The “trade of 2021” has been long copper (+27.9%) and short the 30-year Treasury (-13.8%), BofA’s Michael Hartnett wrote, in the latest edition of the bank’s popular weekly “Flow Show” series.
Copper touched $10,000 this week and was poised for a new record. Q1 witnessed the first bond bear market in 40 years, depending on your benchmark. I suppose this was predictable. Everything is in hindsight.
The inflation theme (and surging commodity prices, including metals, are one manifestation) is pervasive. Hartnett noted that “asset price inflation [is] now mutating into real estate [and] commodities.” The “next leg of the trade,” he said, is wage acceleration, new highs in oil and (gasp!) a “further breakdown in long duration stocks,” which, for the uninitiated, translates roughly to: Additional weakness in the stuff that’s generated outsized returns for as long as you can remember and/or the stuff that’s gone through the roof over the past year or two. Hartnett mentioned XBI under $130, TAN below $80 and the flagship ARK ETF below $110 as levels to watch for possible signs of further de-frothing.
Notably, last week witnessed a large inflow to cash. ICI’s data shows money market funds took in $59.35 billion during the period (figure below).
Taken with robust inflows to bank loans, Hartnett suggested “investors [are] positioning for inflation and tapering.”
He advocated a “long inflation, long quality” barbell. That could mean long commodities, short bonds, long commodity FX, long small-caps and long utilities and stapes in equities.
It also entails being short (or, at the least, underweight) long duration stocks. As ever, that’s a tough proposition considering how difficult it is to abandon names like America’s tech titans. Indeed, they’ve become akin to utilities and they delivered incredible quarters this week (here and here).
Hartnett does allude to the cognitive dissonance that many market participants experience in that regard. “We say own defensive quality [as a] good market hedge in H1 and [a] good macro hedge [in] H2 [as] tapering equals rising credit spreads and pressure on tech even if FAANG are the ‘new consumer staples,'” he wrote.
Globally, equities took in another $10.5 billion last week, bringing the 2021 total to $438 billion (figure below).
Inflows to US stocks were $5.6 billion.
For what it’s worth, BofA private clients pulled the most from stocks since June of 2019, something Hartnett attributes to Joe Biden’s capital gains tax announcement.