By Charlie McElligott, head of Cross-asset strategy at Nomura
BOJ's Dovish Forward Guidance Snuffs Curve Steepening - Yet Equities "Value over Growth" Performance tumult continues globally
Global rates markets see a modest “bull-flattening” overnight, as bond bears were left disappointed by BoJ’s "unch" YCC target and “dovish” forward guidance.
As I noted last week, it never made sense for the BoJ to “shoot themselves in the foot” in the near-term by “self-tightening” long-end financial conditions into a downgrade of their inflation forecast at the same time—instead, expect a painfully-protracting process of “conditioning the market” in coming-months to avoid a JGB VaR-event.
Topix Banks respond with disappointment -2.8%, as the YCC “non-event” disappoints those hoping for a steepening of the curve, while the ETF tweaks are simply “inline” relative to high-expectations.
However, despite the modest “re-flattening” of global yield curves off the back of the BoJ, the violent (and clearly “performance-negative”) unwind of the Equities “Long Growth, Short Value” legacy portfolio construct experienced since the start of last week continues, with both EU- and Japan- “Value” again seeing massive outperformance vs “Growth” factor categories (monitors below).
The collective three-day move in U.S. “Value / Growth” has been the largest since October 2008--a 4.3 standard deviation event relative to the returns of the past 10 year period--while conversely “1Y Price Momentum” sees its largest three-day drawdown since the Nov ’16 election post-trade.
Enormous underperformance of popular longs relative to shorts speaks to “net-down” behavior at the very least across Equities-funds, although seeing pockets of outright short squeeze speaks to a fair-bit of “de-grossing” as well—ESPECIALLY across the quant market-neutral universe.
The question now becomes whether Value continue to outperform Growth if the tape turns to an outright ‘risk off’ one over the next few weeks of seasonal weakness, prior to commence of heavy (Tech-led) buyback.
This “dovish” BoJ is now-paired with the increasingly “frantic”-looking PBoC, as misses in both Mfg / Non-Mfg PMIs for China out overnight further confirm the growth slowdown challenge.
Nomura Chinese Economist Ting Lu remains cautious on calling a Chinese growth rebound:
- There are significant lag-times for infrastructure projects, especially as local govts face a credit squeeze
- Unsustainable-nature of the PSL / cash settlement arrangement for the small-city renovation program
- Time required to unwind previously-implemented deleveraging measures
- Already high yields of Chinese corporate onshore and offshore high-yield dollar bonds have made bond financing much more difficult for of LGFVs and enterprises
Thus, the Chinese are all-but-certain to continue their “piecemeal” easing- and stimulus- efforts in 2H18 to satiate markets, which would instead desire a “BIG BANG” easing-approach—in meantime, CSI 300, SZCOMP and Shanghai Property Index all continue “lower” WTD along with Industrial Metals
This 1) “disappointing Chinese response” (THUS FAR in its current-form) alongside 2) the upcoming “tightening impulse” in October (escalation of “Quantitative Tightening” by both Fed’s balance-sheet runoff and ECB bond-buying taper) and 3) the breakdown in U.S. Equities leadership / paradigm-shift keeps me comfortable maintaining my “Downshift” call on risk as it currently stands (prefer RV / Mkt-neutral and less ‘directional’—e.g. Equities “Value” and “Quality” over “Growth” and “Momentum”)
LARGEST 3D MOVE IN U.S. ‘VALUE / GROWTH’ IN 10 YEARS AND A 4.3SD EVENT:
LARGEST 3D DRAWDOWN IN U.S. ‘1Y MOMENTUM’ FACTOR SINCE THE ELECTION AND A -3.2SD MOVE (2Y REL RETURNS):
U.S. EQUITIES FACTOR REVERSALS EVERYWHERE = QUANT- AND FUNDAMENTAL “NET-DOWN” OR OUTRIGHT “DE-GROSSING”:
EU EQUITIES FACTORS SHOWING ANOTHER POWERFUL “INTO VALUE, OUT OF GROWTH” MOVE:
“IT’S ALL THE SAME TRADE”—EQUITIES HF L/S PERFORMANCE IS AN ALMOST PURE-REFLECTION OF “LONG GROWTH, SHORT VALUE’ OVER THE PAST FIVE YEARS:
FLATTER CURVES / “EASY” CONDITIONS HAVE BEEN CRITICAL INPUT TO DESTRUCTION OF “VALUE / GROWTH” IN POST-GFC WINDOW: