Bullish comments from David Tepper (speaking through surrogates on CNBC) helped set the tone and otherwise rescued US equities from what may have otherwise been a very rocky start to the new week, but the overarching narrative was unchanged.
Treasurys were heavy, especially intermediates, as high-grade issuance weighed and traders warily eyed the supply calendar. The memory of last month’s failed seven-year auction is still uncomfortably fresh, but the outperformance of the long-end suggested Fed expectations are in the driver’s seat.
“The price action was ostensibly textbook for an auction week… except for the outperformance of the on offer 10- and 30-year sectors,” BMO’s Ian Lyngen and Ben Jeffery remarked, noting that Monday “wasn’t about supply as much as it was a function of bringing forward Fed liftoff expectations on the back of stimulus optimism.”
Nuance aside, ongoing pressure in bonds left tech to underperform stateside. In fact, Monday was a particularly bad day from a relative performance perspective. The Nasdaq 100 lagged small-caps by a huge margin. The other red bars (figure below) show big-tech’s underperformance on “blue sweep” day and “Pfizer day(s),” respectively.
“This unwind of legacy ‘Long Duration, Short Cyclicality’ Equities thematic positioning — as the narrative shifted from a decade of ‘QE Goldilocks’ into this ‘Vaccine / Fiscal Stimulus / Renormalization Reflation’ narrative has, by definition, witnessed the rolling destruction of the long-term ‘Momentum’ factor,” Nomura’s Charlie McElligott said, adding that “it’s not just the ‘Value Shorts’ which are gaining.”
With the ongoing bond selloff still the center of the macro universe, “economically-sensitive ‘Value Longs’ are doing their part” too, McElligott went on to write, in the same note.
Value’s outperformance to growth is becoming quite pronounced. On Monday, the disparity was wide, with growth shares falling and value gaining, extending this month’s outperformance.
The reopening narrative gathered still more momentum as the CDC said people who have been vaccinated can safely visit households comprised of other vaccinated people mask-less and without observing social distancing.
Specifically, the new guidance is applicable to those who “are considered fully vaccinated for COVID-19 >2 weeks after they have received the second dose in a two-dose series (Pfizer-BioNTech or Moderna), or >2 weeks after they have received a single-dose vaccine (Johnson and Johnson/Janssen ),” the CDC said. Those people can “visit with other fully vaccinated people indoors without wearing masks or physical distancing, visit with unvaccinated people from a single household who are at low risk for severe COVID-19 disease indoors without wearing masks or physical distancing, and refrain from quarantine and testing following a known exposure if asymptomatic.”
That’s a big step for a country which, just two months ago, logged 300,000 new cases in a single day. The COVID Tracking Project, which stopped collecting data on Sunday, showed just over 40,000 Americans currently hospitalized over the weekend with the virus (figure below). That was down from more than 130,000 in early January.
“With the US vaccination effort picking up speed, new coronavirus cases rose 1.5% in the week ended Sunday, the slowest increase since the pandemic began almost a year ago,” Bloomberg noted.
“There are some activities that fully vaccinated people can begin to resume now in the privacy of their own homes [but] even those who are vaccinated should continue with all mitigation strategies when in public settings,” CDC Director Rochelle Walensky cautioned.
Again, the outlook is improving, and that’s fueling the rotation in equities. Expectations for an economic renaissance as stimulus collides with reopening and normalization have made it very difficult to fade the bond selloff, and the purported read-through for the Fed of an overheating economy is making overvalued equities nervous.
That, in brief, is the rather precarious scenario that confronts market participants day in and day out. It’s unlikely to change much for the foreseeable future.
“Froth” will likely continue to suffer in this environment. Tesla fell another 6% Monday. It’s down more than 20% in five sessions.
That’s a truly disconcerting visual. That kind of performance (in the ARK product) is the stuff nightmares are made of.
“There remains ‘shadow negative convexity’ within the ARKK-complex, which is just a high-beta play on the ‘Expensive Stocks’,” Nomura’s McElligott said. “If you continue seeing this Treasury selloff pressuring this theme and leading to more redemption flows, that’s a fair bit of ‘selling into weakness’ potential lingering.”
