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BofA: “A Deer In The Headlights” Market Moment

Courtesy of ZeroHedge. View original post here.

Looking at the latest fund flow data from EPFR, BofA CIO Mike Hartnett describes the most recent developments in capital flows with 4 ominous words: “deer in the headlights.” He is referring to the unexpected risk-off investor sentiment in the past week, a continuation of last week’s theme, which saw $2.8bn inflow to bonds, $0.9bn inflow to gold, while flows to equities remained unchanged.

Taking a closer look at equity flows, Hartnett notes the collapse in stock “froth” which following massive 2018 inflows of $150bn in the first 2 months of the year, has reversed and equity redemptions have surged to $30bn in the past 6 weeks.

Further narrowing the number down, there was 3% outflows, or the biggest outflows in 3 months, from tech, couped with the biggest HY outflows in 2 months, and biggest EM debt outflows in 10 weeks. In other words, a sudden risk aversion to the highest beta risk-on products and sectors.

Still, it’s too early perhaps to call a top as the 9-year bull leadership intact: flows into tech & EM debt/equity funds nonetheless close to record highs; in fact, only HY funds have seen “bear market” in flows.

Or maybe note: YTD returns are poor & stagflationary: oil 12.9%, commodities 6.1%, equities 0.2%, bonds -0.4%, cash 0.5%, US dollar -0.6%, 30-year US Treasury -7.4%. As Bank of America noted last week, the last time we saw performance such as this was… in 2007.

How did we get here? Recall that 2018 consensus was Goldilocks: higher growth, higher EPS, “good” rise in yields to >3%, sustained equity outperformance (this after Feb’16 lows to Jan’18 highs global market cap up $33tn). However it now appears that both profits and economic growth are peaking: 2018 EPS/GDP = peaking: EU/Japan/China exports & PMIs have peaked; 5 months after large corporate tax cut (and large equity gains – Chart 2), US capital goods orders unchanged.

To be sure, there are some good news, if only for the equity bulls:

First: the recent episode of “froth-off” means that BofAML’s “Bull & Bear” Indicator is back to @ 5.4, or a neutral reading; May FMS investor cash levels jumped sharply to 5%; May FMS tech “long” fell to 5-year low.

Second: the market is now clearly saying that Fed tightening = policy mistake: one can see that in the chart of US homebuilders which are a good lead indicator of Fed funds; other policy mistake price action = flattening yield curve, rising rates ≠ higher bank stocks.

But wait, there’s even better news: according to Hartnett we may be approaching another “Shanghai Accord”, i.e., another “synchronized monetary blinking”: consider China is easing (the 1st catalyst for US$ rally) & BoE/BoC/Riksbank all “blinking” as FX appreciation + no global inflation allows central banks to turn dovish.

So what is BofA’s reco? Do the contrarian trade, which is to buy in May: peak EPS + cleaner positioning + dovish central banks + China easing = rip in tech & EM…which we will look to sell.

Meanwhile, for the non-contrarians, the cleanest trade is long US$: at least until Fed “blinks”; BofA also notes that the US-Europe 10yr yield spread ios now widest since fall of Berlin Wall. 


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