| | | Hartnett: The World's Most Crowded Trades Are Getting Liquidated
And here are the key levels to hold to confirm the correction is "healthy"...
And while many bulls have argued the correction was healthy, Hartnett warns that key levels that must hold are the following: yen (JPY) 152, copper (HG1) 9000, tech (NDX) 18700. Those same bulls will also say that as long as these levels hold, this will be just another dip-buying opportunity as some of the froth clears out; that's because - as Hartnett wrote last week - investors had fully priced-in the bullish combo of Fed cut (100%), Trump victory (75%), and soft landing (68%)...
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... and critically credit spreads - the "glue" for Wall St - have thus far been well-behaved… but this changes if IG CDX spreads (51bps) break above 60bps.
Meanwhile, the bears will counter that a steeper yield curve is recessionary...
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... that bond vigilantes won’t allow Fed cuts to work (since US debt is up $2tn past 317 days to $35tn)...
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... consumers are no longer willing to tolerate inflation (lower nominal GDP = lower not higher EPS)...
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... commodity prices confirm global economy ill (China bond yields at all-time lows)...
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... and we are one bad payroll away from cracking monopolistic/oligopolistic dominance.
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Perhaps, but for now investors continue to flee cash and allocate to risky assets expecting the Fed to cut if not next week then definitely in September, and the latest weekly fund flows confirm it: according to EPFR data cited by Hartnett, the last week saw $22.2BN to equities, $16.1BN to bonds, $1.3BN to gold, $1.2BN to crypto... and $42.3BN out of cash, as investors start to frontrun the coming rate cuts.
And while cash saw its largest outflow in 3 months, the following inflows were especially notable:
- Gold: biggest 2-week inflow since Mar'22 ($1.3bn this week – Chart 7);
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- IG bonds: 39th week of inflows ($8.8bn this week)
- EM equities: largest inflow since Feb'24 ($11.1bn)
- China: largest inflow since Feb'24 ($8.3bn)
- Japan: largest inflow in 3 months ($4.1bn)
Yet while markets keep pressing continued risk-on trades, Hartnett won't tired of doing just the opposite, and echoing what he has said for much of 2024, he remains bullish on bonds in the second half of 2024 as the contrarian reversals of the first half's ABB "Anything But Bonds" trades continue to outperform, to wit:
- "leverage" (REITs, small cap),
- "value" (e.g. UK FTSE…the "anti-Nasdaq"),
- "duration" (e.g. biotech);
... but the black swan - as Hartnett himself admits - is that the fiscal excess of 2020s can flip cyclical bond bull script.
That said, if the coming recession and spike in unemployment cause higher government bond yields as markets discount a fiscal policy panic to avert social & political unrest, e.g. politicians tell Fed to fund deficit and address AI-led unemployment via QE or yield curve control (AI = UBI = YCC), and Fed cuts in H2 and yields rise vs. fall, this will all be hugely bullish crypto/commodities, and hugely bearish US dollar.
Hartnett concludes his latest note by discussing the latest weekly political trends, where we have seen the probability of a Trump win drop to 64% (was 75% last week)...
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