Monday, March 6, 2017

Markets: "Citi’s Matt King says “sell”"

DJIA     20,937.91 -67.80 (-0.32%)
Nasdaq  5,833.74 -37.02 (-0.63%)
S&P 500 2,371.27 -11.85 (-0.50%)

From FT Alphaville:
And quite bluntly at that. With our emphasis:
What’s a manager supposed to do when by early March your asset class has already exceeded your expectation for full-year returns? Take profit and take the rest of the year off, of course! And if it carries on rallying, go outright short! Yet somehow nobody seems to want to.
Part of the reason is that the rally owes more to inflows and short covering than to institutional investor exuberance. And part is that the economic data do seem genuinely to be improving. But sell we think you should, not only in € credit (as we advised a couple of weeks ago) but also more broadly.
He suggests seven reason not to trust your “inner Trump”, here so bullet pointed and slightly fleshed out:
1. The Fed may stop the inflow party — as mentioned up top “the principal driver of investors’ buying seems to have been a response to mutual fund inflows” and he doubts that’s sustainable due to the obvious Fed-hike risk. More so: “Each and every additional bp in risk-free yield is likely to make investors think twice about the risk they are running in order to generate return elsewhere.”

2. A rise in real yields should weigh on risk assets — real yields have remained “surprisingly low” even as nominal yields have risen post-election, with “almost all of the action has been in inflation (and growth) expectations.” But:
We suspect that what has made this move possible is the market’s willingness to focus on all the potential growth positives and yet shrug off the increasing signs of hawkishness from the Fed. Such a position seems increasingly untenable on two counts. First, rates markets have now finally adjusted to the new mood music from the Fed, and seem increasingly likely to be confronted with an actual hike; second, the rally in credit was starting to look out of whack even with today’s real yield levels, never mind following any proper adjustment to follow....