As has been widely trumpeted across the financial media, today was the 7 year anniversary of the March 2009 market bottom: whether this “most hated rally” was worth the $60+ trillion in incremental global debt and the $14 trillion in global central bank liquidity, even as the middle class has been decimated – as we forecast would happen roughly around the time Ben Bernanke unveiled QE1- leading to such outcomes as a global rejection of a failed status quo and the rise of Donald Trump we leave to the historians.
But what everyone wants to know now, is whether this “rally”, both since March 2007 and from the February 11 bottoms, will continue, or whether it will finally fold, and become the most overdue bear market in history.
To be sure, nobody knows the answer, but here are three bullish and three bearish catalysts, i.e., the “P’s“, which according to BofA’s Michael Hartnett (who is still selling into strength) will determine where the market goes from here.
Top Trumps, by BofA’s Michael Hartnett
The big risk rally since Feb 11th has been led by the 4 “C’s” of Commodities, China-plays, Credit & Consumer, all on the back of bearish investor sentiment and the highest cash levels since Nov’01. We are concerned that complacency is creeping back in (both VIX & VDAX back at 200dma), and we do not think policy-makers will beat expectations at the ECB (3/10), BoJ (3/15) and FOMC (3/16) meetings. Therefore we remain sellers into strength; watch the relative performance of HYG/TLT, AUD/JPY & XLE/SPY for signs of buyers’ fatigue and risk-reversal. In March, our new BofAML MVP Model recommends going “long” Japan, Canada & Norway equities, paired with “shorts” in the Netherlands, Italy & US equities.
BofAML’s base case (Table 5) and recent revisions to economic and market forecasts reflect a “reset” of 2016 expectations, rather than the likelihood of “recession” which has once again receded in recent weeks. Our 2016 US growth forecast is now 2.0%, down from 2.3% some weeks ago, and this low forecast of growth is mirrored in other developed economies (Eurozone 1.5% from 1.7%, Japan 0.7% from 1.2%). BofAML now expects two 2016 rate rises by the Fed (down from three earlier in year). Bond yield forecasts have been revised downward, although our assumption is that yields will rise, rather than decline, in coming quarters. And key FX rate and equity market forecasts have been revised to reflect the on-going struggle for sustainable economic growth.
These forecasts certainly hint at a deflationary trading range for major asset classes. So what are the “top trumps” that could send bond, credit and equity markets substantially higher or lower than currently expected:
Bull catalysts
- Positioning: the brunt of the bear market has already happened and cash levels are mountainous.
- Policy: Fed sticks to its guns on rate hikes; ECB/BoJ do not cut rates further; meanwhile an EM rate-cutting cycle is ahead of us, and the Doha Accord signals the
low in oil prices is behind us; heavy hints of G7 fiscal stimulus.- Profits: both the US & China PMI’s move back above 50; Asian exports stop contracting (note the Feb contraction in China export growth of -25.4% was worst performance since May’09 – Chart 8); crucially, to sustain gains in equity and credit markets, we need to see a). US productivity growth acceleration and b). G7 consumption growth improvement…both are necessary to cause big, sustained upward moves in EPS forecasts
Bear catalysts
- Positioning: redemptions cause investors to unwind the “last of the long” positions in quality stocks and investment grade corporate bonds.
- Policy: ECB & BoJ QE is greeted by investor repudiation, i.e. a rise (not a fall) in both European & Japanese bond yields and a stronger euro & yen.
- Profits: US activity falters through the spring – note the ominous trend in US small business confidence (Chart 9); meanwhile a credit crunch and concerns of GREXIT, BREXIT, and the end of the Schengen Agreement causes European economic activity and profits to surprise to the downside.
Hartnett concludes with the following notes to traders:
- Cash mountain. Cash levels are very high (for some investors >1/3 in cash); QE failure, China, illiquid public markets, fragmenting political & social backdrop, poor risk-reward, most quoted reasons for “long cash, short conviction” position.
- Sell-into-strength. Majority of investors in “sell into strength” mood; debate swirls around “level” & “timing” with SPX 1950-2030 & mid-March most favored.
- No US recession. US widely seen as very unlikely to experience recession thanks to US consumer; that said, a Fed hike in the next six months would be big (positive) surprise to investors; bigger problem for investors is that US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated policy response.
- No US$ bear market: no-one arguing for bout of cyclical US dollar weakness.
- QE failure: investors increasingly regard policy meetings as a selling catalyst, not a buying catalyst; central banks can no longer turn “water into wine”.
- Black dragon: first derivative China plays (Brazil, Miners, China) could be right to increase exposure to these on a 3 year view, but the second derivatives (Sydney/ Vancouver Real Estate) are too high; EM more interesting in world of low growth, low yields.
- Extreme policy solutions mooted. Extreme markets/macro leading investors to countenance more extreme policies going forward: GREXIT in the summer, or a breakup of the Schengen Agreement, as a solution to the migration crisis problem; a summer BREXIT, as British are willing to exchange short-term economic risks/uncertainties for an assertion of sovereignty, control of immigration, and a rebuke to the political and economic elites; the abolition of notes and coins in circulation; debt monetization (starting in Japan); sustained period of negative interest rates 2016-2020.
With that said, the one biggest catalyst may come as less than 24 hours from now, and it will be what Mario Draghi says at 2:30pm CET tomorrow. If the devastating December past is prologue, all that “smart money” selling in the past 6 weeks will be explained very soon.
via Zero Hedge http://ift.tt/1SAAfmr Tyler Durden