Markets exhibited a desire to extend the pro-cyclical bent witnessed over the past couple of sessions on Tuesday, while some of the reversals seen in key trends likewise looked poised to continue.
Real yields, for example, rose as much as 3bps, before paring the rise. That had gold under pressure again. At the same time, surging equities pushed long-end yields higher, bear-steepening the curve.
To be sure, one can’t draw any definitive conclusions. “Treasury yields have risen further, but even as 10s flirt with 60 bp it’s difficult to characterize the move as a selloff”, BMO’s Ian Lyngen said early Tuesday. “Instead, the retracement into the prior range appears to be more about accommodating this week’s refunding auctions than a fundamental rethink”.
All the same, it’s worth documenting tentative evidence that the tide may be turning for some of the deeply-embedded trends across assets. If real yields held onto the early move, it would mark the third session they’ve climbed, for example.
“USTs and bunds are bear-steepening with real yields higher, thus gold smoked and Bitcoin lower”, Nomura’s Charlie McElligott wrote, in an early Tuesday note.
Keen market participants will be watching to see if small-caps continue to outperform on stimulus hopes.
“It seems that US equities are the first-movers picking up the tactical August/September ‘reversal’ phenomenon”, McElligott went on to say, referencing the prospects for the “pain trade” he detailed late last month.
Nomura’s 1Y Price Momentum factor is now down nearly 15% from the highs hit early in August, when 10-year US yields were pressing to the bottom end of the range. Growth factors are similarly beset, with the flip side being strength in Value expressions.
The question, as ever, is whether this reversal is just another head fake that will eventually fizzle out into some manner of growth scare that reinvigorates mega-cap tech outperformance and the myriad other equities trades tethered to lower long-end yields and a flatter curve, or whether this has some staying power.
We’ve seen this so many times before. It’s not “once burned, twice shy” as much as “forty times scalded, no nerve endings left”. The late May/early June false start (clearly visible in the figure) was a poignant example.
And yet, momentum is on the back foot over the past two weeks. Small-caps are gunning for a fourth week of outperformance in five versus the Nasdaq 100.
McElligott notes that inflation expectations “are beginning to adjust higher [as] inflation swaps in the US and Europe are starting to tell a story of [a] nascent accelerat[ion] in global views towards forward inflation”.
That, Charlie writes, was “inconceivable to nearly [everyone] just a few months ago”.
He’s quick to point out that this comes alongside the first consecutive weekly declines in M2 since late last year. Taken together, this suggests “a decrease in risk-aversion and saving and a ‘less bad’ economic outlook”, he writes.
Bringing it all together, McElligott says this (somewhat begrudging) embrace of a better macro outlook by the market “in conjunction with the ongoing ‘base effect’ of US economic growth upside surprises”, is fueling upside in US equities.
“Higher Growth [and] inflation expectations = higher S&P”, he says, noting that Spooz is “pulling towards the massive $Gamma at the 3,400 strike”.
It was setting up to be another monster day of outperformance for some perennial laggards over big-cap tech. We’ll see if it lasts.
“The only relevant new information which might augment investors’ understanding of the path of the real economy has come in the form of fiscal stimulus chatter and the President’s comment that he’s ‘very seriously’ considering reducing capital gains taxes”, BMO’s Lyngen remarked.
As noted first thing Tuesday, those comments from Trump are nothing new, but given the “success” the president has had recently with executive orders, it’s not terribly difficult to imagine a scenario where counsel convinces him that indexing capital gains to inflation by decree is feasible.