Is The Biggest Treasury Drawdown In History Imminent? The "Bond Shock" Story Refuses To Go Away
By Tyler Durden
While currency and fixed-income traders are having second thoughts about the extent of the Trump reflation trade just days before the inauguration of the 45th U.S. president as Bloomberg’s Vincent Cignarella writes, most readily observed in the recent 50% drop in 10Y real yields, which have slid from 0.74% in mid-December to just 0.38% in the past month, it is still far too early to call the time of death on the Trump rally.
Which brings us to the Icarus trade, laid out by Bank of America, which we pointed out last week. As a reminder, BofA’s tactical view is that after a Jan/Feb wobble, stocks & commodities will have one last 10% melt-up in H1. Call it the “Icarus trade”. The current melt up, which started back in Feb 2016, will be followed by a meltdown later in ’17 BofA’s Michael Harnett predicts.
This is how it will play out according to the BofA strategist. The current rally started in Feb 2016 with…
- bearish Positioning (BofAML Bull & Bear indicator = 0, cash = 5.6%, big >2SD underweights in Emerging Markets & energy)
- excessively bearish Profits (credit spread blowout, PMI’s crashing toward 45, global EPS negative)
- and Policy impotence (“Quantitative Failure”).
Thus the rally is likely to end with…
- bullish Positioning (BB indicator = 8, cash = 4%, unambiguous long positions in stocks, Japan & banks)
- excessively bullish Profit expectations (global PMI’s >55, US wage growth >3%)
- and Policy hawkishness (Fed jacks up short end of yield curve, ECB tapers).
Are we there yet? No, says BofA. Here’s why:
- Positioning is bullish but not dangerously euphoric (B&B indicator is 3.6, FMS cash @ 19-month lows of 4.8% but elevated versus 15-year history, global equities trade just 3% above 200-day moving average).
- Profits likely to be revised higher following strong Dec’16 ISM print (implies 10% US EPS growth – Chart 2); credit spreads well-behaved with US & European spreads at 18-month lows; however PMI’s getting closer to “peak” and US wages close to 8-year highs.
- Bond market yet to aggressively price-in hawkish monetary Policy: US financials conditions in “easy” territory according to our simple model; US yield curve has stopped steepening but yet to see a “bear flattening”; ECB “taper” remains one of the key catalyst for rates volatility, although for the time being it remains unlikely.
Sure, Hartnett concedes, you can get a wobble in coming weeks. Investors are partial to the “buy the election, sell the inauguration” argument. Fed anxiety could pick-up between the two winter FOMC meetings: Feb 1st & March 15th, especially given December surge in US wage growth. And Trump/Mexico/China headlines/tweets have the ability to rattle sentiment as the new President seeks to immediately boost his ratings via populist trade policies & legislation …from Occupy Wall Street to Occupy Detroit or Occupy Silicon Valley.
Still, Hartnett does not see it… yet.
Positioning, Policy & Profit arguments for a big Q1 correction. The conventional wisdom has flipped from “Davos Man” portfolios to “Joe Six-Pack” portfolios in recent quarters. But let’s not forget the extremity of the …read more
Source: Is The Biggest Treasury Drawdown In History Imminent? The "Bond Shock" Story Refuses To Go Away
