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Fed's BS versus S&P since the restart of the "non QE" - spot the gap
Cash bond excess returns have lagged the equity rally quarter to date
Chart: Year-to-date beta-adjusted excess returns of IG and HY bonds vs S&P 500
Is this October 2008?
When the Fed cut rates today for the 3rd time, it brought the real Fed Funds Rate (Fed Funds - Core CPI) down to -0.8%.
In the past 2 cycles we didn't see a Fed this easy until...
-Oct 2008 (8 months into worst recession since Depression).
-Dec 2001 (8 months into recession).
JPM: Asian Foundries are now seeing a broad-based demand recovery
1. Bullish times are back as capacity fills up across the board in 1H20
2. We believe that Asian Foundries are now seeing a broad-based demand recovery, with capacity starting to fill up across leading-edge and trailing-edge nodes in 1H20.
3. we also expect some margin expansion and price increase commentary in the supply chain in 1H20
4. 1Q20 outlook likely to be extremely positive
Deal or no deal but S&P does not like sharply weaker Yuan and likes stronger Yuan
Yuan is currently pushing new multi day highs. S&P to catch up?
GS on OPEC
we view most of yesterday´s headlines so far as falling short of consensus expectations:
(1) Saudi has threatened to increase production if other countries do not step up compliance
(2) despite this threat, other OPEC countries could not come to an agreement on allocation during their six hour meeting
(3) there appears little discussion of an extension of the current agreement. Finally,
(4) Russia's demand to exclude its condensate production from its quota could allow for an inconsequential decrease in its quota
Nonetheless, yesterdays price resilience (and large speculative buying in recent weeks) in the face of disappointing headlines suggests that price risks are likely skewed to the downside today unless OPEC+ quickly generates consensus amongst its least compliant participants.
S&P - trend channel since October lows intact, resistance 3130/3140, support 3110/3100
We have recovered some 50% of the sell off.
ChiNext - extending the bullish move, biggest 3 day move higher in a long time
Yuan has not closed this strong in 6 sessions, last at 7.0342
The EM equity inflow beat goes on....
EM Equity Funds: ETF inflows persisted for the seventh consecutive week, albeit at a slower pace than last week (+$647mn, from +$1.8bn)
EM total equity fund flows were +$405mn
EU tobacco - cheaper than ever
Chart: EU Tobacco, PE NTM to Europe Staples
The global auto industry
Some market cap statistics:
• Tesla: $60 billion
• Uber + Lyft: $62 billion
• General Motors: $51 billion
• Daimler: $53 billion
• Honda: $52 billion
• Ford: $35 billion
• Fiat Chrysler: $23 billion
• Peugeot: $19 billion
Bottom line: it is remarkable that a marginally profitable carmaker and 2 money-losing ride share companies can have larger market caps than most of the world’s major carmakers.
Returns since their IPOs in the summer of 2004:
Domino's Pizza: +4,304%
Both Microsoft (4.41% of the S&P 500) and Apple (4.29%) have bigger market caps than the entire US large cap Energy sector (4.25%)
December 16th, 2017: peaked to then half in less than 2 months
December 16th, 2018: bottomed to then rally >300% over the following 6 months
December 16th, 2019: ?
The longer term BS chart
Fed BS up $306 billion over the last 3 month.
"In no sense is this QE. This is nothing like it." - Jerome Powell, Oct 8, 2019
End-Market Cycle Summary
illustrates where each end market is in its respective cycle (peak to trough)
Standard deviation of GDP growth has declined
The snapback was limited...
Gold and the Yuan - Gold loves weaker Yuan, but the Yuan is stronger over past sessions....
Remember the low volatility ETF, SPLV?
Doing nothing since September...
VIX futures spread - zzzz mode
The boom and bust of semiconductor cycle
Fed's BS versus S&P since the restart of the "non QE" - spot the gap
Recall last time the world IPOd an oil giant?
Q4 2007: PetroChina IPO with market cap >$1 trillion, after a multi-year bull market. Equities also obviously peaked that same time.
Q42019: Aramco IPO with market cap >$1 trillion, after multi-year bull market.
Both oil stocks and totalitarian states also adds small in the juxtaposition analysis
Oil - has not closed up here since later September...and oil interest stays bullish
What is credit protection saying?
Credit protection was not participating in the last squeeze we saw before this little sell off. We pointed out the short Eurostoxx 50 versus iTraxx trade being put on by "smart" prop books over past weeks. The trade has worked very well. Note how Eurostoxx 50 fell more relative to the iTraxx main (which has recovered the entire move lower).
iTraxx main is inverted in the chart.
China - everything is just fine
Speculative index number one, ChiNext, +1.8%, putting in one of the biggest candles higher in a long time. Chinese margin debt trading (biggest driver of equities) holding just fine.
Have we just had the "blow-off" top?
Bull markets often end with a euphoric rally called a ‘blow-off top.’ We may have just had one
The Dow was up 10.5% over the course of just 74 trading days from mid-August to late November
equities perfectly tracking curve inversion pattern
S&P 500 Index performance after Dec 1988, Jun 1998, Dec 2005, and Aug 2019 initial 2s/10s curve inversion
Why was Eurostoxx 50 so boring in November while S&P squeezed higher? - think gamma
Up until last Friday GS estimates dealers were long 7-9 bn USD gamma. The effect was the "pinned" sensation we witnessed in Europe.
For every 1% move in the SX5E dealer gamma needed to hedge (buy or sell) approximately 20k Eurostoxx 50 futures which is huge (40% of daily average volume).
This gamma has now been "freed"...
Long term earnings estimates re-set lower BULLISH!
1. Long term (5 year EPS) expectations for the market have been cut sharply setting a low bar for future equity market performance.
2. In March 2018, analysts were expecting 12.1% pa growth in EPS for the next five years. This is now 7.9% pa.
3. Cuts of this magnitude have only occurred three times before: after the TMT bubble (a cut from 14% to 11%); after Lehman (11% to 6%) and during the Eurozone crisis (13% to 9%).
4. periods of low expectations tend to be followed by high returns.
5. At the sector level the most extreme view is for global mining where LT forecasts have been slashed to 0%, so in real terms to shrink over the next 5 years!
What if Hong Kong matters (more than we think)?
Every bigger move down in S&P has been preceded by HSI moving lower. S&P has come off, but HSI is back to making new recent lows...
What risk is CTA running?
While on the CTA carnage topic, below is the latest monthly report of the fund we track. VaR per asset; grey equities (big exposure), black total, bluew rates, green commodities, red FX.
The way the CTA behaves, we can probably assume this is a good VaR proxy for the general CTA space..
VIX versus VVIX for some perspective
VVIX was the leader, once again....
The VIX guy is back - our number one contrarian indicator when it comes to volatility just outlined "why VIX should continue to rise"...
...frequent readers of TME know this guy still has a 100% track record, the inverted way. Before getting too excited, remember;
"do not confuse pace with direction".
Gentle reminder - the 2019 rally has been driven by valuation gains amid weak earnings growth
Only thing making new recent highs (ex VIX) is Fed's balance sheet
VIX term structure - extreme shift over past days
Needs little commenting, but demand for short term protection has surged.
S&P versus US credit protection - similar to what we have seen in Europe over past weeks, credit protection has not been buying this latest rally
S&P versus CDX IG (inverted). We usually show the European "trade" as our hit ratio historically is better in Europe than in the US.
VIX futures spread - big spike as people realise they need short term protection.....and picking up dimes in front of the steam roller strategy (vega neutral is not vega neutral more) stopped working abruptly
VIX 2 vs 8 months futures spread.
Was this the correction?
If we are to follow the perfect 2013 pattern, the bounce should start kicking in soon, but maybe this time is different...
The gap between S&P and soybeans is big, but soybeans is not a China "play" only, do recall the stuff that has been going on in Brazil and other related EM currencies
That was quick - equity volatility caught up to credit protection
While equity volatility, V2X, was falling during November, iTraxx main was holding, indicating not all was as awesome as equity land was discounting. We can clearly see how this "gap" was closed yesterday as V2X blew out.
Remember the credit protection versus Eurostoxx 50 futures "pro only" trade?
European credit protection, iTraxx main, has been lagging the equity exuberance for weeks. The "dislocation" came in big yesterday. As we have written, "smart" prop desks have been putting on this trade, short equities, short itraxx main. The average Joe can not put these trades on as the credit leg is OTC only, but watch this relationship going forward. For now the "smart" guys are nicely in the money, let's see what happens from here...
FED BS - highest since jan 9th
Fed's balance sheet at $4.05 trillion, highest level since Jan 9, up $293 billion over the last 3 months.
"This is not QE." - Jerome Powell
The dislocation between US corp profits and S&P Earnings has never been wider
Europe as the relative puke - just when people have loaded up on relative long European trades
V2X "outperforming" the VIX.