The attached notes today highlight some clear themes :
Risk assets are in pause mode, but downside momentum is weak. Positioning shows institutional underweights being drawn into buying value and non-US equities, whilst retail remains active in Growth. SP500 futures are showing the largest net shorts seen for 9 years which we ascribe to hedging and portfolio management.
Quarter end rebalancing looms, the sell flow is expected to sizeable with estimates ranging from 100-200bio USD in size. Meanwhile, as US cases rise in the states that opened up sooner, death rates are falling, due in part to younger people being infected, and improved medical care.
The Federal reserve Balance sheet saw a FALL of USD 72bio last week, but this was related to drawdowns in usage of FX swap and Repo facilities. At the margin, we regard this as a positive sign of markets functioning “correctly”, and the bid tone to Oil and Copper (ie – USD negative), suggests the US Dollar will struggle to meaningfully strengthen. Our medium term technical outlook for the Dollar remains negative, and we view a weak dollar as crucial for equity performance.
In summary – Timing matters. Our core bullish tone remains unchanged, we expected a correction as markets were overextended, but the sell pressure, in the face of at best mixed news flow, is muted. Increasingly we feel the corrective period could end sooner rather than later, but willing to let the market speak at this juncture.
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