The first quarter has been an exhausting one for many and frustrating for all.
After the significant burst higher following the U.S. presidential elections and the burst of liquidity that would come to the markets in the year ahead, everything re-rated higher. This is especially true of the liquidity trade -- the "reflation trade" -- in which all cyclicals, oil, industrials, and financials were bought, given the years of underperformance. But something had to be sold down to make room for this inflow. Technology stocks -- growth and momentum -- were sold down aggressively as the money moved into value.
The problem with these bigger picture macro rotations is that they completely dismiss the fundamental earnings backdrop, but tend to exaggerate both on the way up and on the way down. The moves get even more powerful when the macro tailwinds turn into headwinds. That is the case of the technology sector, which thrived on lower U.S. bond yields, as the Federal Reserve kept buying bonds via quantitative easing. It was almost like free money to buy any technology stock. It was one way: Up.
As the market started to price in a better economic environment, then the reflation/reopening trade, U.S. bond yields started moving higher from their lows of 0.5%. This made the technology sector very unhappy, and fund managers had to start doing some work to really get outperformance from being long select technology names. Amazon (AMZN) , Apple (AAPL) and other such stocks are actually flat vs. some of the smaller, more leveraged names that are down 30% to 40%.
Flows follow performance. As the first quarter has seen the technology sector suffer, it may seem natural that ARK funds (ARKK) and other technology stocks are seeing massive outflows daily into March-ending quarter. This tends to be the year-end for some countries, as well, so it is a very important quarter and is reflective of window dressing, i.e. sell the losers and buy the winners to exacerbate the trend showing a higher marked to market. Low and behold, we are seeing even more selling in gold, silver, and technology stocks into the first-quarter's end -- the long duration trade as bonds, which have had a dismal quarter, got sold down, as well.
The U.S. bond market has been showing signs of distress for some weeks now, as yields moved higher. But as we have argued it is not the level, but is the rate of change that is more important. Disorderly higher moves are not healthy for risky assets. That is where we are as U.S. 10-year bond yields moved from 1.4% to 1.80% very fast causing even more selling in technology stocks. The market is one big giant macro trade, there really has been no alpha as all stocks/sectors seem to have a correlation of one, as we have seen. When we see such relentless selling in large and small-cap stocks in one sector that everyone owns, something usually snaps. And it did. Something strange happened on Friday, as we saw a select basket of stocks massively underperform. Apparently, Goldman Sachs (GS) and Morgan Stanley (MS) jumped the gun and started unwinding some of the positions of one of their clients, Archegos Capital, which reportedly was run as a family office. Their front-running rather caused pain in other banks that took their time to close their positions, Nomura and Credit Suisse, that took most of the $5 billion pain. Yesterday was a blood bath as the entire market tried to go through all the names Archegos had and sell it down as there were rumors that they were not done unwinding.
What a curve ball at a time of quarter's end -- when there was quarter-related selling as it is!
One by one, all these moves become self-fulfilling. This risk-off environment over the past two or three days caused a swift move higher in the dollar, seen in the $DXY, as it is now firmly above $93. The consensus is to be short dollar, so as it moves higher it causes even more of a risk unwind as people start throwing the towel in all the short dollar trades. With all this selling, volatility picks up, which means even more derisking to be seen. Then to top it all off we see U.S. bonds sell off further into quarter end, getting even more people risk averse to sell leveraged assets.
Quarter and month end are very hard to navigate as the true theme of the market is distorted and there are curve balls thrown at us from all sorts of directions. The best way is to ignore the noise, focus on the bigger theme. The Fed is awash in liquidity, as we can see the aggressive reduction in the Treasury General Account recently. Biden is talking about an additional $3 trillion-dollar stimulus, with only $1 trillion paid via taxes and the rest to be monetized by the Fed. That only means more, not less, QE. With this liquidity backdrop, one thing is certain, for good or bad reasons, the Fed will not let the U.S. bond market fall out of control, and will or is doing some sort of yield curve control. The dollar's path is set to move lower, even secular moves see short-term unwinds, but the theme stays the same. Other than a disorderly long-term capital management moment, this is yet another opportunity to buy the beaten-up gold and silver, as it is just a matter of when, not if, we see a move higher, after the banks cover their paper shorts in precious metals during the first quarter selloff, as the physical market is anything but loose.