If one didn’t have access to stock prices, one would be left with the impression that the global market is on the verge of an outright catastrophe. Here’s why.
With the rates market now pricing in almost 4 rate cuts by the end of 2020, long positions in Eurodollar rates futures are now at levels last seen around the European financial crisis, suggesting that traders are bracing for a deflationary tsunami to sweep across the world (of course, stocks are once again near all time highs, because, well, the Fed and more QE is just over the horizon).
Meanwhile, according to the latest EPFR data, bond funds again raked in enormous inflows ($17.5b), as they have been doing all year (even as stock outflows continued unabated). According to Deutsche Bank calculations, this brings total inflows this year to a massive $261BN, approaching the largest on record seen over comparable periods, to levels from which the pace has slowed historically, and yet there is no sign that the great rotation from stocks to bonds is slowing. Quite the opposite.
Excluding riskier categories like HY (-$2.9bn), bank loans (-$1.4bn) and EM (-$0.7bn), bonds in fact saw even larger inflows ($22.7bn) this week, the largest on record…
… with government bond funds (+$8.9bn) seeing the bulk according to DB’s Parag Thatte.
Money market funds (+$31.3bn) are also seeing tremendous inflows, taking the total over the last six weeks to a whopping $138bn, the largest on record over comparable periods in previous years as investors also flee to the safety of cash.
As Deutsche Bank puts it, “Risk-off trade intensifies with bond getting multi-year high inflows; money market funds benefit notwithstanding seasonality.”
So what are investors “fleeing” from? Why stocks, of course even if one wouldn’t know it looking at the S&P500: stocks (-$10.3bn) saw outflows overall this week, but were starting to see inflows return late in the week, especially into US equities which saw inflows starting Tuesday, coinciding with the equity market rebound.
Defensive oriented equity funds (+$1.3bn) like min-vol have continued to see steady inflows with this week seeing the largest in almost 3 months.
Gold funds (+$1.5bn) last week also saw the largest inflow in over 2 years. Gold long futures positioning also rose sharply to the highest in a year.
Meanwhile, stocks remain in a world of their own with positioning elevated across most investor classes: equity futures positioning rose this week and remains elevated. According to DB, after declining, albeit modestly for 4 straight weeks, positioning in equity futures rose this week and remains near the top of its historical range.
Vol Control is still near maximum equity allocations, after some selling early in the week and buying later in the week. While VIX came in, 1M realized volatility increased. Risk from Vol Control continues to be to the downside if vol spikes further.
Risk Parity will likely trim equity beta. Exposure to equities, bonds, and USD is at the top of its range. And vol of the cross asset portfolio increased above its historical average, with equity vol increasing the most vs other asset classes
The CTA complex is still net long S&P 500 as spot very briefly slipped below longterm MAs then bounced sharply above short-term MAs. While CTAs would be liquidity seekers in a more significant move down, the complex is not crowded in the long S&P 500 trade.
The one outlier within stocks: Equity L/S continues to have net beta and gross leverage at multi-year lows. Single-stock portfolios are still overweight Communication Services and EPS Growth so have been somewhat volatile. Despite some short covering, PMs continue to control net beta primarily with ETFs, futures, and options.
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The irony: this tremendous disconnect between equities and virtually every asset class is the result of one thing – the market’s growing conviction that the US economy is sliding into a recession, and the Fed doing everything in its power – cutting rates, doing more QE, perhaps NIRP – to prevent that. As DB’s Thatte notes, the German bank’s rates strategists view short rates as currently putting too high a probability of the economy sliding into recession.
In other words, every single asset class – except equities – is now pricing in something a sharp global slowdown. As for the S&P? Trading just shy of 2,900, the US stock market is not only oblivious to the risks that all other asset classes are screaming about, but continues to rise even more with every incremental economic data point, the disastrous jobs report being the best indication, sending the S&P 1% higher on Friday amid, what else, hopes that the Fed will ease even more as “terrible news is once again tremendous news.”