It’s tough to get a read on exactly how market participants are feeling to start the week.
On Sunday, Treasury Secretary (and man who would really appreciate it if you’d stop sharing that picture of his wife finger fucking freshly printed money in Hermès gloves) Steve Mnuchin showed up on state TV to deliver some “cautious optimism” while donning his “happy” skin mask:
Believe it or not, that was enough to buoy risk assets overnight and it once again puts everyone in a weird position. I mean sure, we’d all like to believe that it’s still as simple as it was last year – just buy the dip because i) “Goldilocks” is still largely intact and ii) the chances of Trump blowing up the world (figuratively and/or literally) are de minimis.
But the events that have unfolded over the past 30 days cast considerable doubt on the notion that the worst case scenario in terms of domestic politics, U.S. foreign policy and global trade can’t play out. Trump’s lawyers are abandoning ship, John Bolton is national security adviser (Iran is calling that “a shame“), and tit-for-tat trade restrictions became a reality last Thursday.
So I don’t know. Everyone still seems to be assuming we’re dealing with some semblance of a rational actor in Trump and despite his best efforts to disabuse everyone of the idea that he’s in full possession of his faculties, folks still continue to push this narrative about there being a “strategy” behind his tweets and a method to his madness. Spoiler alert: there’s probably not. America elected a moron. And it’s funny because if you talk to New Yorkers who have actually done business with him, they’ll be happy to tell you that the idea of him being a cunning negotiator is absurd in the extreme.
I don’t know who’s buying on Monday, but one thing that’s worth noting is that in addition to the exodus from equity funds we saw in the week through last Wednesday (which partially wiped out the record inflows from the previous week, underscoring the notion that retail investors may be as schizophrenic as Trump), JPMorgan is warning that institutional investors are likely to remain gun shy in the near-term.
On Friday, the bank was out with the latest update on that table they publish with institutional investors’ implied beta to equities and one thing they’ve been pretty keen on pointing out since the downturn in February is the extent to which CTAs’ equity beta seems to be declining rather than returning to pre-VIXpocalypse levels. Here’s JPM:
Institutional investors continued to act as a drag for the equity market and if anything they appear to have turned even more cautious over the past week. The cautious stance of institutional investors can be seen in their equity betas which represents a proxy for their equity exposure. Figure 1 shows that all betas declined in the most recent period between March 13th to March 21st. For Equity Long/Short hedge funds, the equity beta declined to well below its level at the beginning of the year. And this beginning-of-year beta was far from elevated; in fact, it was just below its historical average. In addition, the equity beta of Discretionary Macro hedge funds has turned negative, while that of CTAs has gone down rather than up vs. the previous weeks.
Part of the problem here is that the momentum signals are now going in the “wrong” direction again.
“The trend following signals for major equity indices are shifting lower as shown by Figure 2 which depicts the z-score of our momentum signal for S&P500, Eurostoxx50, Nikkei and FTSE100 indices,” the bank goes on to write, before adding that “these momentum signals turned negative for Eurostoxx50, Nikkei and FTSE100 indices following the early February correction, have been hovering around zero since then, but are now firmly into negative territory.” Here’s the chart:
And here are the three reasons the bank cites to explain why institutional investors are reluctant to re-risk:
- Macro forces have turned less supportive. The cyclical momentum of the global economy appears to be downshifting as suggested by this week’s flash PMIs. And an apparent escalation of trade wars is increasing macro downside risks.
- Institutional investors think upward momentum in equity markets appears broken. As a result, chasing longterm equity momentum no longer looks as attractive as an investment strategy.
- Equity valuations are still frothy, and therefore the 9% correction so far since the Jan 26th peak is not enough to trigger “buy the dip” flows.
So when taken together with the following visual which depicts the rather disconcerting propensity of retail investors to jump in and out of markets on a weekly basis, the above would appear to be more evidence that we’re going to need the corporate bid (i.e. buybacks) to keep things afloat in a world where both the “flow” and the “stock” of QE are in decline.
Of course you’ve got to wonder whether companies would still be as willing to plow money into buybacks going forward if it turns out that a trade war escalation negates the fiscal tailwind from tax reform as Barclays claims it would:
Oh wait… Steve Mnuchin is going to save us from the trade war. I almost forgot. It should be fine.