People have a tendency to call equities the “last man standing” or some derivation thereof. We’re probably just as guilty of that as anyone with our cynical “sacred cow” jokes and graphics that depict worshippers clad in robes emblazoned with online brokerage logos praying to a BTFD bovine.
But if anyone has been keen on simultaneously pointing out that credit is in fact that most bulletproof of all Teflon assets, it’s been us. As one credit analysts we spoke to earlier this year put it during a brief exchange, “if you had predicted every geopolitical event of the past year correctly and traded on your correct predictions, you would have gotten it wrong” in the market.
Credit’s resilience to shocks is in no small part attributable to the ECB’s CSPP and to central banks more generally. “Probably the biggest source of “artificial tightening through leverage back in 2007 was the volume of synthetic CDO issuance. Synthetic CDOs (CSOs) effectively created negative net supply, as net protection selling by investors forced dealers to buy bonds to hedge their books, dragging both CDS and cash spreads tighter in the process,” Citi wrote several months ago, before comparing that to today as follows: “But the comparable number today is the buying from global central banks [as] this too produces an “irresistible force” driving spreads tighter, which investors feel powerless to resist.”
On Wednesday morning, SocGen’s Kit Juckes is out with his daily piece and in it, he notes that according to SocGen’s Sentiment Indicator, people have never been happier. The note is called “If market sentiment is happiness, everything is awesome.” Of course as Kit notes, “market sentiment and happiness aren’t the same thing.” Here’s Kit:
After a year of President Trump, 10year note yields are 45bp higher, of which 14bp is a rise in real yields and 31bp comes from higher inflation expectations. The dollar’s gained almost 8% against the yen, but lost 5% to the Euro and 6% to sterling, resulting in a 3% fall for the DXY over this period. But all of this is dwarfed by the move in equities (the S&P is up 21%) and in credit spreads (the IG index is 22bp tighter to 54bp).
Credit spreads haven’t been this low in over 10 years. And on Monday, the SG Sentiment indicator, based on credit, equity and FX vol, credit and swap spreads and the gold/equity ratio, reached its highest level ever (we have data to 2000). If you measure happiness by financial market sentiment, everything is awesome.
Do note, however, that sentiment is not correlating with carry. As Juckes goes on to write, the G10 side of that equation isn’t hard to understand given the rates environment and as far as EM goes, the dollar – which has recently jerked back to life like a villain everyone thought was dead in a slasher movie and that thanks to tax cut “hope” – has served to exacerbate what would already be deteriorating sentiment in some locales where idiosyncratic risk is flaring up again (e.g. Turkey).
In any event, if market sentiment makes you “happy”, well then “ear to ear baby”….
