As low REALZ RISE and CB QE moderates with a$$et valuations so high ...
Say what you want. Agree or disagree. Money talks and sitting here listening to BBG TV with Nancy Davis sell inflation protection (when all you have is a hammer, EVERYTHING looks like a nail), and has been quite successful at it (deploying leverage and options, futures), I couldn’t help but pass along // mention one banks views of CBs, markets and the dollar. An excerpt and couple of their visuals,
… We agree with Matt King that very low real rates and extraordinary large central bank asset purchases have been a major factor in pushing up asset prices over the last 20 months. 2022 therefore marks an important inflection point for asset markets, as central bank net asset purchases are phased out and real rates begin to rise. In particular, investors have not had to grapple with central banks aiming to lower inflation, rather than, say, prevent inflation from rising too much in the future.
As real rates rise and central bank purchases decline, and with the valuations of risk assets very high, we expect risk assets to lose momentum in 2022, with larger or more frequent drawdowns than in 2021, when corrections were shallow and asset prices rose sharply.
However, we think that the backdrop still remains fairly favorable early on in the year, for three reasons…
MY COMMENT: Who DOESN’T agree with Matt King?! Generally speaking, it’s been a good thing to do at least as far as my nearly 30years in the bond biz has gone. Furthermore, in as far as cliff hangere’d 3 reasons, well if you’ve got permission, CLICK HERE and you’ll note
Net central bank purchases will remain positive until Q4 2022 and the stock held by global central banks remains extremely large. For now, between the ECB and the Fed, net purchases still amount to around $250bn or so in Q1, a far cry from the emergency levels of the spring of 2020, but equally still very supportive given how loose financial conditions already are. And even though we expect the rise in real rates to be notable, it is still moderate in size, including as the demand for global safe assets remains high and our rates strategists point out ongoing pension demand for long-duration bonds.
So, (global)CB purchases to remain a POSITIVE (?) impact and so too will GROWTH,
We expect global growth to still be OK in 2022 …
Finally, tightening after tapering, is NOT an unknown
Monetary tightening is not an ‘unknown unknown’ from the perspective of investors. Many metrics of investor sentiment suggest moderate levels of sentiment and positioning. Indeed, Citi’s RPM positioning indicator shows that equity positioning has dropped from elevated levels to close to the lowest levels since May 2020 while both commodity and rates positioning are nearly neutral going into year-end.
In as far as STOCKS go, well expect more of the same — new, higher highs for the S&P and increased / increasing rates VOL,
… We stress that given the massive inflows into risk assets in recent years and notably in 2021, and the major inflection point for central banks, there are clearly risks of larger corrections and we think those will be increasingly relevant as central banks tighten the screws. But in the near-term, positioning and the moderate pace of tightening, while levels of monetary accommodation remain high, suggest that risk assets including equities could continue to prove resilient. Hence for now, we expect to see a few more record-highs for the S&P.
Comment comes with this visual of MODERATE POSITIONING across various asset classes
And the comment concludes a stronger USD (consensus view) with OK global growth (US advantage — think best lookin’ horse in the glue factory) and is highly recommended, especially if you are stuck here until 2p (FI close) or worse yet, 4p (NYSE) and beyond…