Bank of America:
Any time the relative performance of global financials to US Treasuries has stumbled as far as it has, as shown in the chart below, it has meant one thing – a major central bank intervention was imminent.
At least that’s the interpretation of BofA’s Michael Hartnett, who shows that in order to provide the kick for the bounce in this all too important “deflationary leading indicator”, central banks engaged in major unorthodox easing episodes, whether QE1-3, or the ECB’s QE.
Why intervene now? Here are the problems according to Hartnett:
Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response
Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies (“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)
Problem 2 is static, meant for media propaganda and jawboning; it can easily be removed once the global economy takes the next leg lower. Which incidentally would also resolve the gating factor of Problem 1 – as we have said for months, the Fed and its central bank peers need the political cover to launch more stimulus.
And in a reflexive world, where the “economy is the market”, this means just one thing – a big leg lower in stocks is the necessary and sufficient condition to once again push stocks higher, as policy failure is internalized, and global risk reprises from square 1.
This is Bank of America’s summary, warning that unless a major policy intervention is enacted, the market will then sell off to the next support level, below the 1,812 which has proven so stable since August.
Stabilization of “4C’s” (China, Commodities, Credit, Consumer) allowed SPX 1800 to hold/bounce to 1950-2000; weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.
Here is a summary of the near-term events which stocks are betting on do not disappoint: G20 Shanghai (February 26-27); ECB (March 10), BoJ (March 15) & FOMC (March 16).
And as documented previously, the one main near-term event Hartnett is focusing on is the Shanghai meeting next weekend. Recall:
We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations (currently heading sharply south – Chart 1) and credit conditions.
In other words, Hartnett expects a “Shanghai Accord” to be unveiled next weekend, one where like the Plaza Accord three decades earlier, the Yuan will be massively depreciated, which ironically would halt all piecemeal Yuan devaluation on expectation of future devaluation (as it will have already happened), and reset global monetary policy stability if only for a few more months.
Said otherwise, if next weekend the G-20 disappoints and unveils nothing, the next big leg down in the selloff will have arrived.
How likely is such a major intervention? Keep an eye on the recently surging price of Bitcoin for the answer, and also Vancouver real estate, of course.
