Yesterday, it was risk off, and the litany of complaints aimed at "Blooper Mario" and the ECB's disappointment was relentless; then after supposedly "reassessing" what the ECB really announced, we have shifted to a global risk on euphoria and this morning pundits can't find enough praise for "Super Mario."
And yet one strategist refuses to flop to yesterday's flip: BofA's credit strategist Michael Hartnett, who has been urging to sell this rally for the past few weeks, and who continues to do so today. Here's why.
- Central banks spur risk-on: in run-up to ECB/BoJ/Fed flows risk-on, particularly in credit...bond inflows ($6.1bn), equity inflows ($4.5bn), gold inflows ($1.0bn) and Money-Market outflows ($3.6bn).
- Inflows to "weak dollar" plays: 2016 consensus "long dollar" view cracking...largest inflows to EM debt in 12 months, 1st inflows to EM equity funds in 5 months, largest 3week inflow to High Yield bond funds in 3 years, 9th consecutive week of inflow to gold funds (longest streak since 2012).
- Outflows from "strong dollar" plays: largest 5-week outflows from European equity funds in 16 months (Chart 2).
- Sell signal from Global Flow Trading Rule: significant High Yield inflows & rising equity inflows (4-week risk inflows = 1.3% of AUM - Chart 1) trigger contrarian “sell” signal for risk assets; rule currently recommends "take profits" rather than outright short as US ISM is currently improving, not deteriorating.
- Highest (5.6%) cash level since Nov'01 in Feb Fund Manager Survey was unambiguous trading "buy signal": but oil/EM/resources/credit/banks/small cap/cyclicals have rallied big since Feb 11th (when FMS closed).
- ECB gave all they had today (rate cuts/QE/credit purchases) but price action screamed "Quantitative Failure"...gold and volatility outperformed.
- Risk assets about to top: ultimately markets about "rates" and "earnings", little else; central banks have played “rates card” as aggressively as they can; ECB done, BoJ has nothing in the tank, and any US macro strength will elicit Fed rate hike expectations (the Fed wants to tighten); EPS momentum simply not strong enough near-term to overwhelm Q2 risks of Brexit, BoJ failure, US politics, China debt deflation.
- There remain good investments, e.g. gold, US IG, defensive growth stocks in US, dividend yield in EU/Japan, "global peripheral debt" (i.e. EM debt), the "long Main St, short Wall St" theme, "best of breed" in EM (buy the best assets in the worst places); but nearterm risk-reward in assets markets once again looks poor.