By Lev Borodovsky
Jul 24, 2017 12:24 am ET
Equity Markets1. Let’s begin with the ongoing volatility compression in equities.
• VIX hit another low after having spent seven consecutive days below 10.
• Here is the short-term VIX-equivalent index.
• The vol curve continues to steepen, which is an indication of rising risk appetite. This chart shows the spread between the 3-month vol index and the 9-day vol.
• Speculative accounts’ bets against VIX remain near record highs as volatility shorting gains popularity across funds and retail investors alike. It’s difficult to find a period in recent history (including during the bubble years) when equity investors were this complacent.
2. Related to the comment above, Merrill Lynch’s private clients’ cash allocations have not been this low in at least a decade.
Source: @WhatILearnedTW, @BofAML, @businessinsider
3. Short-sellers are capitulating. Here are the assets under management in short-biased hedge funds.
Source: @WSJ; Read full article
4. Investors are betting that strong corporate sales will keep the rally going.
• Positive sales surprises:
Source: @FactSet; Read full article
• Percentage of companies beating revenue estimates:
Source: @FactSet; Read full article
5. However, at these lofty valuations, the market can be unforgiving. The reaction to earnings reports is highly asymmetric.
Source: @bespokeinvest
6. The latest survey from Merrill Lynch shows fund managers becoming more skeptical on earnings going forward.
Source: BofAML
7. Insiders are selling shares again.
Source: @hmeisler
8. Stock buybacks seem to be slowing.
Source: FTN Financial
9. Investors have also been betting on a more robust economy as a result of the Trump administration’s economic agenda. The public, however, is starting to have doubts. Here is the latest survey showing waning presidential approval on the economy.
10. Fund managers have been rotating out of the US and into foreign stocks. Allocations to the US are now the lowest in a decade.
Source: BofAML
Nonetheless, managers’ allocation to global equities (vs. bonds) is near record levels (OW = “overweight”).
Source: BofAML
11. The S&P 500 index is increasingly dominated by tech shares.
Source: @bespokeinvest
12. After a persistently high correlation between the US stock market and crude oil last year, the two markets have decoupled.
Source: @jpmorganfunds; Read full article
13. The outperformance of bank shares seems to be capped. Slower Fed rate hikes (and a flatter yield curve) combined with weaker loan growth are some of the reasons.
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Credit1. Investment-grade (IG) credit spreads continue to tighten.
• IG bond spread:
• IG CDX (“index” of corporate credit default swaps) spread:
2. Covenant-lite leveraged loans are dominating the market. When the economy slows and leverage spikes, creditors will find themselves without the rights they had in the past. But who is worried about an economic slowdown anyway?
Source: @lcdnews; Read full article
3. Average corporate bond maturity continues to extend as more longer-dated paper hits the market.
Source: FTN Financial
Currency land--------
Rates1. The short-term rate markets continue to price in the risk of a US technical default. Such a “tail-risk” event would take place in October if Congress fails to raise the debt ceiling.
• US 6-month – 3-month T-bill spread shows the yield curve inverting on the short-end.
• The market sees the 3-month loan to the federal government as having the same risk as an unsecured loan (fed funds) to banks. Here is the T-bill – OIS spread.
2. The US dollar weakness is starting to push up market-based inflation expectations.
3. Speculative accounts continue to increase their bets on the yen’s decline. On the other hand, they are betting on the New Zealand dollar’s rally. These two trends are a manifestation of a massive “carry trade” in which speculators in effect “borrow” the yen at low rates and “lend” the New Zealand dollar (and other higher-yielding currencies) at a much higher rate to pocket the rate differential (via the F/X markets). It’s an indication of rising global risk appetite. The unwind won’t be pretty.
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2. The inverse relationship between commodities and the dollar has become less pronounced.
Source: BMI Research
a slew of big time carry trade positions and other technical Macro trades are being put on in size in various currencies.
Hedge funds don’t think the euro is overvalued and continue to increase their bets that the currency will climb further.
Back to Index
JapanFund managers have turned bullish on Japan’s stock market.
Source: BofAML
Back to Index
Canada1. The loonie is having an amazing couple of months in response to a more hawkish BoC.
Speculators have completely reversed their massive bets against the Canadian dollar and are now net-long the currency.
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The United States1. The dollar has sold off dramatically since the “Trump-induced” peak in January. DJT was quite adamant back in January and February that he wanted a weak USD to help make US exports cheaper and imported goods more expensive...... and he had clearly been accommodated.
Here is the Deutsche Bank trade-weight US dollar index. The decline could push US import prices higher in the months to come.
2. Below is the breakdown of the core CPI between goods and services. A weak US dollar is likely to ease the persistent goods deflation.
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5. Finally, here are some updates on US property markets.
• Yields on commercial properties are at pre-recession lows (suggesting that the market may be overvalued).
Source: Credit Suisse
• Residential construction pay for skilled workers is rising faster than the national average.
Source: John Burns Real Estate Consulting
The reason for better pay in construction is labor shortages.
Source: John Burns Real Estate Consulting
• The number of existing homes for sale in the US is at the lowest level since the mid-1990s.
Source: Capital Economics
• This chart shows housing starts by “intent.”
Source: John Burns Real Estate Consulting
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