Have the anticipated rebalancing flows kicked in?
Is that what we saw in the US on Monday when equities managed to sustain a bounce predicated on ostensible “trade optimism” tied to a phone call that probably exists only in President Trump’s mind?
Maybe. “Rebalancing of the extreme month-to-date UST over SPX outperformance began in earnest yesterday”, Nomura’s Charlie McElligott writes, in a Tuesday note, adding that the performance gap for August ranks in the 7th %ile since 1982.
(Nomura)
“[Monday’s] US trade looked VERY much like anticipated ‘rebalancing’ flows”, he goes on to reiterate, adding that Nomura’s analysis of lot size imbalances “evidenced this ‘sell TY, buy ES’ rebalancing flow in the futures market for both small (HF / Systematic) and large (Real$) lot sizes”.
(Nomura)
You’ll recall that it was massive rebalancing flows which sparked the U-turn off the Christmas Eve lows last year.
Notably, May’s performance disparity between equities and bonds was large too, thanks to Trump’s decision to break the Buenos Aires truce. “The underperformance versus bonds in its highest decile over the past five years”, JPMorgan’s Bram Kaplan wrote, in a short note out at the time.
These flows can have an outsized impact when liquidity is impaired, as it was in December and as it’s been in August.
JPMorgan’s Marko Kolanovic weighed in on this in an August 20 note. “Fixed-weight trigger rebalances may have cushioned the market selloff even before calendar month-end, but typically portfolio rebalances happen at month- or quarter-end”, he wrote, adding that “we could still see equity inflows and outperformance into month-end [as] bonds delivered their strongest performance in over 7 years”.
At the time, the performance divergence left fixed weight portfolios ~2% underweight equities, which Kolanovic suggested should translate into “a sizeable rotation out of bonds and into equities into month-end”.
I think his colleague Takada is the more sensibly prescient one, big picture wise.
Not likely. Takada’s analysis is very (very) rudimentary compared to Charlie’s stuff. It’s not even close. Charlie knows the big picture, the small picture and everything in between.