The Rotation Trade Is In Its Infancy
Happy Friday,
Wow, what a week - been a tough one here in NYC but we are optimists so let's look on the bright side: NYC had zero CV19 deaths mid week - 1st time since March 12th - while the 1% of protestors doing gratuitous looting have been subdued - both bring hope that the greatest city in the world, supine Monday night, can rise & conquer anything thrown at it. Phase One reopen starts Monday.
Last week’s take home point: we are in a new bull market. It didn't take long for those words to ring out as SPY capped its best 50 day stretch EVER with volumes popping, VIX collapsing and the Rotation trade leading the way.
This week’s take home point: the Rotation trade - in regions, sectors & styles - is in its infancy. It could take markets to new ATHs. Yes, new ATHs. In the very near term equities are overbought so Buy the Dips.
The BTE US May Jobs #s cement the turn to Cyclicals from Defensives, from Tech Growth ( now source of cash) to Value and from the US and USD to ROW (in our case primarily DM x US).
We have noted the self-reinforcing nature of the rotation trade as those who missed the bottom determined they had not and would not miss the rotation trade. The Jobs data & reopenings could prompt an asset allocation shift from bonds to stocks - as the 10 yr blows out towards our 1% target & the 30 yr starts to approach 2% the yield curve steepens, banks make money and the rotation trade gets a tailwind.
One does not want to be UW Banks - on either side of the Atlantic. JPM expects Q2 trading revenues to be up 50% Y/Y. US bank EPS is likely to be better than expected. EU banks, left for dead, have staged a big time recovery; MS notes they trade at a 27% discount to FV.
Meanwhile, European policy makers from the ECB, to the EC to Mrs. Merkel have surprised to the upside & brought the Rolling Thunder. Bunds react (on the way to zero?) and help spark the UST selloff which then is magnified by the jobs #. The case for long duration BUNDS/USTs looks less appealing by the day; they are massively over owned & could provide plenty of fuel for more equity fire in both the US and Europe. Give them a whiff of inflation and look out.
Looking for an uncrowded place to invest some cash - look no further than European Equity where BofA notes the first inflow in 8 weeks, a paltry $600M - yes $600M in a world of Trillions. BofA also notes US equity OW biggest in five years while EU equity UW largest in eight years.
We have been positive and OW equity since April with a Rotation (Cyclical/Value) and DM ex US focus. The action now is in Bonds and FX with the USD signaling real cracks in the American Dream. In the very near term, cross asset moves are extended but the change in direction is clear.
We have wondered for several months whether Covid19 would be able to upend the USD and US financial asset dominance like it has with everything else. It seems like the combo of the botched US virus response & the lack of leadership displayed during the past week of protest may be sufficient catalysts.
Protests reinforce the shift to Big Govt & wealth distribution that was evident from CV19 and increase the likelihood of a Democratic sweep in November. This suggests the coming election season could be among the nastiest and most dangerous in modern American history. For an offshore investor OW the US or an overweight domestic investor rebalancing into Europe & Japan makes sense.
A whole crop of US investors may need to learn about the ROW for the first time in their careers. DM x US markets are ahead of the US in reopening, are bringing the policy thunder on a regular basis, are much cheaper and completely under owned. This trade too is in its infancy.
The Euro rally is the best since 2011, USD has just had its worst two week span in 8 years against both DM and EM FX with DXY rolling over & breaking support. A$/Y breaking out - a VG proxy for global growth.
It's probably worth spending some thinking time this weekend on what could derail this freight train: botched reopenings, CV19 outbreaks, poor Q2 EPS, seasonals (August - Oct worst seasonal period)?
The investment firmament is shifting under our feet - the rotation has legs - it is early days.
Be on the right side of history & be well.
TGIF indeed!
TPW Investment Management Team