Churn And ‘The Absence Of Conviction’

Churn And ‘The Absence Of Conviction’

“Churn” now seems inevitable.

Tech, stay-at-home favorites, and pandemic winners will look oversold to salivating dip-buyers. But macro investors will insist that the confluence of fiscal stimulus and vaccine-driven economic normalization means the reflation narrative and attendant pro-cyclical rotation will remain the defining features of zeitgeist 2021.

And then there’s the self-evident, “in a vacuum” case for the likes of Apple, Amazon, and Google, which aren’t exactly fly-by-night operations. Is there a “bad” time to buy them if your investment horizon is long enough? That’s not a rhetorical question. I don’t know the answer definitively, but I do know there’s a case to be made that something like Apple should always be bought on a sizable pullback. Again: I don’t necessarily agree with that, but you won’t be laughed out of any rooms if you do.

The above sets the stage for a kind of perpetual tug of war between growth and cyclical value, where the latter is no longer destined to lose every battle. You could say the war was lost years ago for value, but the most recent insurgency, fueled by trillions in fiscal stimulus and an assumed “grand” reopening across western economies, has the potential to see perennial laggards outperform meaningfully for an extended period.

And so, back and forth we go, with bonds playing George W. — they’re “The Decider” on any given day. If Treasurys rally (or just don’t selloff) growth could see more dip-buying. If rates are rising, that’s likely to favor cyclicals and value. If yields are surging, or if more signs of illiquidity and market dysfunction show up in rates, you’re in for a day of “diversification desperation.”

The figure (below) is a bit of a “chart crime” on a couple of levels, but it’ll work for our purposes here.

“The way some of the growth names were chased appeared surprisingly aggressive considering the Nasdaq volatility of the past week,” JonesTrading’s Mike O’Rourke wrote, of Tuesday’s epic surge in tech and pandemic winners. “It’s hard to imagine managers feeling the aggressive need to chase Peloton up 15% or Tesla up 20% in a single day,” he added. “We suspect the strength was more model driven than investor driven, and thus would expect the current volatility to continue.”

It’s true. It is hard to imagine anyone feeling suddenly compelled to bid up Peloton and DocuSign by double-digits during just one session. These “reversals of reversals” can engender some truly hellacious to and fro.

Read more: Fireworks

Again, bonds are in the driver’s seat, both for the macro narrative and for equities. The price action in rates has become a story all its own, and everything else is trading off that.

“My guess is we continue to iterate through this churning process where rates go higher, and it’s scary when it happens too fast,” AxiCorp’s Stephen Innes said Wednesday. “Still, when the pace slows or yields back down, investors realize higher rates are fundamentally good economic news and a natural by-product of a rebound into normalcy and reflation,” he went on to remark, before cautioning that “over the next few months, until a lid firmly gets put in place on rates, the rotation never stops.”

The RBA’s Philip Lowe attempted to put would-be “vigilantes” in their place on Wednesday, the same way Haruhiko Kuroda did late last week.

“Over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023,” Lowe said, in remarks to the Australian Financial Review Business Summit in Sydney. “This is not an expectation that we share.”

That was a pretty unequivocal message, and underscored the notion that the RBA has run out of patience with being the punching bag for adventurous markets looking to test central banks.

“One of the more interesting and perhaps overlooked aspects of the recent rate increase has been that it has been global in nature,” TD’s Priya Misra wrote this week, before reiterating that the repricing is, to an extent, just a reflection of the macro reality. To wit:

Some of the move makes sense since vaccines are being deployed globally and that is allowing investors to start to price in the end of the pandemic. Cases are on the decline globally, even with the rise in different variants. Further, there has been fiscal easing across the globe which has cushioned the negative impact of the pandemic. Given that the downturn was triggered by the pandemic, the pricing in of a post-COVID world should be reflected in higher global rates. It is also reasonable that the moves were largest in the long end (10-30y) since the front-end of global curves are pinned lower by central banks.

And yet, at the same time, bear steepeners don’t necessarily reflect anything like certainty about the outlook. Indeed, they reflect the opposite. Especially when they become aggressive.

“Unlike bull steepeners and bear flatteners which reflect repositioning on the back of a relatively high conviction about the actual Fed action… volatile bear steepeners reflect anxiety due to the rapid rise of uncertainty about policy (monetary or fiscal) over an unspecified horizon,” Deutsche Bank’s Aleksandar Kocic wrote, in his latest. “They are not a repositioning for what is about to come, but a reaction to not knowing what to expect — bear steepeners reflect the absence of conviction.”


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