Fast forward 24 hours-ish from the Fed and markets participants were staring down a concurrent selloff in stocks and bonds.
10-year yields moved back up to ~2.56% on Thursday and while equities pared losses, the Dow was still down triple-digits.
It’s was the dreaded “nowhere to hide” trade, although that might be a bit bombastic considering it’s not exactly a bloodbath out there.
The biggest move in 5-year reals in more than a year didn’t help risk sentiment, that’s for sure.
However you want to couch it, it raises questions about how the market is digesting Wednesday’s (mixed) message from the Fed. There are also conflicting headlines around the trade negotiations to cope with.
Naturally, whenever there’s a concurrent selloff in equities and bonds, risk parity questions pop up and Nomura’s Charlie McElligott was out with a quick blast (his second note of the day) on Thursday afternoon to address the market action.
“Many times when folks see both Bonds and Stocks sell-off (or rip) at the same time, there often are assumptions of Risk-Parity- based allocation adjustments, and that may be the case on the margin”, he writes, before cautioning that “rarely is it that simple”.
According to Nomura’s risk-parity model, we would need to see “FAR more significant moves in realized vol to drive a sharp de- or re-leveraging”, McElligott says.
It’s not CTAs either, or at least not on Charlie’s model. “Regarding the CTA model (as our models allocate across 2w, 1m, 3m, 6m and 12m signal buckets), we actually see both US Equities Futs and UST / Rate positions remaining ITM and above current deleveraging levels”, he says.
So what’s behind the flow reversals? Well, it’s simple. To wit, from McElligott:
We simply had a lot of people on the same side of the same trades with the same view–and it was working fine; stability breeds instability however, and all it takes sometimes is a modest tweak to a narrative which then “tilts” excess positioning / leverage into a correction with occasional “cleanses”.
Does that sound familiar to you? It should. Recall what we said on Wednesday afternoon about Powell’s presser:
Curves were whipsawed, ending flatter (2s10s and 5s30s) after an initial bull-steepener and generally speaking, the moves in and around Powell’s comments are indicative of how one or two words can change the entire game in the blink of an eye.
Ultimately, the statement and the IOER adjustment were dovish, but whether he meant to or not, Powell changed the narrative completely during the press conference.
We went on to reiterate just how sensitive markets can be to every turn of phrase in environments like the one we’re in now.
As McElligott writes in closing, “much the same way that Jerome Powell nuked cross-asset vols in early January with his ‘pivot’, it’s totally rational that we could then see the opposite motion (GASP!), as Jerome’s very simple ‘transitory-‘ and ‘patience-‘ focused message yesterday ‘suddenly’ then sees markets lose what was perceived as ‘clear’ forward-guidance on the path of interest rates lower.”
Where as the reflation narrative and Dovish tilt brought the needed reflex action to markets in Q1 reality sets in ..The Buffoonery of this Administration is not limited to Domestic policy alone but has insidiously spread into Foreign affairs. Currently we have three Geopolitical events that can derail the Equities worldwide Venezuela, Libya and the Iranian oil situation. In addition to Charlie’s take on this situation these can pose economic havoc worldwide at the drop of a hat..The main stream media and it’s henchmen would parse Powell’s every word to cover up what the real threats are.. Beware !!!
Maybe Powell should just say fuck it and not hold pressers. We can gather forward guidance from the dot plots and other sources. There is way, way too much focus on every word coming out of Powell’s mouth, and at this point I honestly find it counterproductive.