Things started off ok on Tuesday, but by the time it was all said and done, everything was red as the Nasdaq bounce faded:
As you can see, small-caps underperformed. Notably, they’re pretty damn rich:
First three-day losing streak for the S&P since August:
And remember: significant drawdowns are becoming an endangered species…
… just like sustained vol. spikes:
The rotation trade came off a bit today with the Nasdaq falling less than the other benchmarks, but have a look at this:
Some folks believe the rotation out of tech has little to do with tax reform and more to do with a systematic factor rotation:
As far as Treasurys go, just know that the 5s30s fell below 60bp on Tuesday. That speaks for itself:
The dollar gained and it’s useful to pan out and look at how things have shaped up since the Flynn headline threw everyone for a loop on Friday:
Let’s talk about the dollar for a minute. The conundrum here is whether renewed U.S. reflation optimism centered around tax cuts and repatriation will be enough to offset the drag from improving economic data abroad, a more hawkish ECB, and the Mueller probe, among other potentially dollar-negative factors.
For his part, BofAML’s David Woo believes the greenback “will rally significantly” in Q1 2018 thanks to rising interest rates and repatriation. But the longer-term outlook is far from clear. Consider this out today from SocGen’s Kit Juckes:
Not enough rate or yield support for the dollar to rally further. The dollar is trading about 5% higher, in real terms, than its average level of the last 20 years, and some 23% above the 2011 low. With the global economy surfing the global expansion, and growth becoming more balanced and more synchronized, the dollar looks expensive. It rallied on the back of the Fed’s lead in the monetary policy cycle. Not only is the rest of the world slowly catching up, but it seems increasingly clear that the Fed will remain extraordinarily cautious in its policy moves. We expect the Fed Funds target to peak at 2.00-2.25%, which is consistent with real 10y yields peaking not far from current levels (52bp) and well below the 72bp we saw in December 2016. That’s not negative for the dollar, but means that the currency is vulnerable both to its high valuation and to improving FX fundamentals of other major currencies, including but not limited to the euro.
And then this from DB’s George Saravelos:
(1) There are $3.5trillion of US company earnings re-invested offshore according to BEA data. We estimate that an upper bound of $1.5 trillion of these profits sits in cash or equivalents. This liquidity is held “offshore” for the purposes of tax optimization and has the potential to be “brought back” to the US if the tax treatment becomes more favourable. (2) Of this $1.5 trillion we estimate that only around 10%, or $150bn sits in non-dollar holdings. This estimate is based on a bottom up analysis of company disclosures accounting for around half of S&P 500 cash. (3) In contrast to the 2015 “Homeland Investment Act” the current tax proposals call for “deemed” repatriation which is equivalent to a mandatory payment on foreign earnings without an obligation to repatriate those earnings back in the US. Companies will only bring the cash back when they need it, there is no incentive to bring cash back immediately. (4) Even if a company decided to bring cash “back” to the US, our recent conversations with a number of large firms lead us to the conclusion that the dollar liquidity mostly already sits in US banks. Bringing the money back will merely involve an “accounting” shift rather than a withdrawal of offshore dollar liquidity. Conclusion: in contrast to 2015, the impact of US foreign company repatriation on the dollar and cross-currency basis should be small, if at all.
And how about this, from TD:
As long as global growth maintains a steady pace, reflationary tailwinds persist, and U.S. inflation does not unexpectedly — and uniquely — surge, the global macro landscape should favor a steady depreciation of the dollar.
In short, curb your enthusiasm about the greenback. Again: #Sad.
European shares were mostly mixed on Tuesday. Oil moved higher on geopolitical jitters tied to Trump’s comments on moving the U.S. embassy in Israel to Jerusalem from Tel Aviv. Also, this from Goldman is notable:
Saudi Arabia and Russia displayed a stronger commitment to extending the cuts last week than we had expected. While the deal leaves room for an earlier exit than currently scheduled, we now reflect this resolve in our supply forecast, with full compliance for longer and a more modest exit rate.
This leads us to forecast lower inventories in 2018 and, as a result, we are raising our 2018 Brent and WTI spot forecasts to $62 and $57.5/bbl. These forecasts also reflect higher US pipeline tariffs and a wider WTI-Brent differential of $4.5/bbl in 2018. Importantly, our conviction in the New Oil Order remains intact with our 2-year forward WTI price forecast – the marginal cost anchor – remaining $50/bbl.
As noted earlier today, things are looking dicey in Hong Kong which is something you should keep an eye on. The tech rout in the U.S. is manifesting itself in a 14% drop from recent euphoria-levels in Tencent:
And that’s causing problems for the high-flying Hang Seng, which has lost two round numbers since crossing 30,000 for the first time in a decade last month:
Just like: “Maybe if I tweet about it enough”…