‘Sell Everything To Them And Let Them Deal With It’

“Right now there are more cross currents than I can ever remember”, one CIO told Bloomberg on Tuesday.

He was referring to how difficult it is for investors to decide where to focus their attention on any given day. Tuesday was clearly about stimulus, and specifically the prospect that the Trump administration is prepared to advance a proposal for a $1 trillion infrastructure package.

That buoyed energy, materials and an infrastructure ETF, which rose a third day, alongside the broad US market, which has now managed a trio of consecutive gains following last Thursday’s dramatic rout.

As you might imagine, the curve bear steepened. The 5s30s was steeper by ~7bps, back out to ~1.19. High grade supply weighed, with a dozen issuers tapping the market for some $27 billion.

The lingering effects of the Fed’s latest announcement around corporate bond-buying also helped risk assets along.

Still, tensions between India and China (the death toll on the Indian side of a border skirmish was revised up to 20 from three) and North Korea’s “mean reversion” are flies in the proverbial ointment, as are rising COVID infection rates in Florida and Texas, and the beginnings of a new lockdown in Beijing.

Read more: Tug Of War.

Through it all, though, it’s hard to escape the feeling that nothing matters in a liquidity-driven market.

Nods to fiscal stimulus are icing on the cake in that regard, and although it’s the fiscal impulse that will matter more over the longer-haul (i.e., more fiscal spending is needed to ensure and sustain a robust recovery), in the near-term, it’s central bank assurances that count.

“The markets that plunged on fears of a second virus wave changed their minds when the Fed announced it would start to do something it had already pledged to do three months ago: buy corporate bonds”, Rabobank’s Michael Every said.

“On one level this makes no sense. A second wave is a game-changer for all of us if it is real”, Every went on to write, before noting that “on another level [it] makes perfect sense [because] now that isn’t anybody’s problem but the central banks’, or at least that’s how markets see it”.

That is, indeed, how markets see it.

And truth be told, that’s how the market has viewed any and all potential setbacks for the better part of a decade – they are the problem of central banks, and there is no problem that can’t be solved with a few trillion more in printing press money.

Jerome Powell’s testimony to the Senate (delivered via video conference again), was largely a snoozer, which is actually fine. We don’t need him to inject any additional uncertainty into things at this juncture. With that said, I suppose it’s ironic that his main message about the recovery is that it’s highly uncertain.

BofA’s latest global fund manager survey (more here) showed a big jump in GDP and EPS expectations, but the gap between GDP optimism and earnings hope was the widest on record.

(BofA)

“After a mountain of earnings downgrades, corporate news became scarce and the downgrading abated somewhat”, SocGen’s Andrew Lapthorne wrote Tuesday.

“When it comes to sentiment indicators, earnings momentum included, it is often the change in the level that matters more than the levels themselves”, he continued, adding that “although downgrades persist, the rate of downgrading has gone from 90-95% of all estimates to somewhere between 60-70%”.

Obviously, that’s still bad, but it’s not as bad, which is all anyone is looking for right now, whether in the data or, in this case, in the outlook for corporate profits.

But this is going to be touch and go, make no mistake about that. The CIO cited here at the outset described the situation as one in which “the weight of where investors are focusing day-to-day really swings wildly from fears of the second wave, concerns about escalating tensions with China, and a complete vacuum of visibility on earnings”.

That’s true, but, as Rabobank’s Every put it (injecting a bit of playful disdain), all of this stuff only matters if you’re a central banker. “All the rest of us can just sell everything to them and let them deal with it”, he added.