Earlier today, we noted that according to Nomura (and not only: over the weekend Morgan Stanley said it "Senses A Shift In Tone From The Fed") - based on last week's commentary from both chair Powell and vice Chair Clarida - the Fed's tightening cycle is effectively over.
The has been observed in the rates market, with the Treasury curves now bull steepening, as prior market expectations of future hikes are removed from the front-end. Meanwhile, a wave of dovishness has washed across the Eurodollar curve,with EDZ8Z9 implying just 35bps of hikes; EDH9H0 (March ‘19 / March ‘20) 25bps of hikes; and - as we noted last week - the EDZ9Z0 at -2bps indicating Fed EASING on the margin in 2020.
But, as we noted earlier, before bulls rejoice and bid up stocks into this Fed's relent, Nomura's Charlie McEllgiott notes that even though a Fed pivot “less hawkish / more dovish” elicits “bullish” muscle-memory in Equities, traders should remember why it’s happening: "because growth is decelerating, fiscal stimulus impacts are rapidly diminishing, financial conditions are net / net “tighter” and policy nearing the level where it is no-longer “stimulative."
He then adds ominously, "this further cements my long-discussed investor “psyche shift” from the prior risk-POSITIVE "we are growing faster than we are tightening” to the risk-NEGATIVE one where “we have tightened ourselves into a slowdown."
Meanwhile, as the curve bull steepens, "value" stocks are emerging as the winner, as growth stocks are repriced lower.
Indeed as McElligott said, "global Equities “Value” factors measures up across the boards overnight, per our European- and AsiaPac- factor monitors." But it's not just fundamentals that are behind the move however: so are technicals according to Nomura:
The thing is this: right now “Value” factor market neutral is MUCH less about “Value Longs” sprinting higher than it is about the destruction of “Value Shorts” which are being hammered lower—as “Value Shorts” are (not surprisingly) very “Growth-y“ and “Momentum-y“
Or, as Charlie explained, this is just another reason that historically as we transition from the “late-cycle expansion” to “pre-recession” stage, we typically see “VALUE” outperforms “GROWTH,” because investors move into the “cheap” stuff at the cost of “expensive” stuff, especially ahead of an inevitable “easing” cycle thereafter
And now, in a follow up note to his comments from this morning, when looking at the latest carnage in stocks - now that a trade deal with China is once again off the table and tech names led by Apple, Facebook and Nvidia are getting crushed - McEllgiott adds to his comments about the curve steepening - and underscores that the shift to a "less hawkish / more dovish Fed tone shift view" is the reason why "momentum is getting slaughtered again today…-2 SD move today in Momentum factor." One look at the MTUM ETF shows that he is correct:
In fact, as he shows in the next chart, "we see all 8 value factors higher, with 7 of our 8 up at least 1%, while conversely we see 5 of 6 Growth factors lower" as the Growth-Value trade unwind is accelerating.
Finally, one catalyst behind today's sharp move lower, is likely the following soundbite from Dalio, who agrees with McElligott...
... and pours cold water on prevailing expectations that an end to Fed hiking would be bullish for risk.