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Battle Between Bonds and Equities

Takeaway: Taxable bond outflows have now occurred in 22 of the past 26 weeks with tax-free or municipal outflows in 26 consecutive weeks

This note was originally published December 05, 2013 at 08:00 in Financials by Hedgeye Financials analyst Jonathan Casteleyn. For more information on how you can subscribe to Hedgeye research click here.

Battle Between Bonds and Equities - flows2

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual fund flow for the week ending November 27th was $1.5 billion, a below average weekly inflow for 2013 but none-the-less a slightly positive indication for stocks. Within the total equity inflow result, domestic equity mutual funds lost $1.3 billion, the first outflow in 6 weeks with International equity funds posting a $2.9 billion inflow. Total equity mutual fund trends in 2013 however now tally a $3.2 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 

 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.7 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $3.2 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $1.1 billion outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012

 

ETFs experienced mixed trends in the most recent 5 day period, with equity products seeing very strong inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $11.4 billion for the 5 day period ending November 27th, the 5th best week in all of 2013. Bond ETFs experienced a $251 million outflow, a deceleration from the $363 million subscription in the 5 days prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results

 

Battle Between Bonds and Equities - jc1

Battle Between Bonds and Equities - chart 2

 

 

For the week ending November 27th, the Investment Company Institute reported slight equity inflows into mutual funds with over $1.5 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $1.3 billion outflow into domestic stock funds and a $2.9 billion inflow into international or world stock funds. These results for the most recent 5 day period within stock funds were bifurcated, with the outflow in domestic stock funds below the weekly average of a $597 million inflow and with world stock fund production slightly above the $2.6 billion weekly inflow average. The aggregate inflow for all stock funds this year now sits at a $3.2 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 27th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.7 billion outflow, a sequential deterioration from the $3.2 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.6 billion, which joined the $1.0 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 22 of the past 26 weeks and municipal bonds having had 26 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $1.1 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $870 million inflow in the most recent 5 day period. Hybrid funds have had inflow in 24 of the past 26 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

 

 

Battle Between Bonds and Equities - chart 3

Battle Between Bonds and Equities - chart 4

Battle Between Bonds and Equities - chart 5

Battle Between Bonds and Equities - chart 6

Battle Between Bonds and Equities - chart 7

 

 

Passive Products:

 

 

Exchange traded funds had mixed trends within the same 5 day period ending November 27th with equity ETFs posting a very strong $11.4 billion inflow, a sequential improvement from the $4.0 billion subscription the week prior and the 5th best week all year for stock ETFs. The 2013 weekly average for stock ETFs is now a $3.3 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs experienced a slight outflow for the 5 day period ending November 27th with a $251 million redemption, a sequential deceleration from the week prior which netted a $363 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $265 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

Battle Between Bonds and Equities - chart 8

Battle Between Bonds and Equities - chart 9 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


European Banking Monitor: Cooling Off

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.  

 

European Banking Monitor: Cooling Off - vv. banks

 

Sovereign CDS – Sovereign swaps were wider around the globe last week with the sole exception of Japan (-1 bp). Portugal and Spain led the charge higher, rising 19 and 13 bps, respectively. The US, Germany and France were little changed. 

 

European Banking Monitor: Cooling Off - vv.sov1

 

European Banking Monitor: Cooling Off - vv.sov2

 

European Banking Monitor: Cooling Off - vv.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 9 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Cooling Off - vv.euribor


MONDAY MORNING RISK MONITOR: COOLING OFF

Takeaway: The positive momentum of the risk monitor data we track cooled a bit in the most recent week but remains on the right track.

Risk Monitor / Key Takeaways:

 

* 2-10 Spread – Last week the 2-10 spread reached its widest level since the summer of 2011 at 255 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.

 

* CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 15

 

1. U.S. Financial CDS -  Swaps across US Financials were relatively unchanged last week, though the mortgage insurers saw sharp improvements, with MTG and RDN swaps dropping 35 and 46 bps, respectively. 

 

Tightened the most WoW: TRV, RDN, MTG

Widened the most WoW: JPM, AXP, COF

Tightened the most WoW: MBI, C, WFC

Widened the most/ tightened the least MoM: XL, AXP, GNW

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 1

 

2. European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.  

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 2

 

3. Asian Financial CDS - Asia was mixed last week, with Chinese swaps wider by an average of 4 bps while India's banks widened by 2 bps, on average. Japanese Financials were mixed, but generally modestly lower. The main trend in Asia worth keeping an eye on is Indian bank swaps, which remain sharply higher on a month-over-month basis.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 17

 

4. Sovereign CDS – Sovereign swaps were wider around the globe last week with the sole exception of Japan (-1 bp). Portugal and Spain led the charge higher, rising 19 and 13 bps, respectively. The US, Germany and France were little changed. 

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 18

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 3

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 8.8 bps last week, ending the week at 6.02% versus 5.93% the prior week.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1830.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 6

 

7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 18.3 bps this week versus last week’s print of 18.11 bps.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 9 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 3.70% versus last week’s print of 3.72%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 83 bps versus 81 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 11

 

12. Chinese Steel – Steel prices in China rose 0.4% last week, or 15 yuan/ton, to 3552 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 255 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: COOLING OFF  - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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December 9, 2013

December 9, 2013 - josie


December Taper? Doubtful.

Client Talking Points

UST 10YR

10-Year Treasury yield down a beep this morning to 2.85% (and making a lower-high versus the year-to-date high in September when Bernanke went no-taper). So, if I have to handicap what the bond market thinks versus consensus “economists” (Bloomberg survey just went from 17% on December-taper to 34%), its still no-taper (there’s a -133,201 net short position in CFTC futures/options on the 10-year).

US DOLLAR

The Greenback is down for four straight weeks as Bernanke/Yellen devalue the Dollar. The Euro continues to breakout versus the US Dollar. So on the margin, the currency market thinks no December-taper too, despite there being a bigger net long position in USD than EUR currently.

GOLD

At +26,774 contracts, this is the lowest net long position (CFTC data) since June of 2007. It sounds about right now that 3.6% US GDP and #RatesRising are old news for 2013. If and when US growth slows in the next 3-6 months Gold could be a good contrarian long if the June 2013 lows of $1200 hold.

Asset Allocation

CASH 38% US EQUITIES 12%
INTL EQUITIES 14% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Yield Spread (10yr minus 2yr) is a healthy +255bps wide - bullish for the Financials $XLF @HedgeyeFIG

QUOTE OF THE DAY

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself." - George B Shaw

STAT OF THE DAY

China's annual consumer inflation unexpectedly slowed to 3% in November from an eight-month high of 3.2%, according to the National Bureau of Statistics, easing market fears of any imminent policy tightening as authorities meet this week to outline their policy and reform priorities for 2014. (CNN)



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