Markets stocks

Ebbs And Flows.

Historic outflows, daunting headlines and a rebalancing bid.

By now, every headline about coronavirus’s impact seems to have a “worst day yet” feel to it.

Unfortunately, the weekend has been no exception.

For example, on Saturday, the UK said deaths rose 34% in a single day, the largest rise yet. Fatalities surged by 260 to 1,019, the Department of Health and Social Care said. The news comes as the nation ponders a path forward with a prime minister who is himself positive for the virus.

Meanwhile, Spain said 832 people died over the past 24 hours, marking the deadliest day of the epidemic for the country, which is among the hardest-hit nations in the world. That comes on the heels of Italy’s worst day, when 964 people succumbed.

Market participants endured another wild week during which stocks managed to surge despite the increasingly dour headlines around the virus.

It’s worth noting that while bonds were “the story” from a flows perspective, in the week through March 25, global equities saw more than $26 billion in outflows. When you start to tally up the numbers, you discover that the four-week flow out of global equities is up to $74 billion. Looking back five weeks, the cumulative exodus is large indeed.

“Equity funds suffered their worst weekly outflows in 15 months, taking the last five week outflows sum to -$94 billion, a record for any five-week period in history”, Deutsche Bank writes, in a new positioning update.

As noted Friday, next week is going to be daunting on the data front stateside. The combination of top-tier economic numbers plus what’s sure to be a deluge of disconcerting headlines around COVID-19 will test investors’ mettle anew.

But, remember that many are still pointing to expected rebalancing flows as a possible source of momentum for stocks. Indeed, some see that flow clocking in as large as $850 billion by the time month- and quarter-end have played out.

Deutsche Bank revisits this. “Attention has focused on potential rebalancing by pension funds into equities as we approach month- and quarter end”, the bank said, in the same Friday note cited above.

The bank goes on to say that pension funds’ equity allocations are now near the bottom of the range going back a quarter-century, while bond allocations are approach the top.

(Deutsche Bank)

How large of a role is this likely to play? Well, looking back at history, Deutsche notes that “pension fund rebalancing into equities has had a positive but mild impact on performance’. Specifically, the bank says that “even with bond-equity performance differentials as large as seen this month, historical sensitivities point to only a modest 3% rally in equities in the last week of the month”.

Depending on how things go next week both with respect to the virus news flow and the incoming economic data, that positive impulse could be overwhelmed, although the good news is that vol.-control, risk parity and CTAs are more likely to be buyers from here after the last several weeks’ epic de-leveraging. At the same time, though, household sector allocations to stocks are still “well above the lows of the last two recessions”, Deutsche cautions. That means households could potentially be a source of incremental selling.

Of course, any further rebalancing during the last couple of days of the month/quarter would hit at “low tide”, so to speak, when it comes to liquidity, which remains severely impaired.

As ever, it’s important to remember that when market depth is impaired, a given flow “matters” more. That applies on the upside as well as on the downside.


5 comments on “Ebbs And Flows.

  1. Anonymous

    Sorry, novice question here: Do the month-end rebalancers literally wait until the last day or two of the month before starting to execute their orders? Or do they get a “head start” when things are particularly lop-sided, such as they are going into March end?

    Just curious if some of the bid this past week was rebalancers getting in there early.

    Any comments would be appreciated from the readership, or even from you Walt !

    • I was wondering the same thing, how much flexibility do they have? If everyone knows everyone else is doing it, seems the smart thing to do would be to wait until it’s over then buy in when it goes back down, or buy early before everyone else bids it up.

  2. Sounds like, whatever happens Monday and Tuesday, you should not be shaken out of your short hedges.

  3. Mr. Oxygen

    Novice as well but I take the last line to suggest that lack of available shares has the potential to move the bid and ask quickly toward the; upside or the downside. If the re-balance materializes and there is a lack of shares for sale we might actually see some spikes. It will be interesting. Somebody said buy the dips and sale the rips. Not that i am advocate trading.

  4. Novice question number three: if there’s $850 billion waiting to rebalance into equities, how is the record equities outflow over the past five weeks “only” -$94 billion? Does the outflow refer to some specific equities funds?

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