As we have discussed here over the past few days, there has been a tremendous rotation below the market surface in recent days, one on par with the great quant crash in early September 2019, with value stocks soaring - arguably on reopening optimism and expectations for a rebound in inflation on the back of the fiscal firehose we noted yesterday - as outperforming momentum names have been trampled...
... resulting in the latest shock to hedge funds, which were positioned for a continuation of the legacy momentum-over-value theme.
As usual, any time there are such momentous moves in market, Nomura's quant Charlie McElligott is there to provide his unique perspective, and this morning he did just that, pointing out that "remarkable things" are occurring over the past few sessions within the US Equities space in the context of consensus positioning and what he calls "a tectonic “de-grossing” of short books and overall dynamic hedges, acting to propel both indices and prior “Value” laggards (being economically-sensitive “cyclical beta” Equities) violently higher, while crowded “secular growth” hiding-place longs are acting as an ongoing source-of-funds for this nascent rebalancing."
As touched upon previously, there are 3 key factors behind this pro-cyclical “risk-on” narrative shift:
- fiscal stimulus acceleration (Europe / Germany HUGELY symbolic for a capitulation away from austerity)
- accelerating Yield Curve Control talk from Fed (as a curve steepener / reversal of trend catalyst)
- The ongoing “rush to reopen” the global economy, while high-frequency mobility -and credit card spending - data seemingly shows fledgling indications of “return to normalcy” type behavior from American consumers.
This 3-peat shock to legacy...