* Buy the “flash crash”: as in Oct’14 a Treasury “flash crash” has coincided in early- Jan with a “buy signal” for oversold risk markets and tactical inflection point for markets
* Two “buy signals”:
- BofAML Bull & Bear Index triggers contrarian “buy” signal (Chart 1 - excessive bearish investor sentiment driven by big EM & HY outflows & weak price action in junk bonds);
- BofAML Global Breadth Rule on brink of triggering “buy” signal (Chart 2 - at Wednesday close net 80% of global equity markets trading below 200dma & 50dma, with US, China, Turkey the holdouts)
- “Risk-on” into ECB: our signals tactically argue for “risk-on” exposure in equity & credit markets into the ECB QE event on Jan 22nd (assuming US payrolls are robust)
- Volatility the Q1 winner: we worry a large ECB QE package in Jan will mark “peak QE expectations” leaving Europe/global risk markets in Q1 solely dependent on growth & EPS. And global govt bond yields could rise: fixed income markets have heavily discounted ECB QE (stock of negatively yielding Euro debt now stands at a staggering €1.2 trillion); in 3-months following Fed QE announcements 30-year Treasury yield rose on average 50bps. Volatility the only true winner if low growth, lower liquidity expectations cause investors to discount “policy failure” in coming months.
- Weekly flows: in line with bearish consensus, weekly flows showed “risk-off” rotation from equity funds ($12.1bn outflows) to bond funds ($5.3bn inflows) and money-markets ($9.0bn inflows)
* Asset Class Flows
- Equities: $12.1bn outflows ($7.8bn outflows from ETF’s vs $4.3bn outflows from mutual funds)
- Bonds: $5.3bn inflows (largest in 8 weeks) (Table 1)
- Precious metals: $0.2bn outflows (6 straight weeks)
- Money-markets: $9.0bn inflows
* Equity Flows
- EM: 8 straight weeks of redemptions ($1.3bn) (Table 2)
- US: $12.8bn outflows (via both ETF’s and mutual funds)
- Japan: $0.5bn inflows
- Europe: modest $0.3bn outflows
* Fixed Income Flows
- 55 straight weeks of inflows to IG bond funds ($5.4bn)
- 6 straight weeks of outflows from HY bond funds ($1.9bn)
- 5 straight weeks of outflows from EM debt funds ($0.5bn)
- 26 straight weeks of outflows from bank loan funds ($0.5bn) (Chart 3)
- 16 straight weeks of inflows to muni funds ($1.2bn)
- 12 straight weeks of inflows to MBS funds ($0.7bn)
- $1.0bn inflows to govt/tsy funds