With an otherwise stellar Q1 ending with a whimper, traders expected that Monday would bring a return if not the "animal spirits", then at least the Reflation trade. That, however did not happen, for various reasons as profiled earlier by RBC, among which:
- rates reversing fueled by softening ‘soft’ data vs ‘prices paid’ overshoot, helping to ‘kick off’ a reversal within equities ‘momentum’ longs as ‘growth’ names fading,’defensives’ lead and ‘reflation’ is again hammered.
- Early focus on the big ‘Prices Paid’ beat in today’s ISM (highest absolute # since ’11), with S&P futures at lows on the session following the release indicating ‘bad inflation’ concerns when weighed against signs of ‘slowing growth’ (Street Q1 GDP downgrades, Atlanta Fed GDPNow downticking, Markit comments on Q2 post Manu PMI release) and weakening ‘soft data.’ This harkens back to the post Dec Fed concerns around ‘stagflation’ potentials and / or ‘hiking faster than we’re growing’ fears…i.e. Fed “policy error.”
- Firmer USD (“policy divergence” and start of new Japan fiscal year highlighted below) is meagerly attempting to keep US rates from breaking dangerously lower (recent move lower fueled by the leveraged fund short-squeeze in USTs turning now to interest in establishing LONGS), but this week’s heavy econ calendar will also have fundamental impacts.
- Today’s US data update is showing us that the much-focused-upon ‘hard vs soft’ data dynamic is showing signs of a ‘true-up,’ with the scale of ‘soft’ data survey beats reverting modestly lower (also see the ‘forward looking’ quote below from Markit’s Chief Business Economist—“…the loss of momentum seen in February and March bodes ill for the second quarter”).
- leadership from ‘defensives’ / ‘low volatility’ / ‘anti-beta’ which certainly isn’t helpful for the buy-side majority. Initially the ‘new safe haven’ of ‘growth’ held, although as Tech slips further back on the S&P sector performance tables, we see ‘momentum’ fading as well. Bringing up the rear we see ‘cyclicals’ / ‘value’ getting properly hammered as the aforementioned ‘duration sensitive’ sectors rally, as ‘reflation’ takes another hit.
After sliding sharply at the open, just as news of the St. Petersburg explosion broke, the market managed to grind its way higher all day...
... with the Dow emerging into the green shortly before the close courtesy of a relentless selloff in the VIX, which closed at the day's low, and barely in the green after being 10% higher earlier in the session.
Whatever the internal market dynamics that caused the rebound, however, the otcome was clear: the reflation trade failed to make an appearance all day, despite speeches by several Fed members including a repeat appearance by Bill Dudley (who howeverf was warning about the negative impact of record student loans, even if with a 5 year lag) because while the USD dollar was modestly higher...
.... the stronger Yen did not help, and with the USDJPY sliding back under 111, the expected bid from Japanese buyers on the first day of the new year failed to materlize.
To be sure, there was no trace of reflation across the TSY complex, which saw yields slide at the start of the day, and failed to catch a bid throughout the day,
To be sure, there was no reflation in the 5Y5Y complex, which has pancaked since the early days after the Trump election and if anything has been on a modest downward path.
Arugably the key driver behind the reflation trade in recent weeks, the price of crude, was hite early on, and failed to regain its Friday closing price, even though $50 has emerged as a support level for the time being.
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But while the overall market started Q2 with a whimper at best, one stock ignored decided to yet again crush shorts, and soared to new all time highs, while its CEO was gloating at the expense of shorts: Tesla hit new all time highs today...
... as for Amazon, which likewise closed at new all time highs, it is now just over $100 away from $1,000/share and making Jeff Bezos the richest man in the world.