Thursday Night Reflections: 'What Risk?'

| About: SPDR S&P (SPY)

Summary

It's Thursday evening and something weird just happened.

Stocks went down despite persistent chatter about Japanese fiscal stimulus.

How risk-on-ish has the rally actually been?

Ok, so it's Thursday evening and something weird just happened.

Here, have a look:

Stocks (NYSEARCA:SPY) closed red; as in down.

Obviously that's confusing because as I noted in last night's reflections, I thought we were past this. I thought we had collectively decided that stocks only go up.

CNBC thought so too. If Erin Burnett were still around over there instead of hosting her own "hard hitting" nightly news show on CNN, I imagine this would have been her reaction at the close:

We got some indications going into yesterday's overnight session that Japan's fiscal stimulus package was going to come in at something like JPY20 trillion (these aren't even real numbers anymore) and then exactly eight minutes ago, we got an even more Dr. Evil-ish figure. Here's Nikkei (via Bloomberg):

Japan Stimulus Package Could Be as Large as 30t Yen. Finance Ministry officials briefed Prime Minister Shinzo Abe on July 11 that stimulus can be increased to the range of 20t-30t yen if it includes government guarantees and other off-budget measures, Nikkei reports, without citing anyone. Abe agreed with the need to increase package.

There are too many jokes in there to count.

Want to know how ubiquitous the Japan stimulus wise cracks have become? I didn't create that meme. It was already out there.

So with all this fiscal stimulus talk floating around, what gives with the lower close? Well, for one thing the BBC threw a monkey wrench in everything at around 4:30 a.m. Thursday morning when they dug out comments Kuroda made last month about the "impossibility" of helicopter money in Japan. One has to think he has reconsidered that position since. Here's BofAML with a bit of color on this lunacy:

We expect a major stimulus package, of ¥15-20tn in total spending, financed by at least a ¥10tn supplementary budget, likely coupled with additional easing by the Bank of Japan at end-July. We look for the BoJ to double its ETF purchases to around ¥6tn annually and potentially increase its JGB purchase pace in line with the increased issuance from the fiscal stimulus plan. Inclusion of municipal and agency bonds is also possible, but given their small market and limited liquidity, we see this as a more symbolic gesture. We do not expect a further cut in interest rates at this time, but would not completely rule it out either.

Right. So they're going to combine helicopter money with more traditional QE, more ETF purchases, some "symbolic" muni buying (because we wouldn't want to leave anyone feeling left out), and probably no more rate cuts, but hell it is Kuroda so you never know.

And really, why not? It's worked so well thus far:

(Chart: BofAML)

As I was pondering all of this and marveling at the extent to which some outdated Kuroda-speak apparently trumps the fact that Mario Draghi basically said he would throw public funds at European banks' bad loan books, I thought I'd check to see just how "risk-on-ish" this risk-on period has actually been. So I looked around for some desk chatter and found a few interesting tidbits for you (you're welcome).

Consider this from Deutsche Bank:

Within equities, low rates remain a big driver of flows and sector performance. Flows have rotated into bond-like equity funds (dividend, minimum vol, defensive sectors) while the rest of US equities have seen large outflows (+$180bn vs -$300bn since 2010). Cyclical sector performance relative to defensives has disconnected from traditional cyclical indicators like the ISMs (correlation 17%) and is instead strongly correlated with bond yields (73%). Bond-like sectors are trading at large premiums (+20%) to historical drivers while cyclicals are cheap.

Click to enlarge

As Deutsche puts it, that is "massive" underperformance for cyclicals. And can you guess what the ETF flow picture looks like based on that? Yeah, same sentiment:

(Chart: Deutsche Bank)

Here's some additional color:

With $10.7bn of inflows in 2015, and $14.3bn in the first half of 2016, Low Risk ETFs have been the most popular equity trend within US-listed ETFs. Furthermore, investors have been allocating to Low Risk strategies across every equity region or market, with the US representing about 70% of the inflow market share.

Consider that food for thought when you think about this (NYSEARCA:VXX):

Click to enlarge

Talk amongst yourselves...

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.