The 1 month 25 delta risk reversal showing clearly that people are not showing much interest in paying up for downside protection on a relative basis.
With Christmas approaching and narratives fading for 2020, we should not be overly surprised by the chart below.
Spotgamma
Global equity fund flows turned positive post the election, in line with the historical template. Chart shows Global equity fund flows as a % of AuM around US Elections
Haver
What will happen if the economy starts surprising on the upside again? Estimates are already pretty bullish for 21 and 22 growth but what if vaccine + low interest rates + consumers spending war chest means that we are now entering into a 6-month period where macro and micro just keep on beating?
Refinitiv
What if the market does not appreciate how much $ needs to come out of fixed income at 0%, and over the next decade or two – it all comes for equities? Equities then also need to lever, and buyback stock. The sooner the better. What is a logical PE at 0% interest rates? It certainly makes 30x look cheap (esp with cash, and into growth).
Maybe S&P495 should trade at a much higher multiple
Refinitiv
Chinese yields have continued moving higher since March panic lows. Note the 10 year took new recent highs here. With the rate spread between China and US, the mighty Yuan continues trading with a strong bid.
Yuan at 6.55 as of writing, still inside the perfect channel, but momentum is rather impressive.
A little more than a month ago, Kolanovic had a great Nikkei break out call we wrote about. His logic was;
"Dealer hedging flows near key knock-out barriers, positive seasonality into year-end and the recent dip in Nikkei implied volatility make the cases of buying calls more attractive"
The break out move started with a small shake out, eventually delivering one of the cleanest break out moves we have seen in a long time.
As frequent readers of TME know we hold Kolanovic high, not only for his quant skills, but also the market touch so many quants lack.
Refinitiv
Maybe (just maybe) he did some more analysis than looking at the below chart showing healthcare trading at a record valuation discount and similar levels to previous policy milestones.
Berkshire’s 13F: ABBV, MRK, PFE. Number 3, 4 & 7 in the XLV weightings.
GS
Nobody we speak to sees any clouds on the horizon. One big PM we speak to on a regular basis is once again complaining "hedges only cost money". Vols have crashed and the seasonality effect is strong. Note we just completed the leg higher and seasonality suggests a small consolidation here before the Santa rally starts.
The question is will Corona interrupt Santa or is he on?
GS
According to the latest fund manager survey by BofA;
1, the crowd has the highest allocations to equities since Jan 2018
2, the lowest allocation to cash since April 2015
3, and slightly ironically "they" all think they are taking on a lot of risk here
Add to this the various "stretched" metrics we at TME sent as a "special" email yesterday, and suddenly some hedges feel like a good idea. Vols have come down a lot, offering relatively cheap ways to hedge, we would look at outright downside, or replacing longs with cheap upside calls exposure.
What could possibly go wrong when the crowd is this one way in their thinking?
Not extreme yet, but definitely a big move higher in greed. Are you starting to get that nagging feeling of this market can't even go down from here? Why would it go down?
Usually that is the time when something happens and we once again learn the hard way…
CNN
Yesterday we outlined our Brazil logic. Brazil ETF, EWZ, is the only main EM ETF green on the day, +2%.
In case you missed it, our reasoning from yesterday goes:
"…currencies such as BRL are still dogs compared to the USD.
With Moderna's vaccine now becoming "reality"…. the dollar should start fading versus EM FX (ex China).
Global demand should be lifting all boats, commodities exporting countries as well,and BRL is a big one in this space.
If the vaccine news start spilling over for real, laggards such as Brazil ETF, EWZ might get the second leg going."
EWZ is approaching recent highs, so watch it closely, but as a relative long vs EEM it sure looks interesting.
Recall, EEM is full of Chinese tech that has lost a lot of the upside mojo.
A trade, not for the fainted hearted, is EWZ vs KWEB. The ratio has just started bouncing…
Everybody loves Bitcoin and hates VIX these days. We do not have huge views on either asset here, but given the move higher in Bitcoin, long VIX could be an interesting and cheap hedge for Bitcoin longs.
This "hedge" has been well rewarding on several occasions…
Refinitiv
Travel to arrive on vaccine? Considering year-end melt-up already somewhat done?
As the market has rallied MTD, there has been HFs sell into strength, especially in EMEA (9 consecutive days of selling). However nearly all the de-grossing is coming from Quants. Ex. Quants, gross activity has
remained slightly positive.
JPM Position insight
USD net positioning did not change much last week. Still pretty decent net short.
Haver
© 2020 The Market Ear
You are receiving this email because you signed up for the The Market Ear newsletter using your email content@mrtopstep.com.
If you'd like to unsubscribe and no longer receive this newsletter, please click here.
