Nomura: “It Is Increasingly Obvious That Powell Believes The Fed Has Engendered Outright Asset Bubbles”

Friday, December 28, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Fri, 12/28/2018

While most traders may be clueless how to trade this painfully illiquid, directionless market, with some refusing to even participate and are instead “on the golf course”, Nomura’s Charlie McElligott, is not among them.

The head of cross-asset strategy has a clear idea of why the right tactical trade here remains to be “bullish Equities”, which he justifies with broad institutional underexposure which makes the case for “renter” longs in Equities “as clients continue to voice desire to play for “January Effect” and gross-up books, especially against much more attractive entry points/valuations from the long-side”

Longer-term, however, he is anything but bullish and believes that as the market increasingly witnesses the slowing growth- and inflation- impacts of:

1.“tighter financial conditions” / lagging negative impact of prior Fed hikes / QT,
2.fading fiscal stimulus,
3.deteriorating “wealth effect” due to recent market shocks and impact of spending and
4.the cyclical reality of corporate deleveraging late in the cycle—which means lower CAPEX

… that early 2019 rallies are to be faded and/or used to move “up in quality” ahead of the upcoming painful end-of-cycle realities.

Looking at recent market action, McElligott concludes that this “late-cycle” trade is exactly what is occurring within US Equities, observing that yesterday’s “incredible” late-day rally showing a huge preference for “Quality stocks as 7 of 8 “quality” factors in the bank’s factor suite up on the day, “and even more incredibly, 6 of 8 up MTD against most US equity indices down 9%, while equity hedge fund long/shorts are anywhere from -1.5% to -5% MTD.”

What would it take for McElligott to reverse his long-term bearish view? Nothing less than a breakthrough in one of the following three major fronts:

A Fed reversal towards EASING of policy / pausing- or stoppage- of the balance sheet unwind;
A conclusive resolution to US / China trade in the form of a “deal”;
A major Chinese policy easing “capitulation”

The Rest…HERE

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