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RBC Explains The Market's Sudden Regime Shift
06-29-2017, 01:41 PM,
RBC Explains The Market's Sudden Regime Shift
RBC Explains The Market's Sudden Regime Shift

<p>There's a clear change in the air as growth stocks are pummeled, bond yields spike, and central bankers wax hawkish.</p>
<p><a href=""><img alt="" src="" style="width: 600px; height: 313px;" /></a></p>
<p>Here is RBC's head of cross-asset strategy Charlie McElligott to explain what's happening...</p>
<p><strong><em>The selloff in USTs &amp; duration / concurrent &lsquo;bear steepening&rsquo; is further-set to act as an &lsquo;accelerant&rsquo; on both my equities &lsquo;rotation&rsquo; call and the unwind of the broad &lsquo;slow-flation&rsquo; narrative overshoot and its key trade expressions. </em></strong></p>
<p>And just to get this question out of the way: as we have mentioned many times in the past 5 years,<strong> equities can handle higher nominal rates to a certain extent before becoming &lsquo;too violent,&rsquo;</strong> at which point we&rsquo;d have to become concerned about the potential for risk-parity deleveraging flows across what have been recently &lsquo;low vol&rsquo; assets, which has allowed for greater leverage deployment on said &lsquo;risk allocations&rsquo; which would then be taken-down.&nbsp; This could be exacerbated by recent &lsquo;longs&rsquo; into USTs tapping, as some faster money late-comers get stung here.&nbsp; However in the &lsquo;now,&rsquo; the recently higher realized vols in rates isn&rsquo;t bleeding into a gamma repricing yet (Jenny Xiao&mdash;&ldquo;It&rsquo;s pretty incredible that a 15bps selloff couldn&rsquo;t muster anything more than a 1 annual bpvol move in gamma&rdquoWink.&nbsp; And FWIW too, with &lsquo;real rates&rsquo; chopping along here and unable to break meaningful higher (= &ldquo;tighter&rdquo; financial conditions), I don&rsquo;t expect this to be a headwind for awhile either.</p>
<p>Currently, it&rsquo;s the same &lsquo;higher nominal rates&rsquo; catalysts which I&rsquo;ve been noting that are continuing to push yields around.&nbsp;<strong> Hawkish rhetoric from global central bankers (most recently BoE&rsquo;s Haldane this morning stating they &ldquo;need to look seriously at raising rates&rdquoWink is certainly a large dynamic right now, catching the &lsquo;slow-flation&rsquo; crowd--who had recently piled-into duration and flatteners on account of slowing data trajectory and what had been a collapse in inflation expectations / inflation proxies&mdash;&lsquo;wrong way.&rsquo;&nbsp; </strong>More &lsquo;higher rates&rsquo; right-sizing as the &lsquo;narrative excess&rsquo; is corrected.</p>
<p>Further playing into my hands on the <strong>&ldquo;slow-flation narrative &amp; positioning overshoot&rdquo;</strong> theme at the core of the equities factor-rotation trade I&rsquo;ve been pushing are two key commodity inflation proxies reversing course:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Crude &lsquo;capitulatory&rsquo; flows from &lsquo;lazy OPEC longs&rsquo; seemingly reached peak &lsquo;tap-out&rsquo; over the past 3 weeks (with net manager length at 11-month lows and all-time highs in ICE Brent spec shorts)&hellip;.which allowed for a &lsquo;stabilization&rsquo; off the 50dma and pivot ultimately higher.&nbsp;<strong> Now it seems &lsquo;less bad&rsquo; inventory data&nbsp; is helping to fuel a modest squeeze higher, with WTI +7.7% in one week&hellip;.although there are some notable &lsquo;production decline wins&rsquo; worth-noting here too</strong>: our Energy equities team is highlighting that the &lsquo;lower 48 states&rsquo; production saw the largest drop in 10 months, and has declined twice now this month.</p>
<p><strong>And even more importantly from an &lsquo;inflation expectations&rsquo; key price &lsquo;sensitivity&rsquo; input, Qingdao Iron Ore pivoted MASSIVELY-HIGHER off the lows mid-month, </strong>as the Chinese &lsquo;flinched&rsquo; on liquidity (3 weeks of powerful injections via OMOs and MLF beginning late May) began to &lsquo;pay off&rsquo; in the form of a 16.8% rally in 10 sessions (and for the broad industrial metals complex as well).&nbsp; And mind-you&hellip;this rally has continued despite the PBoC liquidity withdrawals of the past week, as money market rates in aggregate have moved lower.&nbsp;</p>
<p><strong><em>Take a look at said &lsquo;easing&rsquo; of tighter financing conditions as per overnight SHIBOR over the past week alone&hellip;it&rsquo;s like a steroid-shot for the global commodities complex:&nbsp; </em></strong></p>
<p><a href=""><img alt="" src="" style="width: 600px; height: 404px;" /></a></p>
<p>Bloomberg Global Commodities Index and Overnight SHIBOR:</p>
<p><a href=""><img alt="" src="" style="width: 600px; height: 405px;" /></a></p>
<p>Overnight SHIBOR and Qingdao Iron Ore:</p>
<p><a href=""><img alt="" src="" style="width: 600px; height: 405px;" /></a></p>
<p><strong>In turn, look at the counter-trend move across inflation proxies&mdash;pivoting HIGHER / WIDER for the first time in months</strong>--everything from US 5y5y inflation fwds to breakevens to the aforementioned iron ore and crude:</p>
<p><a href=""><img alt="" src="" style="width: 600px; height: 407px;" /></a></p>
<p><u><strong>It&rsquo;s still the same story we&rsquo;ve been grinding over for the past three years</strong></u>:</p>
<p>...the <strong>entire global macro trade continues to hinge on the perceived &lsquo;binary&rsquo; direction of &lsquo;inflation&rsquo; </strong>(&lsquo;reflation&rsquo; vs &lsquo;disinflation&rsquo; debate)</p>
<p>...<strong>which then dictates everything from the rates &lsquo;flatteners vs steepeners&rsquo; trade to US equities factor rotations</strong> (&lsquo;value&rsquo; and &lsquo;size&rsquo; factors vs &lsquo;momentum,&rsquo; &lsquo;growth,&rsquo; &lsquo;quality,&rsquo; and &lsquo;anti-beta&rsquoWink to CCCs vs high-grade in credit.&nbsp;</p>
<p>Why?&nbsp; <em><u><strong>Because every asset class in the post-GFC era now possesses a heightened sensitivity to &lsquo;interest rates&rsquo; on account of ZIRP &amp; QE monpol.</strong></u></em></p>

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