McElligott at RBC – Grossing Down


–good commentary from Charlie at RBC:

OVERNIGHT: Generally higher equities (Estoxx / DAX still holding at highs while Spooz dip ‘red’—highlighting the ‘relative value’ of EU equities against US as they break-out, see Mark Orsley’s piece today) and bonds (bull flattening, with US1 +0.4% vs TY1 +0.2%), with lower rates dragging USD lower against most of G10 and especially against EMFX (20 of 24 EM currencies higher against Dollar).

The pause in the rates trajectory continues to be extraordinarily ‘tame,’ as many have been anticipating a sharper ‘counter-trend rally’ which has yet to occur.  One thought here is the ongoing situation with Chinese outflows, with data overnight showing their FX reserves dropping the most in 10 months…as such we see the Yuan at 8 year lows against the Dollar.  The rhetoric and twitter-barbs from Trump regarding the potential to paint China as a currency manipulator, along with the Taiwan phone-call faux paus, continue to agitate the situation.

It is certainly reasonable to believe that this source of UST selling will continue to keep USTS rallies ‘limp,’ and still in front of a very pro-growth / reflationary Trump policy mix to come: lower corporate and individual taxes, industry deregulation, trade policy (tariffs will drive up domestic prices as cheaper international goods competition is removed) and a fiscal policy shift away from monetary policy will all conspire to take rates higher in the year + window ahead.

COMMENTARY: I’ll keep this simple…we continue to see obvious re-risking in the form of “buy everything” price-action, as investors push further out onto the risk curve against a shift away from the 5+ year narrative of “secular stagnation” towards positioning that allows capture of “reflation animal spirits.

Add-in the market ‘comfort’ of knowing that both the BoJ (Iwata reiterating that they can accelerate / expand purchases overnight) and the ECB (extension expectations tomorrow) will continue providing a QE-monetary policy “backstop” to keep the grind higher in rates from getting ‘disorderly’ in the medium-term.  This is critical to avoiding ‘VaR shocks,’ as well as avoiding a drag to the broad economy through ‘financial tightening.’

More of the same “price is news” on reflation positioning-pivot—a look at market metrics:

–USD 5Y5Y inflation swaps making 2-year highs last week and holding

–UST 5Y Zero coupon inflation yields at 26-month highs last week and holding

–UST 30Y Breakeven yields at 26-month highs last week and holding

–WTI Crude 17-month highs this week and holding

–XLF/XLU ratio at 8-year highs

–Global Cyclicals to Defensives index ratio at 2-year highs

–IWM/TLT ratio at 3-year highs

–U.S. Growth / Value ETF ratio at 2.5-year lows

And to the macro data-points (note: much of this is expressed in the charts section below):

–G10 Economic Surprise Index at 3-year highs

–US Consumer Confidence printing at 9-year highs

–CEO Confidence Index 3rd highest print since July 2007

–Global Manufacturing PMI’s at 27-month highs

–Global Services PMI’s at 1-year highs

–49-month highs in G10 Inflation Surprise Index

As such, we are seeing ‘real money’ client portfolio rotation stay ‘front-footed’ on adding risk.  That said, and for a multitude of reasons, we are also seeing signs of tactical profit-taking into year-end from some of the leveraged-fund universe—where the performance (or outright ‘survival’) focus has been well-documented.  The desire there is to ‘lock’ gains, survive and advance into next year.  Thus, some evidence of ‘grossing down’ behavior continues in pockets, as shorts outperform while a smattering of ‘winning’ longs are sold.

CROSS-ASSET RISK THERMOMETER: Moving ‘right and up’ on the risk-curve.

EQUITIES THEMATIC—SAME AS IT EVER WAS: Small Cap / High Beta / Cyclicals / Value / High Short Interest / Inflation / Domestic Exposure / Weak Balance Sheet over Low Vol / Defensives / Anti-Beta / Growth / Quality / Strong Balance Sheet.

EQUITY FACTORS—IF IT AIN’T BROKE, DON’T FIX IT: Size (long small cap over short large cap) and Value (long value, short growth) continue to crush it, while momentum / quality / anti-beta hammered as per the ‘cyclical reflation’ regime.

greg blotnick
greg blotnick



greg blotnick
greg blotnick