Behold the beauty of Abenomics - a failed #CurrencyBurning central plan that promises more of what doesn't work. In related news, Japan just fell into recession.
Editor's note: This complimentary research was originally published November 13, 2014 at 07:33 in Financials. For more information on our services click here.
After a two month slide, taxable bonds rebounded posting their first subscription in 8 weeks.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
After an exciting month of October whereby over $36 billion alone spilled out from the taxable bond fund category, the latest ICI survey relayed some stability with a $5.0 billion inflow by investors, the first subscription since the week ending September 10th. A post-mortem of the beneficiaries of the October snap redemption shows that broadly bond ETFs hoovered up the most "money in motion," with several select Total Return Funds including the Metropolitan West Total Return Fund (a unit of TCW), BlackRock's flagship fund, and Jeff Gundlach's DoubleLine substantially improving assets-under-management in the month. Interestingly, but not a surprise to us, the Janus Uncontrained Bond Fund, had a very modest benefit and as a result we remain skeptical of the resulting market cap improvement of that company without the support of new assets-under-management (read our JNS research here).
In other survey data, U.S. equity mutual funds put up another worrisome $1.7 billion redemption making it 25 of the past 28 weeks with outflows. We continue to recommend underweight or short positions to those managers with outsized U.S. equities exposure (read our research here). Passive fund flows via ETFs continue to be substantial with a year-to-date high of $17.7 billion into total equity ETFs last week and another inflow into bond ETFs, the 6th straight week of fixed income subscriptions. The blood letting continued specifically in the Materials Sector SPDR with another 19% of assets-under-management alone coming out of that product over the past 5 days. Conversely there has been strength in Utilities (XLU) and the 20+ Treasury ETF (TLT) products with respective inflows improving AUM by 7% and 8% during the week.
In the most recent 5 day period ending November 5th, total equity mutual funds put up net outflows with $302 million coming out of the category according to the Investment Company Institute. The composition of the outflow was squarely the result of domestic stock fund redemptions as a $1.7 billion loss more than nullified the $1.4 billion which came into international stock funds. The two equity categories have been polar opposites all year with international stock funds having had inflow in 43 of the past 44 weeks, versus domestic trends which have been very soft with inflow in just 15 weeks of the 44 weeks thus far year-to-date. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.1 billion inflow, now well below the $3.0 billion weekly average inflow from 2013.
Fixed income mutual funds napped their drawdown schedule of the past 5 weeks putting up inflows in both the taxable bond fund category and also in tax-free munis. Taxable fixed income netted a fresh $5.0 billion in investor money with municipal bond funds putting up a $399 million inflow, making it 42 of 44 weeks with positive subscriptions in tax-free bonds. The 2014 weekly average for fixed income mutual funds now stands at a $985 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).
ETF results were very strong during the week with substantial inflows in equity funds and decent subscriptions into passive fixed income products. Equity ETFs put up a 2014 year-to-date high subscription with a $17.7 billion inflow which made the $564 million inflow into passive bond products look very modest. The 2014 weekly averages are now a $2.1 billion weekly inflow for equity ETFs and a $1.1 billion weekly inflow for fixed income ETFs.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014:
Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI) and the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014. The third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In specific callouts, the blood letting continued in the Materials Sector SPDR with another 19% of assets-under-management alone coming out of that product over the past 5 days. Conversely, the Utilities (XLU) and 20+ Treasury ETF (TLT) had respective inflows of 7% and 8% during the week.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $11.4 billion spread for the week ($17.4 billion of total equity inflow versus the $6.0 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $2.9 billion (more positive money flow to equities), with a 52 week high of $17.7 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week).
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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
European Financial CDS - Swaps mostly tightened in Europe last week
Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened by 1.3% (0 bps to 20 ) and Portuguese sovereign swaps widened by 25.2% (42 bps to 211).
Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 10 bps.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The SUGAR, SILVER, AND SOYBEANS markets experienced the most BULLISH relative positioning change in the CRB week-over-week
The ORANGE JUICE, GOLD, AND WHEAT markets experienced the most BEARISH relative positioning change in the CRB week-over-week
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
Takeaway: Our Risk Monitor shows a roughly even mix of positives and negatives across all three durations in the Financial Sector currently.
The XLF fell -0.9% last week, the first down week in a month as Financials have also rebounded sharply with the broader indices since their mid-October lows. The XLF is right in the middle of the pack from a year-to-date sector performance standpoint, up 9.7% in 2014, the 5th best performer of the 9 major sector SPDRs trailing the performance of Healthcare (+21.6%), Utilities (+18.5%), Technology (+16.3%), and Consumer Staples (+11.3%). Specifically in the sector from a risk standpoint, Genworth Financial CDS regained some ground, with swaps falling -14.4% week-over-week. However, Genworth swaps are still up 105.3% month-over-month on news that a review of its claims reserves and goodwill would result in a combined charge of over 1 billion dollars pre-tax. Travelers was the biggest mover for the week with swaps rising 33.4% from 28 bps to 38 bps. The company's CEO announced a neuromuscular condition last week forcing insurance on that company's credit profile higher. High yield spreads continued to back up over the back 5 days, rising 7 bps to 5.99%. Commodities continued to slide, although at a slower pace with the CRB Index falling another -0.6% on the week.
Our heat map table below is increasingly more green with intermediate-term measures now mostly positive and short-term and long-term mostly a mixture of improvement and unchanged.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Positive / 2 of 12 improved / 1 out of 12 worsened / 9 of 12 unchanged
1. U.S. Financial CDS - Swaps tightened for 17 out of 27 domestic financial institutions.
Tightened the most WoW: GNW, MMC, AXP
Widened the most WoW: TRV, AON, ALL
Tightened the most WoW: MMC, CB, MBI
Widened the most MoM: GNW, TRV, AON
2. European Financial CDS - Swaps mostly tightened in Europe last week
3. Asian Financial CDS
4. Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened by 1.3% (0 bps to 20 ) and Portuguese sovereign swaps widened by 25.2% (42 bps to 211).
5. High Yield (YTM) Monitor – High Yield rates rose 6.7 bps last week, ending the week at 5.99% versus 5.92% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1880.
7. TED Spread Monitor – The TED spread rose 1.4 basis points last week, ending the week at 22.4 bps this week versus last week’s print of 20.96 bps.
8. CRB Commodity Price Index – The CRB index fell -0.6%, ending the week at 267 versus 268 the prior week. As compared with the prior month, commodity prices have decreased -2.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 10 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 10 basis points last week, ending the week at 2.473% versus last week’s print of 2.569%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 0.3% last week, or 9 yuan/ton, to 3047 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread widened to 181 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TRADE resistance and 1.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.
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