Although a cursory glance at the S&P suggests absolutely nothing went on Wednesday, there are, as is usually the case these days, all manner of market undercurrents worth mentioning.
For instance, there’s the rebound in chip stocks, with the SOX up 3% on the session. News that Micron has figured out a way around the Trump administration’s Huawei ban is, to my mind anyway, one of the bigger stories of the day. The shares rose more than 12% following the earnings call on Tuesday.
And then there’s oil, which rallied hard thanks in no small part to the biggest supply draw since 2016, even as some are now positing an “uber-bearish” scenario for crude in the event the trade war gets entangled with the Iran debacle.
Another notable on Wednesday is the selloff in Treasurys. 10-year yields were higher by 6bp on the day, closing the US session on the lows. A lackluster 5-year auction contributed. At the front-end, traders continued to price out rate cuts amid somewhat ambiguous Fedspeak over the last 48 hours (“ambiguous” really just means “not fully committed to cutting by 50bp next month”). We’re “all the way” up to 2.05 on 10s (chuckles).
Given crowded positioning in rates, these kinds of days matter and they have implications for equities. “Thanks to today’s selloff in the enormously lengthy US Rates / USTs position (UST 10Y cheapening 6.5bps, White and Red ED$ -7 to -8.5bps), we are seeing a powerful reversal of the US Equities consensual ‘Slow-flation Risk Barbell’ positioning as well”, Nomura’s Charlie McElligott wrote Wednesday afternoon, in a quick blast noting that “the massive short or underweight in Value / Cyclicals ripped higher [while] longs in Defensives and Secular Growth got hammered.”
The end result: A “bonkers” move in Charlie’s Value/Momentum “pain trade”.
“My ‘Pain Trade’ monitor is going bonkers today, +4.9% and now +7.3% in the past two days, which aligns with [a] broad ‘reversal of QTD losers/winners on a clear ‘Gross-Down’ flow”, McElligott said.
(Nomura)
That’s a pretty stark reminder that any unwind in the massively crowded rates space/falling-out-of-love-with-duration could have knock-on effects in the equities complex.
