All eyes in the financial world will be on the Federal Reserve come Wednesday when the policy statement will be released. Expectations are for a .50% rise in short term rates and the announcement of the dates of the Fed’s contraction of its balance sheet. As we mentioned last week, the outlook of a scorching economy that the Fed needs to reign in precipitously with aggressive interest rate hikes is waning. Some economic numbers are even deteriorating to the point of bordering on recession. An example of that would be employment numbers tumbling to its weakest since Aug 2021. Strangely though, some manufacturing numbers were a pleasant surprise upward. The data from 1st quarter earnings from big companies was disappointing, but the 2nd quarter appears to be starting on firmer footing. At the end of the day, there is nothing obvious to say that the Fed should not raise rates, and of course the Fed has been banging hawkish drums for weeks now as they are responsible for much of the inflation that we now see. No matter what we feel of the wisdom of raising rates, we are betting that the Fed will raise rates and the only possibility we see is they may only raise .25% - but that is unlikely.
Once again, take a look at a chart of the price of the U.S. Dollar vs. a basket of other currencies…
That chart doesn’t make us think that inflation is going to run wild even after supply chain disruptions calm down. Like we mentioned last week: sesweb.net/blog/canary-in-the-coal-mine
Asset markets have priced in this rate rise – so now the question is, where do they go if the Fed does as expected and raises interest rates .50% on Wednesday? Here we are going to share an analysis from Goldman Sachs. Scott Rubner provides research for the top clients of Goldman and here is his 11-point checklist of why he thinks the worst of asset markets’ selloff is done for now…
- U.S. Corporates return back to the open window on Monday with dry powder. Rubner calculates $5BN of demand per day, every day until mid-June. U.S. corporates are the largest buyer of equities in 2022 and have authorized record YTD (AAPL = $90bn; GOOG = $70bn; MSFT = $60bn; FB = $50bn, etc).
- Pensions flipped to buy given the recent outperformance of bonds vs stock. This should carry over into next week.
- S&P Index gamma turned negative on Thursday for the first time since March.
- Synthetic Short Gamma through CTA and Vol-Control strategies supply will fade over the next week (Thursday’s move will lower some of the supply expectations and Goldman’s estimates will dramatically change next week).
- Liquidity is simply not available to try to cover liquid macro. As we noted on several occasions last week sesweb.net/blog/canary-in-the-coal-mine, top book liquidity in the S&P 500 futures is $2.8M. This ranks in the 1st percentile in the last 10-years. This is as low as it gets.
- Sentiment is the most bearish since the market crash lows in March 2009. Rubner says that he has done “more bearish zoom calls these past two weeks, than I can recall.” The bears (AAIIBEAR) published a reading of 59.40 today. This was the highest level since March 5th 2009 (70.27). S&P500 rallied 8.54% in March 2009 and 9.39% in April of 2009. That was the generational market bottom.
- Money Market Inflows Logged a massive +$60B inflows last week, which was the largest weekly inflow since Covid 2020 (and typically another fear gauge).
- For the fixed income watchers, Goldman’s CTA models show some impressive demand. Goldman has +$20B of bonds to buy in a flat tape, but +$117B of bonds to buy in an up tape, and $37B of bonds to buy in a down tape. This should ease some of the pressure on long duration equities and largest construction of market cap.
- Goldman’s Prime Desk notes that hedge funds exposure is dismal. Gross and Net Exposure are currently at 2-year lows. And vs the past 5 years, Gross ranks in the 21st and Net ranks in the 38th. US TMT Megacap L/S ratio declined by -48% in the past 1-month. (~right before earnings)
- Everyone is short: Short leverage (with options) ranks in the 98th percentile in the last 5 years.
- New month = New Inflows. There should be some decent inflows to start May per normal rebalancing cycle in retirement accounts.
There is a lot of trader-talk in that analysis but to put it simply, most everyone thinks the stock and bond markets are going down. Sentiment is at 5-year lows and volatility is high. GENERALLY that means – along with some of the other points Rubner puts together - that a relief rally at least is due. There are many, many challenges to the world’s asset markets as are all over the news wires. We aren’t suggesting that things can’t get worse. But we are suggesting that for now the bulk of the damage has been done. Invest accordingly!!
Regards and good investing,