Economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.
Whether it is due to the recent speculation that Japan may usher in helicopter money, or ongoing concerns about what Brexit may do to the future of European asset returns, there has been a dramatic shift in fund allocation and as Bank of America reports, investors are rushing to vote with their wallets. They have done so in the latest week by continuing to plow money into EM stocks, allocating a record amount of cash to Emerging Markets, while yanking a similarly record amount of cash from Europe.
“Cash On The Sidelines.” is the age old excuse why the current “bull market” rally is set to continue into the indefinite future. The ongoing belief is that at any moment investors are suddenly going to empty bank accounts and pour it into the markets. However, the reality is if they haven’t done it by now after 3-consecutive rounds of Q.E. in the U.S., a 200% advance in the markets, and now global Q.E., exactly what will that catalyst be? However, Clifford Asness summed up the problem with this myth the best and is worth repeating...
A strange paradox emerges when flipping though the latest BofA Fund Managers' Survey: with the S&P trading at all time highs, investor buying of protection against sharp decline in stock market at record high, something which would not be happening if the market was "normal" and if traders expected a continuation of the recent upward trend in stocks.
Bank of America's Michael Hartnett (who has been bearish throughout the recent central-bank inspired rally, as have been most professional investors), looks at the latest EPFR fund flows data,and concludes that Monday is when the bears finally capitulated.
Yesterday, JPM's Adam Crisafulli explained the simplistic explanation why according to his trading desk, the JPM is headed promptly toward Goldman's 2017 year end target of 2,200: $130 in EPS and a 17x multiple. This morning, Crisafulli shifts from the quantitative and focuses on the qualitative, laying out the three narratives that explain the persistent equity bid.
Pretend, for a minute, that your country responds to the bursting of a credit bubble by borrowing unprecedented amounts of money and using it to prop up banks and construction companies. This doesn’t work, so you create record amounts of new money and push interest rates into negative territory in an attempt to devalue your currency. But this - amazingly - doesn’t work either. Your currency soars and the inflation you’d hoped to generate never materializes. Now what? Is there even anything left to try, or is it simply time to stand back and let the current system melt down?
Trading trends are pretty slow and that is a function of disbelief/skepticism in the recent rebound (there is a lot of doubt that the SPX will wind up getting off this easy from the referendum and thus people are reluctant to chase).
Brexit is the biggest electorate riposte yet to The Age Of Inequality created by policymakers to save (some) of the world, and as BofAML's Michael Hartnett warns, investors must anticipate a shift to an increasingly populist policy response. The backdrop of Quantitative Failure nonetheless means a renewed bull market in risk assets is impossible unless fiscal policy can quickly arrest the downside in GDP & EPS forecasts.
The fund flow paradox continues: US stocks trade just shy of all time highs as global outflows from equity funds continue with another $2.6 billion yanked in the past week; this represents 10 weekly outflows in the past 12 weeks. More confusing is that just in the US, $2 billion was withdrawn leading to outflows in 5 of the past 6 weeks. So who is buying? That is the implied question in the last fund flow note from BofA's Michael Hartnett...
Today is a historic day for the corporate bond market: with the launch of the ECB's CSPP, Mario Draghi is now directly buying European investment grade non-financial bonds. This means that no longer will European corporate bonds trade based on their fundamentals, but purely on expectations of frontrunning future ECB purchases, such as the following...
After yesterday's two key events, the ECB and OPEC meetings, ended up being major duds, the market is looking at the week's final and perhaps most important event of the week: the May payrolls report to generate some upward volatility and help stocks finally break out of the range they have been caught in for over a year.
Yasuhiro Sato, president of Mizuho, Japan's second-largest bank by assets, said Abe's framing of the sales tax delay would determine whether it sparked concerns about the government's credibility regarding its plans for fiscal consolidation. "The worst scenario is [the government] will just announce a delay in the tax increase. That could send a message that Abenomics has failed or Japan is heading for a fiscal danger zone and then it will harm Japanese government bonds' credit ratings."
As BofA also put it: "Equities continued to experience outflows and lost $3.32bn (-0.1%) last week, their 4th consecutive decline. Year-to-date, equity funds have lost $58.6bn (-0.6%), the largest ever dollar outflow in any 22 week period for the asset class"