Key takeaways
* record week of Tech inflows, big IG inflows, but HY & EM debt flows weakening* We think EMD...HYG...SX7E...BKX...SOX...recent pullback is "dress rehearsal" not the Big One
* Icarus meltdown more likely after SPX 2863 but before 22nd Aug 2018
Talking Points
- Inflows ebb: $3.9bn into equities, $6.5bn into bonds, modest slowdown in recent weeks
- Flow leadership intact: record week of tech inflows $1.3bn (Chart 1); big IG debt inflows past 4 weeks ($25.1bn); but weakest EM debt inflows in 12 weeks & biggest HY outflow in 8 weeks; still, fund inflows to IG/HY/EM bonds YTD massive $296bn (Chart 2); and big 5 BofAML GWIM ETF positions of
US large cap, IG bonds, EAFE stocks, high dividend stocks, Tech stocks (Chart 3) confirm "growth" & "yield" leadership
- Price leadership stung: Oct 26 /27 ECB announced "tapering", Brent broke $60/b…concerns of "peak policy" stimulus & "peak profits" caused toppling
of credit, bank, tech "leadership"; sell-off sequence past few weeks = 1 EMD, 2 HYG, 3 SX7E, 4 BKX, and #5 SOX (Chart 4); watch EMD & HYG in
particular…needs to stabilize…note junk bonds v correlated with tech stocks (Chart 5)
- Icarus: recent pullback also follows insane gains…FAANG+BAT market cap up $1.5tn YTD, a sum larger than entire market cap of DAX ($1.4tn); and Aug saw all-time low yields in US HY tech bonds (4.3% H0TY) & EU HY corp bond yields hit low in Oct (2.1% HE00, i.e. lower than yield on US Treasuries)
- Dress rehearsal: flattening yield curve big +ve for risk assets YTD but past 8 sessions of lower bond yields has more concerningly coincided with weaker credit performance; but credit hit by special factors (IG hit by big supply, HY by telco issues (10% of HYG)); & all-time low in MOVE index suggests pullback a "dress rehearsal" for potential meltdown…requires recession risk or higher wage inflation/ bond yields/ bond vol (i.e. MOVE)/ credit spreads
- BB was a warning sign: BofAML Bull & Bear Indicator was 7.6 on Oct 26 …once again useful warning signal; now BB @ 7.1 on weaker equity breadth, slower risk asset inflows; next Tuesday's BofAML's Nov Fund Manager Survey needs to show big drop in FMS to 4.2% to trigger "sell signal" of 8.0 (ceteris paribus)
- Big Bad Bull: 1. on Aug 22 2018 S&P 500 bull market becomes longest ever; 2. @2863 S&P 500 bull market becomes 2 largest of all-time; Icarus could end badly after 2863 SPX and before Aug 22 2018
Asset Class Flows
- Equities: inflows 20 of past 22 weeks ($3.9bn; $4.8bn into ETFs, $1.0bn outflows from mutual funds)
- Bonds: 34 straight weeks of inflows ($6.5bn)
- Precious metals: small week of inflows ($0.3bn)
- Fixed Income Flows :
- 46 straight weeks of IG bond fund inflows ($7.0bn)
- Largest HY bond fund outflows in 8 weeks ($0.6bn)
- Inflows to EM debt funds 41 of past 42 weeks ($0.5bn)
- Small muni funds inflows ($0.3bn)
- 8 straight week of govt/Tsy fund outflows ($0.8bn)
- Small inflows into TIPS ($0.3bn)
- Largest bank loan fund outflows in 11 weeks ($0.4bn)
- Equity Flows
- US: large outflows reverse recent inflows ($5.6bn)
- Japan: inflows continue after recent redemptions ($1.1bn)
- Europe: inflows in 9 of past 10 weeks ($2.9bn)
- EM: inflows for 32 of past 34 weeks ($0.3bn)
By style: moderate US value fund outflows ($0.9bn), moderate US small caps outflows ($1.0bn), US growth outflows in 14 of past 16 weeks ($0.3bn)
By sector: record inflows to tech ($1.3bn), consumer ($0.2bn), energy ($0.1bn), materials ($0.01bn, 11 straight week); outflows from health care ($0.01bn), financials ($0.04bn), utilities ($0.3bn), real estate ($0.2bn)