks. An expectation that positive data surprises were likely to persist underpinned DB's call 2 weeks ago that a pullback was unlikely in the very near term. The bank takes stock of the current situation below:
  • Duration of rally now in top 10%. The rally without a 3-5% sell-off that is typical every 2-3 months is now running over 4 months and is in the top 10% of such rallies by duration.

  • Data surprises positive but getting less so. While incoming data in the last week has continued to surprise to the upside relative to consensus, it has done so at a more modest rate and DB's data surprises index, the MAPI, is now declining off its highs.

  • Divergence between sentiment and hard data surprises diminishing. Attention has focused on the divergence between sentiment data which has run up strongly and hard data which has so far lagged. In terms of surprises, i.e., relative to what’s priced into consensus forecasts, hard data surprises have fallen back to neutral over the last two weeks, while sentiment surprises have declined this week but remain elevated. The surge in sentiment data is getting built into consensus forecasts and sentiment surprises also moving down to neutral over the next 3-4 weeks.

  • Fund positioning already trimmed in line with neutral hard data surprises. US funds have already been trimming equity exposure for the last three weeks in line with the decline in hard data surprises suggesting funds may already be anticipating a modest slowdown in overall data. Real money equity mutual funds are already close to neutral but asset allocation funds and long-short equity hedge funds are still overweight. Macro hedge funds are exposed to short rates positions in our view, not long equities.

  • Inflows accelerate. The pace of US equity fund inflows has accelerated over the last 4 weeks ($36bn). However flows have been closely tied to overall data surprises and could start to moderate in turn.

  • Buyback blackout period has begun. Heading into the Q1 earnings season, the pace of buybacks will slow as an increasing number of companies enter earnings blackout periods starting this week.

* * *

DB's summary take on near-term equity moves:

Continued muddle through most likely in the near term. The fundamental drivers as well as demand-supply considerations for equities point to a continued muddle through in the near term. However history suggests that with the duration of the rally already in the top 10% by duration, the probability of seeing a negative shock is high. But the medium term outlook remains robust with the unfolding growth rebound having plenty of legs while from a demand-supply point of view flow under-allocations to US equities and robust buybacks remain very supportive.

* * *

Away from equities, the picture in rates, commodities and currencies based on trader flows is as follows:

  • Oil falls but still expensive and long positioning still elevated. Following the November OPEC supply-cut announcement oil prices became very expensive on our medium term valuation framework for oil and commodities based on the trade-weighted dollar and global growth (Trading The Commodity Underperformance Cycle, Apr 2013). The decline in oil prices over the last two weeks has trimmed the extent of overvaluation but leaves oil prices slightly above the upper-end of the historical 30% overvaluation band which has marked extremes (currently $48). Net long positions are off of recent record highs but remain quite elevated.
  • Extreme short positions remain an overhang for rates moving up. Bond yields fell sharply after the rate hike this week much like they did after the December one. While real money bond funds remained close to neutral going into the FOMC this week, leveraged funds shorts in bond futures remained near extreme highs. Outside of HY funds which saw a large outflow as oil prices fell this week, bond funds have continued to receive robust inflows. Indeed duration sensitive funds have this year completely recouped all of the outflows seen in the aftermath of the elections.
  • Gold valuations stretched again. Gold prices have rallied on the back of a return of inflows into gold funds this year reversing the modest outflows in Q4. Massive cumulative inflows since early 2016 ($40bn) remain an overhang. Gold longs had been declining heading into the FOMC meeting. Gold prices have again disconnected sharply to the upside from the historical drivers of the dollar and the 10y yield as well as global growth. Copper long positions continued to slide for a 6th straight week.

  • Shorts in the Mexican peso, the best performing currency this year, have collapsed to neutral. Mexican peso shorts fell sharply last week to the lowest levels in over 15 months as gross shorts fell sharply while longs also rose. Aggregate long dollar positions had been rising going into the FOMC meeting reflecting rising shorts in the yen and sterling even as euro shorts were pared.

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LetThemEatRand's picture

BTFNS (buy the fucking negative shock) doesn't have the same ring to it.

XqWretch's picture

Stock Market has officialy taken over Nike's slogan: Just do It

John Law Lives's picture

You are a worthless spammer on this forum.  Take your spam and F.O.


Stuck on Zero's picture

I don't see anything wrong with that chart. It's very encouraging. Within fifty years we should have close to a thousand lifetimes of up markets without a single down day.  Then we'll all be rich.

By the way, that curve has the same shape as the pounds of yummy food they feed pigs before Easter.

John Law Lives's picture

I wasn't responding to the author of the article.  I was responding to the resident spammer, xythras.

1.21 jigawatts's picture

The probability of Goyim blood being sacrificed at the altar of Moloch is also high, Goyim.

Dragon HAwk's picture

They just hate when the Big Boys, get their Timing Wrong..

Ban KKiller's picture

So the dipshit can read a chart, big deal. Wonder what cunt boy is selling and to whom? The whom.....suckers! Deutsche Bank attorneys are idiots, by the way. 

Herdee's picture

So does that mean that the traders on the Fed's trading desk are running out of margin?

Dr. Engali's picture

"The equity market rally has been going uninterrupted for a long time, driven by the unusual resurgence of positive data surprises."

The policy tool known as the equity market rally has been going uninterrupted for a long time, driven by printing and bullshit data.

There, fixed that for ya.

Edit: With 50 trillion in derivatives, how is this bank still standing?

Grandad Grumps's picture

Past performance is not a guarantee of future events.

besnook's picture

my feeling is the sell off begins tomorrow nd accelerates into first quarter earnings for a 20-30% correction over the summer.

DoctOZ's picture

I hope you are right. I seriously do. But it seems like everyone on here has been saying that exact same thing for the past several years. 


I mean at what time do you all give up. Personally I am waiting for all of the perma bears on here to capitulate and then I will go bearish. I mean the Dow has tripled. I am glad I did not listen to you folks on here. 

hedgesofnight's picture

These people are complete morons on here. If they had a clue of what they were doing it would be scary. I doubt that any of the idiots like him even have any money. 

besnook's picture

thjis is what makes you a 3 weeker. zh has been right on the money since 2009. it has been BTFD since then. something has changed. the fed is taking the punchbowl away for the first time in 8 years. a lot of you are already too young to know what went down in 2008-9 and a lot fewer of you know what happened during the internet bubble.

zh has not been wrong. it has only pointed out a lot of wtf events and anomalys that say this is going to be a spectacular explosion when it explodes. only god can time it.

MrNoItAll's picture

How many people rode the major stock market bubbles of the past all the way to the top, talking just like you, only to lose it all when the market crashed?  Answer: A lot.  A large majority of those who had money in the market.  That's historical fact.  Very few managed to get out "just in time".  If you were a student of history and were paying attention, you'd realize how stupid you sound.

Stormtrooper's picture


assistedliving's picture

Yeah.  Negative Shock caused by DB derivative book.

thank you very much


Yen Cross's picture

  That's "RICH" coming from Douche Bank,  > progenitor of derivatives<

DoctOZ's picture

A lot of people here are like broken records. They have been saying that now the markets are ready to go down. If you all have had money on the line this whole time then I honestly can't see how you are still able to even feed your families.


You know about a year ago I saw some of you talking about Shepwave.  Well, all I know is that they do call the market direction. END OF STORY!  Morons. 


They are aways showing old but fairly recent trades on their blog  so, I will stick with the analysts who are getting the markets right. It is really that simple. 

MexInvest's picture

Stick with what works and is proven. None of the calls on here have been worth a crap that is for sure. Just more hoping and wishing that they get it right at some time. SW analysts have a solid record going back for many years. 

overbet's picture

Shepwave my nuts. If your edge works there is no need to sell it. This place is getting close to 50/50 real post vs spammers.

divingengineer's picture

If you were old enough to have some pubes, you'd remember 2008 when every sub-genius like yourself had it all figured out until they didn't.
There is no liquidity when the wheels come off, NOBODY is buying on the way down.
You and your falling knife are fucked until it hits the floor.
Now go off and play, the adults are talking.

MrNoItAll's picture

The problem with the internet is that dumbasses get equal time and exposure.

DarthVaderMentor's picture

This is the understatement of the decade!

Leszek's picture

Circumstances are different. All biggest central banks are creating money on massive scale. And US has collosal, fast rising debt.


If you have access to free money, stock prices are never to high. Cash generates no income, and stocks offer dividend (and higher prices eventually).


And if your debtor (USA) lost ability to pay debts, you (China for example) are trying to change debt for something of value, like stocks for example. Safety is more important than price.


These two facts create fuel for rising stocks.


All technical or fundamental analysis of stocks prices has no value whatsoever. It's nonsense pushing people to bad investment dicisions. Rising rates will kill stocks rally. Unless huge debt will still be rising fast. Real present inflation - government is hiding its existense, and fear of future inflation, are helping to maintain bull market.


It's simle as that.