Citi’s Matt King is the latest to join the growing list of Wall Street strategists struggling to identify the catalyst of the ongoing market sell-off, which has seen the Nasdaq plunge by 8% in a month.
From his new research note:
What makes the moves particularly puzzling is the lack of an obvious cause. The Fed Minutes were generally perceived as dovish. That may help explain the rally in Treasuries, but not the sell-off in risky assets. The latest headlines in Ukraine are potentially concerning, and oil and gas prices have risen slightly, but EM generally has outperformed. Similarly, while the latest negative trade and price data out of China have us and others scrambling to shave growth forecasts, we struggle to see them as the cause of market weakness more broadly.
This doesn’t mean King and his peers are bad analysts. Since the dawn of financial markets, prices have had a tendency to make unexplained and often counterintuitive moves for extended periods of time.
King does acknowledge there are reasons why we shouldn’t be surprised by any of this.
As is so often the case, almost the only unifying theme we can find is a squeeze on consensus positions. Aggregate CFTC data suggest duration shorts have again been nearing record levels. The rapid run-up in tech sector P/Es likewise suggests tech equity investors have been overextending themselves. And EM has had so much negative news that it feels likely to be the site of many tactical underweights, which are now coming under pressure thanks to signs of renewed inflows.
Like many, however, King isn’t convinced that the 7% sell-off we’ve seen in the Nasdaq is the beginning of something much worse.
King believes that the global central banks that have been there for us since the financial crisis will continue to be there for us, at least in the near-term. To that, he offers some comfort to bond market investors.
And yet for all that we share those longer-term concerns, we still see nothing to suggest that such a “Wile E Coyote” moment is even close to being reached. Indeed, if credit does follow other risky assets weaker here, we would buy, not sell.
The fact remains that in this environment, central bank liquidity remains the major driver of spreads, whatever the fundamentals. While we might be on “borrowed time”, central banks still seem intent on supplying more of it. As we have said many times before, even with full Fed tapering, globally we still see too much money chasing too few assets. The past few weeks show outflows from money market funds, inflows to bond funds and inflows to credit funds, both in the US and in Europe. Investors are even putting a toe back into emerging markets. That implies more of the same money that investors are struggling to know what to do with.
“[W]e seriously doubt that this is finally the Wile E. Coyote moment where investors look down and conclude markets are treading on air,” he said.
It’s great imagery. Anyone who’s long risk asset surely hopes he’s right.