Some were “undaunted” by the second week of losses for US equities, which finally seemed to tire of the steady rise in yields.
Actually, that’s not quite accurate. Stocks didn’t tire of the “steady” rise in yields. Rather, they got spooked when “steady” morphed into “frenetic.”
The rapid backup in rates long predicted by those inclined to fret over such things, finally came knocking.
But, as Bloomberg’s Lu Wang and Vildana Hajric colorfully put it, some combination of “heroic resolve or epic naiveté,” found many stock investors giving “no indication that they are troubled by the worst volatility to land on the bond market in a year.”
Maybe the mantra for America’s legions of newly minted, day-trading heroes goes something like: “I lived through GameStop. I can make it through anything.” They wouldn’t be entirely wrong, I suppose. Long live General “Roaring Kitty.”
In any event, the latest EPFR data (which didn’t capture the entirety of last week’s drama) showed another week of robust inflows into equities. More than $46.2 billion poured into stocks, the third largest inflow on record. Over the past 16 weeks (so, since the election), investors poured $414 billion into shares, BofA’s Michael Hartnett said late last week (left figure below). In the linked article (above), Bloomberg’s Wang and Hajric flagged $80 billion in inflows to ETFs in February, a figure they noted is “four times the 12-month average.”
Meanwhile, Hartnett cautioned that the bond selloff is “hitting speculative froth,” conjuring “ghosts of 1999.” He used the ARK Innovation fund to draw a parallel (above, right).
The ARK funds have garnered quite a bit of attention during the rates tantrum. In short, they’re seen by some (rightly or wrongly) as the quintessential example of froth and, in some cases, stretched valuations.
Read more: Raiders Of The Lost ARK
Cathie Wood faced a reckoning of sorts early last week, when some of her firm’s funds saw big outflows amid losses for Tesla and jitters that tech was in the firing line as rates spiked.
As of Friday afternoon, both the Innovation ETF and the Genomic Revolution fund were on track for their largest weekly outflows on record.
Nomura’s Charlie McElligott suggested the outflows from the ARK products (and others) are an example of “second-order deleveraging” and the “shadow impact” of a sudden uptick in realized vol.
“The realized vol ‘crash-up‘ of the past week is now crunching a ton of systematic and vol arbitrageurs who’d crowded into VIX roll-down trades due to the enticingly extreme steepness in [the] VIX futs curve, which then accordingly drove such exaggerated stop-outs in UX1 shorts [Thursday] as realized exploded higher,” he said, adding that “this matters particularly” from a risk management perspective, as vol-sensitive investor cohorts mechanically react to a “positive vol impulse.”
The good news, McElligott went on to say, is that “if we can see vol again stabilize and anybody is able to sell skew/fwd vol ever again (perhaps with help of the Fed, or more realistically, if VIX ETNs take profits in longs), we could just as quickly re-leverage.”
Hope floats.
Thanks for the Bowie reference. Always welcome.