With global equity markets now sprinting higher in a furious meltup to daily record highs, one which will most likely not end until the bubble finally bursts, destroying any shred of credibility the Fed and fractional reserve banking have left (while leading to brisk sales of pitchforks) but not before generating countless headlines such as these...

The term of the week is 'melt-up' pic.twitter.com/6phpDc47uW

— Mark Constantine (@vexmark) January 12, 2018

... we said - following Bill Dudley's surprisingly hawkish speech yesterday - that the odds of a surprise rate hike under Jerome Powell are now especially high.

Dudley repeating that "financial conditions today are easier than when we started to remove monetary policy accommodation" means odds of surprise rate hike under Powell are high

— zerohedge (@zerohedge) January 11, 2018

This morning, Bank of America's Michael Hartnett, in his weekly Flow Show report, touches on this growing possibility, specifically of when, and what level in the S&P, will the Fed engage in a surprise rate hike. Here is BofA:

SPY me to the Boom: #1 FAQ is "what level of bond yields will cause equity markets to fall?"; better question is "what level in SPX causes Fed to start hiking 50bps"

Well, judging by Thursday's close, it's not 2767, which is why Hartnett reminds clients of what BofA's Q1 targets are: SPX 2860, CCMP 8000, GT10 2.85%, EUR 1.10.

Arguably, that's where the Fed will wake up and realize that it has blown its third consecutive, and biggest ever bubble, something which another Bank of American, Barnaby Martin, pointed out two months ago:

"the irony in today's world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt "supercycle"…that itself was partly a result of too easy (and predictable) monetary policies in prior times."

Or maybe not, and the Fed will just keep pushing risk assets higher and higher as the alternative is nothing short of violent social conflict.

Meanwhile, judging by the fund flows in the first week of the year, it is clear that investors are fully confident that the Fed will never pull away the punchbowl: as Hartnett explains, it's a "maximum bullish barbell boom" in which  "the new year kicked off with blockbuster $24.4bn inflows into equities, the 6th largest equity inflows on record (split between $21.7BN in ETFs and $2.7BN in mutual fund inflows), and big $13.7bn inflows into corporate & EM bonds - the largest in 31 weeks - which the BofA strategist calls "the beginning of the bull capitulation."

Some other fund flows details:

  • 2nd largest week ever of inflows into EM debt ($3.6BN)
  • 2nd largest inflows into tech ($1.3BN)

 

asd

 

  • Biggest inflows into HY bonds in 48 weeks ($1.5BN)
  • largest 6 week inflows into energy in 3 years; largest inflows into energy in 57 weeks ($1.1BN)

 

asde

 

  • investors double down on bull market leadership; funds investors chasing laggards too

 

asd

 

Looking at Bank of America client indicators, Hartnett sees nothing but froth and euphoria:

  • Unambiguously long: BofAML Bull & Bear indicator jumps to 7.1 from 6.2, active equity funds finally seeing inflows, BofAML private client debt (22.5%) & cash (10.2%) allocations making new lows…investors are unambiguously long and will likely stay so until rates go up and/ or EPS goes down.
  • Tick-tock: triggering B&B indicator "sell signal" requires Jan'2018 FMS cash levels peak Positioning on its way but we expect asset prices to overshoot first.

 

 

sdf

What happens next? According to the BofA strategist there are two "great" trades on deck:

  • The Great Tapering: BoJ & ECB clearly saying they will soon join Fed and start tapering the $12tn of asset purchases since Lehman; only government bonds care thus far; US Treasuries (-2.4% total return) on course for worst January since 2009; but tapering without inflation = flatter yield curve not bond shock.
  • The Great Bond Bear: if ultimate destination for a bear market in Treasuries is 10-year yield

Finally, according to Hartnett, should the Fed not get involved, just two things can stop the party and prevent a risk asset overshoot in early 2018: wage inflation & >3% yields, and/or trade war (EPS -ve). Everything else is noise.