Treading Water

The market has been a bit of a non event so far this month. We’ve had a 4% trading range on the Eurostoxx and we’re smack in the middle of that range at the moment. Lack of conviction in the imminent sustainability of the rally has beset the bulls and volumes are low as a result. Even the AAII Bull index has ticked down .
The retail sales number yesterday initially buoyed the markets until the devil in the detail was outed and it was clear the beat came from gas, up 3.6% with necessities robust and the higher ticket consumer items continuing to lag. This lack of conviction is manifesting itself in the defensive outperformance today. The pharmas are strong, MS had an upbeat note yesterday, UBS has a big push on AZN today, Liberum are touting Roche and the Telcos are a good market too. That said, the pharma volume and move is particularly impressive so if anyone has a better reason (DXY rally maybe?), I’d love to hear it.

The equity market’s insistence on trending sideways has not spread to other asset classes and yesterday saw a big bond rally. The 10yr traded just about the 4% level intraday, but rallied back hard post the successfully $11bn 30yr auction which came in 4.72% (vs consensus of 4.8%) with a bid/cover ratio of 2.68 (vs 2.14 at the previous auction). While the market has been rife with talk of increasing inflation expectations, and for sure this has contributed to the bond move, the data have not corroborated this, as yet anyway. I subscribe to the school of thought that a substantial amount of the move has been asset allocation out of safe and into risky and certainly the pickup in individual investor appetite for equity mutual funds has been impressive.

Anecdotally, I saw a piece today talking about heavy July 45/55 call spread buying on the VIX which is presently at 28. Somebody thinks there's a big dirtnap around the corner that's for sure.