Overcooked?

Overcooked?

Risk sentiment felt a bit frail to kick off the new week, but analysts seem undeterred.

Credit Suisse’s Andrew Garthwaite, for example, lifted his 2021 target for the MSCI World ex-US. He’s looking for a more than 12% return this year.

There’s scant evidence of sell signals, Garthwaite mused, in a note. Between the policy put(s), a still elevated ERP, rising inflation expectations, and, of course, plenty of liquidity, it’s easy to remain upbeat on stocks, he contends. It’s worth noting that some 90% of the S&P trades beyond its 200-DMA.

If there’s one concern the majority seems to share, even as most don’t believe it’s poised to choke off stocks’ gains entirely, it’s rising US yields.

Investors will be watching real yields closely this week as any further move higher could add to dollar strength, hobbling the reflation trade and, perhaps, denting what some say is euphoric equity sentiment.

The greenback started the week on the front foot.

“The case for higher yields and steeper curves remains intact and is a more immediate risk in the US,” SocGen’s Subadra Rajappa remarked, noting that with 10-year Treasurys some 30bp higher since mid November, “we think yields will either extend further or at worst settle into the 0.9-1.20% range.”

Still, ongoing Fed QE should “temper any upwards impetus,” she went on to say. As for breakevens, momentum will depend on incremental improvements in the fundamentals, which could be hard to come by, at least until vaccine rollout catches up with the virus.

Meanwhile, retail investors are back at it when it comes to grabbing for upside exposure in calls. “The liquidity force appears to be reverberating once again in an intense manner via retail investors, in a repeat of the second quarter of last year,” JPMorgan said Friday.

This is a potentially perilous dynamic that contributed to last summer’s melt-up and also to the spot up/vol up conjuncture that presaged September’s mini-rout.

Of course, calls aren’t just for speculating. They can also serve as a yield enhancer or a rational way to replace stock exposure when things have become stretched.

In any case, the bottom line on Monday was captured by AxiCorp’s Stephen Innes. “After all these positive stimulus vibes, it seems the overcooked reality is setting in that the Georgia Senate results could threaten the Goldilocks economic scenario,” he wrote. “With risk assets at extremely stretched levels, there are some concerns that higher bond yields could [have a] negative impact.”


 

2 thoughts on “Overcooked?

    1. That was a bit harsh. I should have said still elevated compared to what? Elevated historically? Not likely. Elevated as compared to what would be consistent with the theory on which it is based and the historically overall low discount rates? Not likely. Elevated in a relative sense to the normalized bubble insanity of the present day? Maybe. I just wouldn’t call that scientific.

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