Sentiment Snapshot: What About Reflation?
Whatever happened to that whole "reflation" trade theme that everyone seemed to be talking about a year ago? Well, judging by some of the charts in this blog, it looks like the reflation theme is still very much well and alive, with traders displaying extreme confidence in the reflationary outlook. It also seems as though this confidence is at least for now justified. But other than that, we go through some of the usual charts from the weekly positioning/outlook surveys I conduct on Twitter (differentiating the outlook based on technicals vs fundamentals).
The key takeaways from the weekly sentiment snapshot are:
-Equity investors remain bullish fundamentals, and about neutral on the technicals picture.
-There remains a slight disconnect between bond investors and equity investors on the fundamentals, but the reflation theme seems well and alive.
-The reflation speculative futures positioning indicator implies extreme confidence among traders.
-The solid showing across a couple of key PMI indicators seems to justify this confidence, at least for now.
1. Equity Technicals vs Fundamentals Sentiment: As usual, starting with a comparison between equity investors' perceptions around the "fundamental" vs "technicals" outlook, the conclusion remains that investors are still bullish on the fundamentals while less enthused about the technicals picture. In fairness the technicals sentiment is probably more around neutral... which makes sense given the short term tactical setup there, which I talked about in the weekly S&P500 ChartStorm.
2. Equity vs Bond Fundamentals: Focusing on the fundamentals, the gap between bond investors and equity investors is closing. Equity investor perception of the fundamentals remains at solid levels, while bond investors are slowly coming around to a more bearish fundamentals view on bonds (recall, much of the time what's good for bonds is bad for stocks, and what's bad for bonds fundamentally speaking is usually good for stocks i.e. a better growth and inflation outlook). It's hard to blame equity investors for being so optimistic given the trend in corporate earnings, but as for bond investors, it brings to mind the almost forgotten theme of "reflation".
3. Market Breadth Reflatometer: Indeed, on the topic of reflation, it's interesting to note how the market breadth reflatometer (which tracks the combined breadth of global equities, commodities, and bonds - with the bonds signal inverted), has actually stood up fairly well through the global equity market correction. Likewise the reflation/risk-on futures positioning composite indicator looks likewise relatively unperturbed.
4. Reflation Trade Speculative Positioning: On speculative futures positioning, the next chart looks at the average standardized positioning across crude oil, copper, US equity indexes, and treasuries & DXY (both inverted to align with the signal in the previous 3). With this lens it looks like there is simply extreme confidence in the reflation trade. Sometimes it is true that such extreme confidence is justified, but if I've learned anything in my career of watching markets it's that you want to pay special attention to extremes - because they can often come at turning points.
5. Global PMI Pulse: On the topic of growth and inflation, and the buzzword 'reflation', I thought it would be good to show the chart of the global PMI indicators - which is just freshly updated with the April round of data. The line that stands out to me in this char is the Employment indicator - just slightly down in April from a record high in March. New orders are plodding along at a solid level, and add to that the prices picture and it looks very much reminiscent of the mid-2000's.
There is a lot of focus on the month-to-month gyrations in the data, and part of this is justifiable, but I get the sense that many people are looking at the slightest dip down and overlaying their bearish bias as many investors are still carrying the scars of the financial crisis. The way that such people would be wrong, would be if you get a multi-year global economic expansion, such as that which occurred from around 2003 through 2007. If that scenario plays out, then the speculators in the previous chart will have been justifiably confident on the reflation outlook...
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