"Pick Your Poison": These Are The Market's Three Negative Narratives

Tyler Durden's picture

Having turned over the past few months from reflationist, to increasingly skeptical of the whole reflation impulse scenario - mostly on the back of China's infamous credit impulse crashing - RBC's Charlie McElligott takes a look at the three "negative narratives" that are gradually emerging for the markets. But before listing them, here is his latest summary of where the increasingly more confused market finds itself:

From "The Battle Of Who Could Care Less" by Charlie McElligott

  • My ‘macro range-trade’ thesis continues to be representative of the lowest-conviction market I’ve seen in a long-time, with ‘risk-sizing’ at VERY muted levels.
  • Sentiment “paper-cuts” are mounting with risky-assets sitting near recent nose-bleed highs, making them ripe for today’s modest draw-down into poor liquidity.
  • Negative client narratives are building largely around this idea that 1) the Fed is tightening (staying ‘on message’ with hawkishness); 2) China is deleveraging (PBoC has ‘room to run’ in light of recent + data overshoot); 3) the ECB is pivoting ‘less dovish’--all while 4) the global economy is mean-reverting ‘slower’ following the outstanding expansion since last Summer.
  • Today’s Macy’s earnings clunker dragging down ‘bricks-and-mortar’ retail / REITS and adding to the laundry-list of consumer- / credit- stories weighing on the psyche (weak SAAR prints, US subprime auto concerns, CA subprime housing, US credit card delinquencies), as we not-so-ironically print six-week lows in today’s US Consumer Comfort Index.
  • Despite WTI Crude’s +6% move off the Tuesday lows, hawkish Fed language, generally ‘better’ US data this morning and a HOT-GARBAGE UST 10Y auction yesterday, nominals remain unable to cleanly-break
  • 2.40 / 2.45 level as domestic buyers offset fast $$$ sellers who’ve been keen to reset shorts.
  • Risk-asset ‘bull case’ still formidable too though, namely (still) expansive PMIs and the best first quarter earnings season in five years—with buyside expectations of ‘fiscal policy’ kickers (taxes, infra) coming late ’17 / 1Q18.
  • As such, 2.15 / .20 in nominal US rates has proven to be the level where you ‘buy reflation’ (long banks-cyclicals-‘value’ equities / long ED$ steepeners or TY shorts); ‘sell reflation’ at 2.40 / .45. 
  • This is then notable today, as despite UST curves being modestly steeper for the first time in awhile / nominal yields at upper-end of recent range, we continue to see US financials act poorly now -1.5% WTD with generalist selling any uptick.
  • US equity ‘value vs growth’ ratio collapsing back to 2015 lows, as last year’s ‘reflation / fiscal stim’ bounce is completely unwound. 
  • Investor preference for ‘secular growers’ with negligible policy- / interest rate- sensitivity relative to last year’s ‘cyclical beta’ high-flyers shows lack of belief in long-term economic growth / higher rate profile, and largely mirrors the recent relentless flattening of UST curves alongisde the sizeable outperformance of ‘quality’ factor market-neutral over ‘size’ m/n of late. 

With that in mind, here is RBC's head of cross-asset stratgy allowing his readers to "pick their poison" from the following meny of negative narratives that are increasingly replacing the bullish outlook:

  1. “The global economy is slowing into a tightening regime,” based-upon the recent global data mean-reversion into Fed / PBoC ‘hawkishness’ and ECB ‘less dovish-ness.’  This is another expression of the “central bank policy-error” theme.
  2. We’re tightening into a disinflationary impulse,” based-upon the Chinese deleveraging-effort impacts on global commodities / ‘inflation expectations.
  3. And now after today’s PPI- and Jobless Claims- (“tight labor market”) data, revisiting an ‘oldie but goodie’—“Stagflation” fears again being noted by clients.




5Y breakevens are widening back to 1.83 for the first time in a week on a triple-whammy of:

  1. the crude bounce (five consecutive crude draws in conjunction with OPEC members strategically engineering the short-squeeze with headline commitments to production cut extensions / enhancements just as net positioning went to LOTY last week per CFTC data),
  2. further lows in US Jobless Claims and most obviously
  3. a big PPI beat, which portends +++ for tomorrow’s CPI print. 

VIX and the logical relationship with labor market tightening (claims):


I spent the majority of last year discussing the drivers of the pivot from ‘deflation to reflation’ and the impact that had on every global macro thematic trade in the world: ‘long vs short duration,’ ‘cyclicals vs defensives,’ ‘EM vs DM,’ ‘high vs low beta’ and of course, ‘value vs growth.’

It’s now become utterly clear to me that easing financial conditions / suppression of rate volatility is what has ‘killed’ equity ‘value’ factor (especially as it relates to ‘growth’).  Look at the relationship below seen between the ‘value / growth’ ratio and the Fed’s “lower / flatter forever” policy.  Last year’s ‘reflation’- / ‘fiscal policy’ –induced interest rate volatility higher provided a period of massive ‘value’ over ‘growth’ outperformance. 

Now, ‘value’ is again massively underperforming ‘growth.’  After late last year's 'value' run (think cyclically geared stuff), the ratio vs ‘growth’ (seculars like tech, cons disc, biotech) is back again collapsing.  There is just so much market skepticism regarding the long term growth outlook, which also happens to mirror the relentless flattening story in UST curves YTD, or the sizeable outperformance of ‘quality’ factor market neutral vs ‘size’ factor m/n.

US equites ‘Growth / Value’ ratio inversely correlated to ‘US Financial Conditions’ since the Fed began easing during the GFC period:

Ironically, it should be noted that today there is speculation of a large ($1B) equities program being executed away, rotating INTO VALUE and out the past year’s ‘momentum’ high-flyers like financials, tech and consumer.

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johngaltfla's picture

I'll take China fucks the markets + US credit implosion for $1000, Alex.

Or a buttload of out of the money SPY puts. 170 should do nicely.

JamesBond's picture

The US has turned into a three ring circus of war, corruption, and debt.



johngaltfla's picture

Aka, "The Apprentice" meets "Mad Max" on free crack.

PrayingMantis's picture

>>> ... "... Negative Narratives ..."

1. "The global economy is slowing into a tightening regime"
2. "We’re tightening into a disinflationary impulse"
3. "Stagflation"

... what, no Russian hacking?



GUS100CORRINA's picture


Government statistics are way understated on costs while other government statistics are way overstated on growth. For example, APPLE earnings have been flat since 2014 and yet the stock goes up.

If it were not for the fact that the American people have been RAPED, PILLAGED and PLUNDERED by OBAMACARE, we would already officially be in a RECESSION!!!

===== Latest Economic Reports from WWW.SHADOWSTATS.COM ====

May 8th, 2017

Topics: April 2017 Employment and Unemployment, Money Supply M3

• Headline Employment/Unemployment Numbers Were Too Good

• Jobs Gain Boosted by Heavily-Distorted Seasonals and Unusually-Large Upside Biases

• Unadjusted Year-to-Year Payroll Growth Dropped to a 68-Month Low

• Last Time Annual Payroll Growth Declined to that Level, the Economy Had Started Its Collapse into the 2007 Recession

• Household Survey Showed Shift from Part-Time to Full-Time Employment

• April Unemployment of 4.40% Was a 1-in-1,000 Shot; Could It Have Been Targeted?

• That Said, April Unemployment: U.3 Declined to 4.4% from 4.5%, U.6 Fell to 8.6% from 8.9% and the ShadowStats-Alternate Fell to 22.1% from 22.5%

• Those Were the Lowest, Headline Unemployment Rates for U.3 since May 2007, for U.6 since November 2007 and for ShadowStats since October 2010

• Nominal Money Supply M3 Annual Growth Rebounded to 3.3% in April, Versus 3.1% February and March, Otherwise at a 39-Month Low


No. 884: March 2017 Trade Deficit, Construction Spending, Real-World Employment

May 4th, 2017

• April 2017 Real-World Employment Conditions Continued in Annual Decline at a Pace Not Seen Since the Depths of the 2009 Collapse

• First-Quarter Real Merchandise Trade Deficit Narrowed Minimally versus What Had Been on Track for a Minimal Widening

• Despite a Decline in March, First-Quarter Construction Spending Surged with Massive, Upside Monthly Revisions to January and February Activity

• Real Construction Spending Remained 21.1% (-21.1%) Shy of Recovering its Pre-Recession Peak, Still Holding in Low-Level Stagnation


No. 883: First-Quarter 2017 GDP, Consumer Liquidity

April 29th, 2017

• Weaker-than-Expected First-Quarter GDP Real Growth of 0.69% Was Suggestive of Stalling Economic Activity

• Headline Growth Likely Faces Downside Revisions in the Next Two Months

• Final Sales (GDP Net of Inventory Change) Rose to 1.62% from 1.07%

• Better-Quality Series Show Continuing, Protracted Economic Collapse, with No Recovery of Pre-Recession Highs and No Economic Expansion

• First-Quarter 2017 Velocity of Money Rose Minimally for M3, Declined for M1 and M2

• Renewed Stresses on Consumer Liquidity

Peacefulwarrior's picture

All True and thanks for posting. But do we find it all finally topples OR do we find  another accommodative CB intervention and possible reversal of Interest rate hikes. We are way past due for issue but never underestimate the potential of Fear to breathe life into this Market. At least it is getting to a point of picking Black or Red on the roulette table.

Peacefulwarrior's picture

Is this like waiting for the Cascadia Fault line to performs its 350 year 9.0 ritual which then potentially sets off the San Andreas too? Point is the energy builds need to find one side of the boat prior to a major event.

Offthebeach's picture

Power comes from a barrel of a gun.

Violence is it's foundation. 

FinsterF's picture

The Fed raising rates is NOT a "policy error". The error was in failing to do it years ago.

Or better yet, in setting interest rates in the first place. That's the market's job.

SeuMadruga's picture

Or even better: the biggest "error" was the fed inception back in 1913.

Herdee's picture

Fed will raise in June because they use the wrong economic models. They're tightening into weakness.

JamesBond's picture

Having a federal debt that is tied to floating interest rates sounds like a very bad thing...


Let it Go's picture

The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.

In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory.