For all of the recent drama in markets, with many pundits jumping the shark in repeatedly pointing out the "worst start to May in 50 years", the S&P is barely below its all time highs, despite Trump's trade war - or as Bank of America puts it "trade bore" - with commodities up 18.0% in 2019, global stocks up 12.4%, junk bonds 7.2%, IG bonds up 4.9%, government bonds 1.9%, US dollar 1.5%, cash 0.9%.
And as BofA's Michael Hartnett notes in his latest Flow Show report, despite Trump's May 5th tariff announcement, key market technicals held, such as S&P 2775, SOX 1400, KOSPI 2000, WTI $60/b, and most crucially IG CDS 70 (because as Hartnett notes "credit is the "glue" that holds the bull together").
Which, from at least one perspective is odd, because the outflows from stocks have not only continued but have accelerated. Indeed, the YTD "greed trade" has not been stocks but rather "yield", with IG/HY/EM bonds seeing $127bn inflows; as such Hartnett believes that the big risk-off trade will be signaled when lower rates coincide with credit redemptions. Meanwhile, despite the buyback driven stock market levitation which pushed the S&P to new all time highs, the YTD "fear trade" remains equities, with a whopping $135bn redemptions.
Some other notable EPFR flows in the latest week as highlighted by BofA:
- bid for IG bonds continues ($7.8bn),
- HY (-$3.5bn) & EM buckled this week (debt & equity -$4.5bn; note Monday = biggest EM equity outflow day $2.6bn since Aug'15 China devaluation),
- tech fund flows continue to be very subdued relative to 2017 & 2018 - Chart 5).
To be sure, in many ways it was a perfect storm to sell in May, including factors such as the following:
- profits to take,
- seasonality ("sell in May"),
- a "toppy" tabloid IPO (see AOL TimeWarner merger Jan'00, Visa IPO Mar'08, Glencore IPO May'11) fueled expectations of 10% SPX correction to 2650 (EPS $165 x 16X);
However, as we noted last week, ahead of this sudden trapdoor in the markets, "investors quickly and significantly hedged" and as the latest (May) BofA Fund Manager Survey showed, there was record hedging among professional investors...
... coupled with an $821Bn drop in delta-adjusted open interest across US equity indexes (from $515bn to -$306bn), while credit failed to break lower thanks to inflows & Fed (Chart 4 - in 2019 spreads & 2-year Treasuries are now tightly correlated)...
... as well as corporate bonds responding to investor demands to "improve balance sheets" (Chart 3).
As a result of this maximum liquidity regime, in which the recent Bitcoin surge confirms belief in world of negatively-yielding debt, once again exceeding $12tn...
... BofA expects that the S&P will hit 3000 before Q3, with credit spreads & rate volatility tethered by this still giant liquidity tsunami.
Further supporting BogA's optimism, the bank does not yet see signals of "policy impotence" and urges clients to watch Australian equities & real estate for 1st signs.
Meanwhile, the April US housing data "crucially shows US consumer remains rate-sensitive", confirming that the Fed still hasn't jumped the shark.
Putting it all together - at least when looking at the May BofAML Fund Manager Survey (profiled here), and the latest NY Empire & Philly Fed surveys - BofA concludes that "investors & businesses have initially shrugged off May 5th tariff announcement"... but largely due to a record $188 billion in US stock buybacks in the first quarter, up 7.9% YoY from the prior year (and as we noted last week, China is now in the record stock buyback game too). If and when the buyback levitation scheme ends, all bets are ogg.