The Flow Show: SPY me to the Boom
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The Flow Show
The Flow Show: SPY me to the Boom
• New year kicks off max bullish with blockbuster inflows into equities, corporate & EM bonds
• Triggering B&B indicator "sell signal" requires drop in FMS cash and big HY & EM inflows next 3 weeks
• What level of the SPX causes the Fed to start hiking 50bps...it's not 2767Talking Points
Maximum bullish: new year kicks off with blockbuster $24.4bn inflows into equities, big $13.1bn inflows into corporate & EM bonds…the bull capitulation begins.
Barbell boom: 2nd largest week ever of inflows into EM debt, big inflows to IG & HY bonds, 2nd largest inflows into tech...investors double down on bull market leadership; largest 6-week inflows to energy funds...investors chasing laggards too (Chart 1).
Unambiguously long: BofAML Bull & Bear indicator jumps to 7.1 from 6.2, active equity funds finally seeing inflows, BofAML private client debt (22.5%) & cash (10.2%) allocations making new lows…investors are unambiguously long and will likely stay so until rates go up and/ or EPS goes down.
Tick-tock: triggering B&B indicator "sell signal" requires Jan'2018 FMS cash levels <4.3% (released Tuesday) + $15bn inflows into HY + EM equity + EM debt next 3 weeks; peak Positioning on its way but we expect asset prices to overshoot first.
The Great Tapering: BoJ & ECB clearly saying they will soon join Fed and start tapering the $12tn of asset purchases since Lehman; only government bonds care thus far; US Treasuries (-2.4% total return) on course for worst January since 2009; but tapering without inflation = flatter yield curve not bond shock.
The Great Bond Bear: if ultimate destination for a bear market in Treasuries is 10-year yield <3% then greed in credit & equities will continue to trump fear; wage inflation & >3% yields, and/or trade war (EPS -ve) only impediments to risk asset overshoot early-2018.
SPY me to the Boom: #1 FAQ is "what level of bond yields will cause equity markets to fall?"; better question is "what level in SPX causes Fed to start hiking 50bps"...it's not 2767; BofAML Q1 targets: SPX 2860, CCMP 8000, GT10 2.85%, EUR 1.10.
Chart 1: Inflation vs deflation assets (total returns)
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data, Bloomberg; note: Inflation assets: Commodities, TIPS, EAFE, US Banks, Value and Cash; Deflation assets = Govt bonds, US IG, S&P 500, US Cons. Disc, Growth and US HY
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