Rocket Science And Sacrilege

US equities stormed higher into the weekend, as another late afternoon surge propelled shares to records.

The S&P capped off a tedious five sessions with its best daily gain in three weeks, thanks in part to energy, which jumped nearly 3%. Financials rose more than 1.5%.

Big-tech also managed to eke out a gain on the week thanks to Friday’s afternoon fireworks. The Russell, which recently fell into correction territory, wasn’t so lucky. That said, small-caps rose ~4% between Thursday and Friday. If you bought the correction, you’re looking good already.

I’d note that it’s not particularly surprising that stocks managed to sprint through the finish line.

Yields were higher, but futures volumes were subdued. With the data stateside mixed (i.e., predictably underwhelming consumption numbers for February set against upbeat sentiment in March), there was no obvious driver for rates during what was a choppy session. A nervous bond market managed to make it through this week’s hyped five- and seven-year sales without anything approximating panic, even as the seven-year auction was something of a flop.

“The 10-year Treasury finally retraced from its highs, while rates volatility declined significantly across tenors,” SocGen’s US rates team wrote, in their weekly, adding that “decent results for two-year and five-year auctions [helped] the market overcome some concerns regarding demand for Treasurys, which were amplified following last week’s Fed announcement… on the supplementary leverage ratio.”

“If bonds rally a bit more or the 10-year Treasury yield stays in the new range (1.55%, 1.75%), volatility in the belly will continue to be under pressure, as the five-year still looks dislocated versus the two-year, 10-year and 30-year tenors,” SocGen went on to say.

Friday’s marginal weakness notwithstanding, the dollar posted another strong week. March is poised to be among the best months for the greenback since summer of 2019. That has obvious ramifications for assets of all kinds, and could become a problem eventually, although apparently not now.

If all you looked at was a weekly change chart, you’d think oil was uneventful. It was anything but. “The last days feel like oil investors are on a rollercoaster,” UBS’s Giovanni Staunovo told Bloomberg. “Drops are followed by a rise the day after, with fundamental news not being able to explain those shifts.”

“The latest round of COVID lockdowns in Europe has revived jitters about oil demand, so much so that they outweighed supply concerns caused by a blockage in the Suez,” PVM’s Stephen Brennock remarked.

If you ask Marko Kolanovic, price collapses last Thursday and again on Tuesday this week (figure below) were likely down to CTAs, despite “over 80% of weighted average signals based on historical regressions” being positive.

“Why were CTAs selling while most of the signals are still positive? The reason is stop-loss signals got triggered,” Marko went on to say, adding that,

A broad range of these stop-loss signals were breached for oil last week, resulting in CTAs selling the bulk of their oil positions. In addition to stop-loss, increased volatility reduced positions on account of volatility targeting (philosophically very similar to stop-loss), and vol-targeting adjustments usually last 3-5 days.

Again we’re reminded of the somewhat disconcerting reality facing “regular” investors: If you want to stay apprised of things, you need to consult literal rocket scientists.

Then again, the big picture might not be as complicated as you’d be inclined to think. In a new global markets strategy piece, TD suggested things might not be disconnected with the fundamentals at all.

“This may seem sacrilegious, since it seems clear to every man, woman, and child with Robinhood installed on their phones that there is a huge bubble in equity markets that they must add to daily for fear of being left behind and yields have been unnaturally depressed for too long and now must be restrained for fears of popping said bubble,” the bank began, before insisting that “the fact of the matter is that markets price in surprises and discount future risks.”

As TD went on to write, referencing the figures (above), “this has been the most surprising upside surprise for US and aggregate global economic data in at least 20 years – and most markets have just been along for the ride and are currently sitting right where they should be given those long-term relationships.”

Sacrilege indeed.