Russia/Ukraine amplify "buyers strike", but glimmers of incremental positives, such as falling rates, outperformance in HY

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STRATEGY: Russia/Ukraine amplify “buyers strike”, but glimmers of incremental positives, such as falling rates, outperformance in HY

On Tuesday’s trading session, equity markets came under further selling pressure, with all the major indices down around 2% at the lows. The selling started late morning and continued throughout the day. Ostensibly, this stems from further escalation of tensions in Russia-Ukraine. Equity markets are in turmoil and we are again witnessing the effects of a “buyers strike”

– a buyers strike = investors uncertain
– uncertain buyers = step to sidelines
– sidelined buyers = stocks downside pressure

We have seen buyers strikes at multiple points over the past two years. So this is something that we are all familiar with. At “event driven” moments, investors pause. This happened during 2020 elections and in front of FOMC meetings. And in prior instances, investor were better off not trading/ de-risking in front of such events.

– could Russia-Ukraine be different?
– maybe, like many fear it could lead to global conflict
– however, for reasons discussed below

– it seems like equities are far more concerned about this than others
– thus, we see this more as another “buyers strike” event
– and it pays to be patient

Curiosity #1: If Russia is going to invade Ukraine, why are Ukrainian equities rallying?
Curiously, Ukraine equities continue to outperform.

– wut?
– if the Ukraine is getting invaded, how can their stocks rally?
– it is happening
– I find this very curious (see below)
– Russian equities continue to underperform Europe (Stoxx 50)

Don’t forget that stocks rally on the “invasion” as highlighted below

Curiosity #2:…US stocks are falling, even as rates are falling = divergence = “bond vigilantes” winning this battle
One of the more positive incremental developments is that interest rates are not rising any longer. The interesting divergence is the fact that long-term bonds started rallying on 2/16. As shown below, the TLT (long-bond ETF) has risen even as S&P 500 has fallen sharply since 2/16.

– two reasons bonds rally
– “risk-off” and this is plausible given war risk
– inflation risks are falling = bonds rally

So, bond vigilantes are winning this battle as rates are falling.

Curiosity #3: Fed hike odds falling and is the yield curve only seeing 7 total hikes over next 3 years = better than feared
Another incremental positive recently is Fed funds probabilities for hikes are falling.

– it was only a few weeks ago that consensus was 2 hikes (2X 0.25bp) for March
– it has fallen now

The hawkish Fed terrified many investors.

Incidentally, at Fundstrat, the strategy teams have generally wondered how Fed tightening will solve the “hot inflation” issues. In fact, Brian Rauscher, Head of Global Portfolio Strategy, explained it very eloquently below:

– he questions how raising rates solves the issues triggering USA inflation pressures
– it is so well put, I decided to include a snapshot of his email

And looking at the yield curve, we can see that the curve is flattening sharply after the 3-yr tenure. This is not too different than 2018. But one way to view the message is:

– bond market sees Fed funds stopping at around 1.75%
– or 7 hikes over 3 years
– Consensus is calling for 7 hikes in 2022

The bond market is saying there are likely fewer hikes than consensus is forecasting. This is a positive development.

For those wondering how correlated short-term rates are to Fed funds rates. It is very high. As shown below, the correlation is:

– 1-yr = 97%
– 3-yr = 86%

In a sense, the Fed has enormous influence on short rates. And right now, the front end sees 7 hikes by 2025 (3-yr out). This is below the consensus view. In a sense, the Ukraine escalation is driving Fed incrementally dovish (based on market pricing).

Curiosity #4: high-yield has rallied since 2/14, even as S&P 500 has come under pressure…
Take a look at the High-yield ETF (HYG 0.03% ) and that has risen, albeit slightly since 2/14. Conceptually, high-yield bonds should not rally if there is serious economic consequences from a Russia-Ukraine conflict.

– if HY bonds are rising slightly
– while equities are tanking
– one of these markets is wrong

And we think the “buyers strike” in stocks is amplifying selling pressure. On the other hand, there are fewer buyers strikes in credit. Thus, we think the relative outperformance of HY is the signal.

BOTTOM LINE: Russia-Ukraine is turning what was a touchy situation into a full blown “buyers strike” but don’t perspective
In the first two months of 2022, a number of developments understandably rattled investor convictions and confidence around financial assets. One of the biggest lessons I learned at JPMorgan is the view “credit markets run on confidence, and they are good until they are not.” In other words, even the ever wise bond market itself relies on confidence to maintain its enormous liquidity.

To recap the “biggies” weighing on markets (our belief):

– inflation soaring = Fed behind curve
– interest rates rising = bond market outcry for a recession (save the complex)
– Fed hike = fear of regime change + fear of policy error
– Russia/ Ukraine = “sell the build up, buy the invasion”
– White House approval ratings low = turmoil = risk of steps to redirect

EXTRA CREDIT:
– “stocks expensive”
– “bull market historic”

And the recent escalation of tensions in Russia-Ukraine is taking a touchy situation and making it far scarier. But this is event risk. In other words, while these building headwinds are creating short-term uncertainty, but these should largely dissipate/fade before 1H2022. And thus, the set-up remains that we see equities as treacherous in 1H but stronger in 2H.

STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)

Our 2022 themes are shown below. And in not in any order:

– Bitcoin + Bitcoin Equities BITO 1.73%  GBTC 1.62%  BITW 1.93%
– Energy
– FAANG FNGS 0.96%  QQQ 0.79%

Combined, it can be shorted to BEEF.

– Homebuilders (Oct – Apr aka Golden 6 months) XHB

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33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________

POINT 1: Daily COVID-19 cases 128,555, down +32,047 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 128,555 vs 96,508 7D ago, up +32,047
• 7D positivity rate 7.7% vs 10.4% 7D ago
• Hospitalized patients 53,422, down -27% vs 7D ago
• Daily deaths 1,903, down -17% vs 7D ago

The latest COVID-19 daily cases came in at 128,555, up +32,047 vs 7D ago. The 7D delta in daily cases turned positive because of the data distortion from the Presidents’ Day holiday. And this is the first time since he last data distortion occurred during the MLK Day holiday. Despite the positive 7D delta, the case trend still look promising, especially when we compare the total cases over past two days vs. 7D ago:

Monday (2/21)47,923
Tuesday (2/22) 128,555
Total 176,478

7 days ago:

Monday (2/14) 209,093
Tuesday (2/15) 96,508
Total 305,601

As you can see, compared to 7D ago, total new cases over past two days are actually down -129,123 (-42%). Admittedly, social gatherings over the long weekend as well as recent easing of COVID restriction could cause the decline in cases to slow (and even cases to re-surge). But at least so far, we have not seen the sign. As we noted, we will have a clearer view on the COVID trends in the next week as the data distortion fades. We will be tracking it closely.

7D delta in daily cases has been negative for a month…
As we noted Monday, we are likely to see a positive 7D delta on Tuesday due to the data distortion from the Presidents’ Day holiday. And yes, the 7D delta in daily cases did turn positive. But as we noted above, the overall case trend in the US remains promising. And we just need to wait a few day for the data distortion to clear out.

All US states are seeing decline in daily cases now…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.

• We also calculated the number of days during the recent case surge
• The US as a whole, UK, and Israel are also shown at the top as a reference

Daily deaths are still rising, while positivity rates and hospitalization are falling now…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID

• Net hospitalization started to roll over. And more importantly, the daily mortality did not follow the same pattern as hospitalization, which shows Omicron is less deadly compared to other variants (at least so far).
• Positivity rate finally started to fall after plateauing for two weeks. It also confirms the recent decline in daily cases.

POINT 2: VACCINE: vaccination pace has slowed recently…

Still more than half of eligible people have not received their booster shots…
Current Trends — Vaccinations:
– avg 0.4 million this past week vs 0.5 million last week
– overall, 28.5% received booster doses, 64.5% fully vaccinated, 75.9% 1-dose+ received

Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are above 100% combined penetration
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

There were a total of 444,385 doses administered, as reported on Tuesday. The vaccination pace has slowed from the recent peak of 2 million doses per day in mid-December to ~600,000 recently. The improving COVID case trend across the nation may have influenced people’s desire and sense of urgency to get the booster doses. That said, as more and more states lift their COVID-19 restrictions, we believe vaccination remains a key to support us to smoothly transition back to “Normal”. Therefore, the daily number of vaccines administered is still one of the most important metrics to watch.

This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.

In total, 548 million vaccine doses have been administered across the country. Specifically, 252 million Americans (76% of US population) have received at least 1 dose of the vaccine. 214 million Americans (64% of US population) are fully vaccinated. And 94 million Americans (28% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.

The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors
– Opposite effects hold true in the winter

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.