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BofA: "A Deer In The Headlights" Market Moment
04-27-2018, 11:35 AM,
BofA: "A Deer In The Headlights" Market Moment
BofA: "A Deer In The Headlights" Market Moment

<p>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: "<strong>deer in the headlights."</strong> 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.</p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/deer%20headlights%202.jpg?itok=NZNysuPs" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="7f3d4126-01d1-4223-b94a-ad62c816d132" data-responsive-image-style="inline_images" height="328" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p>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.</p>

<p>Further narrowing the number down, there was 3% outflows, or <strong>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. </strong>In other words, a sudden risk aversion to the highest beta risk-on products and sectors.</p>

<p>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, <strong>only HY funds have seen “bear market” in flows.</strong></p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/flows%20bofa%20ytd.jpg?itok=lwWxPuRt" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="fc7fb14b-c5d1-4a33-9d67-4e1aa0476be7" data-responsive-image-style="inline_images" height="186" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p>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, <a href="">the last time we saw performance such as this was... in 2007</a>.</p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/total%20returns%20bofa.jpg?itok=BtpTSVoK" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="b7dc9616-6b7d-4495-8799-cab156d980bf" data-responsive-image-style="inline_images" height="271" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p>How did we get here? Recall that 2018 consensus was <strong>Goldilocks</strong>: higher growth, higher EPS, <strong>“good” rise in yields to >3%, </strong>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.</p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/hart%20chart%202.jpg?itok=cbMQRg7-" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="a9845089-8c37-4063-b73a-e645cc165ded" data-responsive-image-style="inline_images" height="283" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

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

<p>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.</p>

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

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/hart%20chart%203.jpg?itok=h94HWlm9" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="4c668fb2-593a-428f-85c9-5e621aa9215b" data-responsive-image-style="inline_images" height="339" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p>But wait, there's even better news: according to Hartnett we may be approaching another "Shanghai Accord", i.e., another "synchronized monetary blinking": consider <strong>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</strong>.</p>

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

<p>Meanwhile, for the non-contrarians, <strong>the cleanest trade is long US$</strong>: at least until Fed “blinks”; BofA also notes that the US-Europe 10yr yield spread ios now widest since fall of Berlin Wall. </p><img src="" height="1" width="1" alt=""/>

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