Getting More Bullish on Policy for Financials, Housing

Jaret Selberg from the Cowen Washington Research Group has a very positive outlook for the second quarter and is more bullish for financials and housing and what Washington has in store for these sectors. Selberg adds that while it is true that Team Trump is distracted and has shown no ability to enact legislation, some positive changes are happening, with the President slowly filling key regulatory slots with pragmatists who will reduce compliance burdens. That offers policy tailwinds to banks, housing and asset managers, concludes Selberg in this piece. His biggest worry is tax reform. Click here to request access to this report.

Equities: Cracks Appearing But Resources Looking Good

BMI Research believe that global stocks are in the final innings of their bull market and while they do not have enough evidence to suggest that the recent sell­off marks the top, risks are rising as monetary conditions tighten, they write in their latest Monthly Equity Strategy report. On allocation they’ve maintained their long-­held view of EM and eurozone outperformance relative to the US, but in volatility­ adjusted terms, given the more volatile nature of these indices. Most interestingly this month BMI say the recent firming of oil prices, in line with other commodity markets, suggests to them that commodity stocks are set to significantly outperform in the coming months, after a lengthy period of underperformance. BMI track 5 equity market drivers; Trend, Market Internals, Sentiment, Valuations and Fundamentals. They are bearish on valuations and cautious on the other four. The report takes the reader through each of these drivers individually. As part of this report, you will also find BMI’s weekly global commodities strategy note. Click below to request access to the report.

Widespread Self-Reflexive Negative Convexity

Chris Cole from Artemis Capital and Michael Green from Thiel Macro, sit in a continuous enthralling back and forth on how the current market has become an ecosystem of self-reflexive short volatility strategies, where convexity is unappealing, risk is transferred onto future consumption generations and how it could mathematically spiral into a self-enhancing extremely volatile market. Hard to think of two better qualified people to decipher this complex market.  Click here for a short excerpt of the interview. Alternatively click below to take a free trial.

Greenspan and the Next Tech Boom

Dario Perkins from TS Lombard draws parallels between today’s macroeconomic backdrop and that of the mid 1990s, a time when Alan Greenspan reigned supreme. As Perkins points out in this note, in the mid 1990s Greenspan noticed something quite profound happening to the US economy. The Fed’s Phillips curve models had broken down and their NAIRU estimates no longer made sense. Greenspan blamed a technology-induced surge in productivity, even though there was no sign of this in the official data. There are obvious parallels to today – the broken Phillips curve, very high levels of corporate profits, subdued inflation and widespread talk of a technological revolution (including warnings of a tech ‘bubble’). However, as Perkins explains here, mismeasurement is less compelling now. Some of this is put down to a lack of diffusion (beyond FANG). But with some experts expecting major advancements in technology over the next 5-10 years, these forces could still fundamentally reshape the global economy. Click here for the full report.

US: Steeper Yield Curve+ Steve Mnuchin+ Stress Test+ M&A= Financials

Sean Darby, chief global equity strategist at Jefferies, reckons a confluence of factors are coming together that makes the Financials sector a very attractive proposition and long-term earnings revisions continue to climb. Indeed. in quick fire succession, Darby reels off a series of factors favouring financials. He says that while investor focus has been on Healthcare reform and the implications for subsequent tax changes, the passage of financial reform is progressing without much fanfare. Secondly, the banks passed the Fed’s stress test with flying colors. Thirdly, capital markets are flush. Fourthly, global yield curves are rising as central bank QE ends. Lastly, sentiment towards European financials has turned 180 degrees. Jefferies clients can read the full report via the bank’s portal.

Central Banks Turn Hawkish; Why the Surprise?

The surprise is not that central banks are turning hawkish, but rather that it took so long, writes TD Securities. They say that the current turn is fully explained by the sustained turn in the data and the dollar, with enough momentum to suggest further hawkish risks through at least end-August. In terms of what that means for European rates, TD say they’re now more comfortable shorting Bunds after the Draghi Sintra speech, although its not been enough for them to revise their forecasts (see report), though Draghi’s comments in Sintra should put a floor in yields for now, pending data, and support shorts, they add. While the ECB has yet to provide significant and sustained hawkish rhetoric, it has reduced TD’s own fears of a Bund tantrum for the time being. Also see a great section where TD have done some historical analysis that asks a vital question: Are major central banks responding any differently to news now than they have in the past? TD’s answer  is no, at least not insofar as markets should be concerned, so there should probably be less concern over over tightening risks, and less speculation around central bank cabal conspiracy theories to explain recent actions. TD clients can read the full note on the bank’s research portal.

Oil, Geopolitics and Big Data

Predata Research are among an interesting new breed of research providers harnessing big data and social media to provide insights to investors, such as political election outcomes in the US and Europe. For instance, Predata’s work on the US election detected a loss of momentum in the Clinton campaign in the final two weeks, which went against conventional polling data. In this note –  via our friends ta Quant Insight – Predata provide signals for security related unrest to help provide indicators for moves in WTI. Click below to contact the provider directly to request sample of their work.

Melt-up or Bear market; Possible but not the Most Likely

As long as central bank (ex US, China) flood the system with money and bond yields are not rising sharply (as the global economy continues to improve), the prospects for most asset markets are fairly favourable, write ECR Research. However, at the same time, it will be increasingly difficult for the asset price rallies to continue considering the present valuations. Therefore, in their Q3 asset allocation report, ECR have structured their strategy in such a way that that it profits from further price rises while simultaneously providing an attractive hedge against sharp drops. A neutral equity allocation is compatible with their expectation of limited upside price potential. To profit from a melt-up scenario investors can purchase call options (for example on the S&P 500 index) as these tend to be fairly cheap due to low volatility. ECR are overweight sovereign bonds and take out a long position in the CDX to hedge against sharp risky asset price drops. This note is available for purchase on the ERIC platform. Alternatively, contact the provider directly.

Variance Swaps: Hidden Correlation of Risk Assets

Macro Risk Advisors produce some the best analysis on Vol markets across the market. MRA produce regular research reports that devise strategies based on a range of volatility products for yield enhancement and hedging, while also identifying mispricing in the derivatives markets. The firm was founded by Dean Curnett, who built BAML’s variance swap before starting MRA in 2008. He is a regular research contributor and in this report he warns of the dangerous set up that currently exists in the variance market, which in his opinion means the markets are more fragile than they appear. MRA’s analysis finds that “portfolio preparedness” is very low. Curnett cites the surgical work done by his colleague, Pravit Chintawongvanich which points to the potential for a spike in the VIX simply based on the mechanical demand for VIX futures that will be set in motion from a pop in realized volatility. If you’d like to get access to some of MRA’s excellent research on vol, click below to request access to these reports. They have a generous trial program.

Equity Rotation: Positioning for Mid Cycle

Equity markets could be in for a summer wobble, writes the BAML equity strategy team. They cite a combination of bullish sentiment, slowing cyclical momentum, weak oil and policy uncertainty (fiscal, monetary, China). Without any clarity on these, upside will be capped over the summer, the report says. That said, their central view is that portfolios should be positioned for a mid/late cycle environment, which is typically good for equity returns. The key is to strike the right balance between cyclical and defensive sectors, at a time when global cyclical momentum is slowing. The report’s author, Ronan Carr argues that peaks in cyclical indicators require a balance between cyclical and defensive sectors. BAML have thus rebalanced their cyclical bets (on a previously reflationary view). They have moved neutral Utilities, Oil and Basics, overweight Construction and Insurance (diversifying Banks o/w) and to underweight in Retail. On Resources BAML write that these stocks are too oversold to underweight, and that a bearish house view on crude and a weak case on the FCF/ valuation front (especially for Oil), means the position is culled. In terms of overriding themes, cyclicality is geared to Europe where M&A and corporate activity has them overweight Chemicals, while a strong Eurozone macro backdrop has them overweight Banks and Construction. Meanwhile they’re bearish on UK macro, with underweights on Retail and Travel. Finally, in terms of structural trends, BAML see a strong pipeline in Pharma (o/w), margin or competitive threats in Autos, Retail (u/w) and they keep their bias for higher bond yields (u/w Food). Finally, they have spread their o/w Financials allocation across Banks and Insurance to tilt their bond yield exposure more to the long end than the short end (which is ultimately the key for Banks). BAML clients can read the full note on BAML Mercury.