Powell has once-again “bent the knee” to vigilante markets in regards to removing the “Fed policy error” left-tail concern and addressing “downside risk” fears (“…listening sensitively to the message markets are sending”)
That’s from Nomura’s Charlie McElligott, who’s out with a quick Monday note documenting what looks like a burgeoning tactical rally on the back of Powell’s (this time successful) efforts to placate markets.
So far, the follow-through from Friday’s rally has been a bit lackluster – at least from where I’m sitting. Sure, Asia rallied, but as noted, the gains in mainland and Hong Kong shares did not suggest that anyone is too excited about the RRR cut.
Still, policymakers are trying, the trade soundbites continue to be some semblance of upbeat (e.g., reports that Chinese Vice Premier Liu He attended trade talks with a lower-level delegation from the U.S. in Beijing on Monday) and positioning certainly has room to get more aggressive.
McElligott touches on all of this in his Monday missive. On Powell, he of course flags the “stated willingness to alter the balance-sheet run-off”, but Charlie notes this is still “only a ‘break glass’ option for the Fed.”
After commenting briefly on the RRR cut and the Liu He “leak”, he describes positioning as follows:
All against widespread broad-scale “under-positioning” in US Equities (US Equity Funds seeing -$196B of “Active” outflows over the past 1m; GS and MS PB data showing HF “net-“ and “gross” exposures at / near multi-year lows; Nomura CTA Trend data highlighting “Max Short” positioning in US Equities futures; HFR Equities HF Index 20d rolling beta to SPX at lows since May)
Below find the chart on that latter point:
As we’ve variously suggested, the now daily hints at tweaks to the balance sheet runoff plan are probably more important than any dovish relent on the rate path as the market has now completely priced out hikes and is looking for easing in 2020.
“[Powell] confirmed a Fed pause [but] most-importantly, he capitulated to market forces on Quantitative Tightening by voicing ability to alter course of the BS run-off”, McElligott goes on to write, before describing the action as follows:
As such, the knee-jerk to Powell’s comments were a powerful “easing” impulse of what had been the most “restrictive” US financial conditions seen in years, with his message simultaneously 1) sending USD lower, 2) relaxing US real yields, 3) driving Equities volatility sharply lower and 4) tightening credit spreads further.
On Monday, S&P futs were up a highly amusing 9%+ from the overnight lows just ahead of the December 26 rally.
Meanwhile, here’s reals and the dollar:
In the end, though, Charlie thinks all of this is tactical or, as he’s fond of putting it, “for rent.” The bottom line for him remains this:
The longer-term outlook for US Equities remains dictated by the 1) late-cycle nature of both the US- and global- economy, 2) the lagging effects of prior tightening / ongoing US balance-sheet runoff and 3) still-fading inflation expectations—all “negatives” for stocks.