From FASANARA CAPITAL

Banking sector remains under-pressure, also due to ever-more negative yields environment and flatter curves

–         US Banks have over-performed European and Japanese peers, despite 10yr Treasuries yields plummeting too and flatter US curves.

–         S&P has vastly outperformed other major indexes since mid-Feb, however the rally was not confirmed by US Banks and US Biotech (which have usually been leaders during US market rallies)

–         The ratio Nikkei/S&P declined more than 20% in the last few months. This has historically been a leading indicator, perhaps signalling more pain ahead for global equity markets

–          VIX signals extreme complacency. Several VIX indicators are at extreme levels (V2X – VIX, VIX term structure, VXX/VIX, OXV/VIX): downward trend in equity markets may resume soon, including in the US.

–          More fundamental indicators, i.e. US forward earnings expectations, have also vastly decoupled from S&P expensive valuations.

–          Oil has also broken down again, and detached from the 40$ handle. Oil may move further lower from here, as a meeting filled with wishful thinking comes due on the 17th of April between OPEC and Russia.

 

 

Financial engineering of US Buy-Backs, dovish comments from some-not-all FED officials, USD weakness may not manage to keep S&P valuations close to all-time highs for very long. Equities globally would then experience a sizable sell-off.

 

We remain wary of more equity weakness to come, and stay put. In Equities globally limited upside is combined with the risk of a sizeable sell-off in the months ahead. We keep dry powder ready should the market become way cheaper between now and September, as we expect.

 

 

 

 

CHARTBOOK:

 

EUROPEAN BANKS vs. 10yr GERMAN YIELDS: EU Banks kept declining in sync with 10yr bund yields

(longer time series are available in the attached Cookie)

 image002 (5)

(from Bloomberg Charts)

 

 

the same is true for JAPANESE BANKS vs. 10yr JGB YIELDS

 

 image004 (6)

 

(from Bloomberg Charts)

 

 

 

US BANKS, instead, have not yet followed 10yr US TREASURY YIELDS

 

 

image006 (6)(from Bloomberg Charts)

 

 

US BANKS have out-performed EUROPEAN & JAPANESE peers

(the outperformance of US Banks has been striking, 13% to 20%, considering drivers of banking sector weakness are somewhat similar globally)

 image008 (3)

(from Bloomberg Charts)

 

 

DOLLAR INDEX vs S&P: positive correlation has broken down since mid-March (Yellen speech)

(US Dollar weakness is now helping US equity markets, and their out-performance over Europe and Japan)

 image014

(from Bloomberg Charts)

 

 

S&P over-performed all other major market indexes

(S&P performance vs Nikkei, DAX, European banks, Emerging Markets)

 

image017(from Bloomberg Charts)

 

 

However, S&P over-performance was not followed by BANKS & BIOTECH

(US Banks and US Biotech have usually been leaders during US market rallies in the last few years)

 image020

(from Bloomberg Charts)

 

 

Ratio NIKKEI/S&P declined ~20% recently: may signal troubles ahead for US equities

(the ratio has repeatedly led S&P market action in the past)

 image027

(from Bloomberg Charts)

 

 

V2X at its highest levels vs. VIX may signal short-term complacency on US equities

(the ratio has been higher only during the Greek saga last year)

 

image028(from Bloomberg Charts)

 

 

VXX / VIX ratio around its highs, may signals short-term complacency on US equities

(VXX is an ETF which buys 1 and 2 months VIX futures contracts, while VIX is spot volatility. When the ratio between the two is very high, it signals that spot vol has reached extreme levels and may pop higher in the following weeks)

 image003 (8)

(from Bloomberg Charts)

 

 

OIL Volatility / VIX Volatility is also at stretched levels

(Ever since Oil started to drift lower, the ratio between Oil volatility and VIX volatility has been well correlated to the S&P. High levels of this ratio have usually coincided with tops on the S&P)

 image030

(from Bloomberg Charts)

Francesco Filia

CEO & CIO of Fasanara Capital ltd