We said that just as likely presaging another major leg down in equities, this move may simply mean the following: “a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs.”
While a central bank did not directly intervene, it did so indirectly when the September payrolls was a complete disaster, slamming any possibility of a rate hike in 2015, largely confirmed by yesterday’s FOMC minutes which showed that the “no hike” decision wasn’t close at all, and that as we first presented, a rate hike is now mid-2016’s business, if ever.
Today, we got confirmation that what the rally of the past week has been all about is precisely that: a massive short-covering squeeze, when Bank of America’s Mike Hartnett looked at the latest weekly fund flow data and noted a “monster $53bn MMF inflows vs redemptions from equity ($4.3bn) & fixed income funds ($2.4bn)…rising cash levels indicate big risk rally (from intraday lows last week SPX +7.7%, EEM +13.5%, HYG +4.2%) driven primarily by short-covering rather than fresh risk-on.”
Here is the asset class flow breakdown using EPFR data;
- Equities: $4.3bn outflows (3 straight weeks) (almost all via ETFs)
- Bonds: $2.4bn outflows (outflows in 8 out of past 9 weeks)
- Money-markets: huge $53bn inflows (largest in 2 years)
- Precious Metals: small outflows ($0.2bn)
So now that we know what is causing the ongoing rampage, courtesy of a “green light” from the Fed, here is how the rest of the fund flows look like.
- Credit carnage: more pain in HY/IG/EM with 4th consecutive week of IG outflows, 10 out of 11 weeks of HY outflow, 11th consecutive week of EM outflow = worst stretch for credit in more than 2 years (Chart 2). But daily data show inflows Wednesday to both IG & HY for first time in 11/12 days so credit redemption shock easing.
- Cracks in “Crowded Longs”: Japan funds see largest weekly outflows ($2.0bn) since Nov’14; Healthcare funds see outflows in 5 out of past 7 weeks, worst stretch since Jun’14; watch October FMS (next Tuesday) for positioning unwind in other “crowded trades” (EU, Tech, Discretionary) or first UW in stocks since Jul’12 to suggest unwind mostly over.