Compelling Narratives

A lackluster start to the week was blamed, in part anyway, on underwhelming data out of China.

A relative dearth of news made conjuring a more compelling narrative difficult, unless you wanted to pretend markets care about geopolitics (they don’t) or that a sky-high read on the Empire prices paid gauge exacerbated inflation worries (it didn’t, everyone is already worried enough).

Semis are in a correction (figure below) and tech continues to waver on the prospect of higher yields tied to a run-it-hot macro regime. Apparently, US tech shares have trailed the broader market by nearly four percentage points annually when consumer prices rise at least 3.9% YoY. Ned Davis downgraded tech to a Sell equivalent. Don’t expect any such overtly bearish calls on mega-cap US tech from the big banks.

After a pretty substantial purge, the systematic universe could provide a bit of local support for stocks.

CTA signals for the Nasdaq 100, the Russell and the Nikkei are “close to buying levels” again on Nomura’s model and vol control, after selling nearly $18 billion over the past week, could add more than $20 billion of exposure assuming stocks stay a semblance of well-behaved (i.e., index moves are confined to a 50bps range on either side).

That’s according to the bank’s Charlie McElligott, who did caution that “there’s a LOT of options positioning set to expire this week, with ~32% of SPX/ SPY Gamma dropping-off, 53% of QQQ Gamma and ~50% of IWM Gamma, which means ‘movement’ thereafter with a broader distribution range coming out.”

The Fedspeak Monday was maddeningly repetitive. April’s jobs miss means the economy has “not made substantial further progress” in the Fed’s eyes, so no commencement of the taper discussion, Richard Clarida said. “We will certainly give advanced warning before scaling back those purchases,” he remarked. The Fed, he insisted, is “attuned and attentive” to the incoming data.

Notably (and I’m just tossing out potpourri) BBB spreads have tightened to levels not witnessed since 2007 (figure below).

Single-A spreads are at 16-year tights.

“We attribute the resilience and stability in credit to continued expectations of a Goldilocks recovery, although we note the possibility that stimulus in the system has brought a paradigm shift which has fundamentally lowered the credit premium,” BMO’s Daniel Krieter and Daniel Belton said. “The next material move in credit spreads will likely depend on the market’s response to indications of inflation [and] wage inflation should be a key driver of this dynamic.”

The high grade market is expected to see between $30 billion and $35 billion in new supply this week. For the year, the total is now up to $616 billion in IG (figure below) and around $220 billion in high yield.

That, as inflation jitters are cause for concern. Bearish bets on the largest IG credit ETF are at a record and BofA sees spreads widening over the next few months. “Our baseline scenario is another phase of rising rates as the red-hot economy and inflation lead the market to price in a much faster rate hiking cycle,” Hans Mikkelsen said late last week.

Meanwhile, Bitcoin is having all kinds of trouble with Elon Musk, who refuses to leave the crypto crowd alone. For my part, I refuse to devote undue space to his mercurial Twitter activity, although to be fair, I suppose I’d be heavily engaged in the debate too if my company was sitting on a $1 billion position.

“Its volatility is so huge that it can actually distract clients from their investment goals,” someone complained, to Bloomberg, noting that Bitcoin “is often driven by tweets rather than fundamentals.”

Of course, that was also true of the equity market from January 2016 through January 2021. Ah, the “good” old days.