Requiem For A Rally: 2018’s First Half In Charts

Well, anyone who went into 2018 calling for a “melt-up” or a “blow-off top” in risk assets ended up being right – if only for a month.

The first half of 2018 is in the books and we did indeed see a panicked rush into risk assets on the heels of the tax cuts, as retail investors poured record amounts of money into equity funds in January.

Google interest in “how to buy stocks” exploded, Millennials opened E*Trade accounts to trade crypto and weed names, and money managers were forced to push back the expected date of an equity market peak.

By January 26, we’d hit full-on, FOMO, fuck-tard as stocks raced higher, blowing past nearly half of Wall Street’s year-end targets  in just the first three weeks of 2018 on the way to trading in overbought territory for an incredible 17 straight sessions:

Remember this chart?

Domestic equity funds saw a veritable avalanche of inflows during the month:

And this was hardly confined to U.S. shares. At one point, the Hang Seng was riding a 14-day winning streak, the longest since it was launched in 1969.

At the same time, H-shares were a veritable world-beater, staging a truly incredible 19-session win streak:

This all culminated in $33.2 billion in inflows to equity funds in the week through January 24 – a record in data going back to 2002.

In a sign on the times, active funds got $12.2 billion of that, which suggested investors weren’t even concerned about paying high fees for relative underperformance anymore.

Through January 25, the S&P had gone a record 398 days without a correction:

And the MSCI world broke a similar record:

Goldman’s risk appetite indicator hit an all-time high in late January:

The euphoria manifested itself in a record percentage of Americans calling for stocks to rise in the year ahead:

The following account of a client call described by Barclays Head of Macro Research, Ajay Rajadhyaksha, is emblematic of sentiment at the time:

In the last week of January, as equities went on yet another run, a client who had been waiting to buy the dip called us with an exasperated query. What, he asked, could possibly go wrong given strong global growth, non-existent inflation pressures, and a spanking new US tax cut? Sure, markets seemed too complacent, but there didn’t seem to be a plausible catalyst to shake that equanimity, especially given how calmly investors had reacted to event after event in recent years. How, he wondered, does one buy the dip if stocks only keep rising?

And then, it all fell apart.

Or actually, it didn’t “fall apart” per se, but the “blow-off top” that everyone assumed would come sometime later apparently happened in the first three weeks of the year.

The January selloff in Treasurys finally spilled over into U.S. equities at the start of February, leading to one of the worst weeks for balanced portfolios and risk parity in recent memory.

An ostensibly innocuous above-consensus AHE print on February 2 catalyzed an inflation scare and the pain spilled over into the following Monday when the rebalance risk inherent in short and levered VIX ETPs was finally realized. XIV imploded, falling 80% AH on the way to termination:

That triggered the “doom loop“, sparking the largest one-day spike in VIX history and leading directly to a massive unwind from the systematic crowd.

It was, as we put it, a “psychedelic swan” event:

Through Wednesday, February 7, CTAs had one of their worst 5-day stretches on record:

No sooner had markets recovered from the VIX quake, than the trade war took center stage. In late March, regulatory worries hit tech, leading to a veritable bloodbath for the “robots”.  The Nasdaq would subsequently make new highs, but the March massacre is clearly visible on the chart:

The regulatory concerns would eventually take a backseat to trade worries as the Trump administration continued to raise the stakes. What started in January as token tariffs on residential washing machines somehow mushroomed into the threat of a cartoonish $800 billion in total prospective fuckery:

Those threats ultimately led to a rough six months for Chinese equities which, as you’re hopefully aware, are in a tailspin, with the SHCOMP sitting in a bear market and ChiNext bumping around near its lowest since early 2015.

Perhaps the only trade war chart you need:

The yuan is of course the big story of late, with the PBoC seemingly content to watch it depreciate and perhaps planning to kill two birds with one stone by letting the depreciation cushion the blow from the trade war and then using that same depreciation to justify selling USTs to defend the currency should it fall “too” far. The pace is (almost) unprecedented:

Despite the distinct possibility that trade tensions will ultimately weigh on global growth and undermine market confidence, the Fed has stuck to its guns. That buoyed the dollar:

And squeezed the shorts:

Intermittent flights to safety kept 10Y yields from rising further after a brief brush with 2011 highs. Stretched positioning likely exacerbated periodic short squeezes. The recalcitrant Fed made everyone hesitant to price out further hikes. All of that together was a recipe for a flatter curve.

That doesn’t help financials, which suffered a historic losing streak to close the quarter, snapped on Thursday:

With the stronger dollar and an unapologetic Fed came emerging market turmoil. Q2 was the worst quarter for EM equities and EM FX since Q3 2015 or, more to the point, since the yuan deval. Here’s equities:

And here’s FX:

Panning out to the YTD view, the picture looks like this:

Needless to say, the EM FX story was defined by idiosyncratic flare-ups in Argentina and Turkey. The peso was a disaster:

Brazil’s real is under immense pressure and in Indonesia, BI has been at pains to hike enough to keep control of the rupiah. This isn’t great:

In Europe, the trade war threat has manifested itself in a horrible stretch for the automakers and the DAX is suffering on trade woes as well:

Italian banks plunged into a bear market as political turmoil rocked Italy:

In credit, USD IG has been a notable laggard, as the asset class has become synonymous with macro-systemic risk. Here’s Goldman:

IG total returns remain well into negative territory this year, down 3.5%. This performance ranks as the second worst in nearly three decades, only faring better than the 1994 “great bond massacre.” A similar picture has also prevailed in HY where year-to-date total returns rank amongst the lowest if we exclude recession years.

The HY/IG spread ratio is at its the tightest in almost three decades:

U.S. equities are not catching down to credit’s reality:

Whereas across the pond, there is no such disconnect:

Oil continues to surge despite the OPEC production hikes, as Iran sanctions continue to prompt traders to embed geopolitical risk premium in prices. In the following chart, the red box denotes the snapback catalyzed by renewed U.S. pressure on allies to curtail Iranian imports:

Oh, and finally, Bitcoin continues to converge on its intrinsic value of zero:

Right along with the rest of the crypto space:

As for what’s in store in the back half of 2018, just throw out the script, ok?…