While market volatility remains so high it leaves many trading desks speechless by "brutal" if obvious unwinds, and both institutional and retail traders clueless and at best hoping to ride the momentum wave in any direction before it violently reverses, one person who is a steadfast seller into any and every rally is BofA's chief investment strategist Michael Hartnett who in a note titled "Fed, dollar & the end of splendid isolation" explains just why with one simple chart, and further notes that he will continue to sell "at least until a coordinated and aggressive global policy response" emerges.
NIRP in Eurozone and Japan crushing bank stocks (Quantitative Failure); Fed now admits dollar appreciation could have “significant consequences” for the economy; and thus weaker US non-manufacturing data signals end of US “splendid isolation” and unwind of trades based on “higher US growth/rates” (US dollar & FANG the last of the dominoes to drop).
US dollar-reversal sparking bear market rally in humiliated EM/commodities/resources; note even retail sales in HK down 8.5% YoY; should China FX reserves beat expectations on Sunday, we think a tactical rally is likely to be vicious.
We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations (currently heading sharply south – Chart 1) and credit conditions.
And so we are back to square one, where global economic growth is so weak that the Fed's relent is back in play, corporate earnings are collapsing, where 30% of global GDP is now produced in "NIRP" nations, and where more than half the global markets remain mired in a bear market, that the only thing that can "save us" is precisely the same thing that has brought us here: coordinated, global central bank intervention.
We eagerly await to see just how the Fed's "renormalization" plan works out.