Some comments (from Friday) from UBS on the equity sell off, centring on "the central bank put has gone for the time being"
- Central bank officials so far view this week's events as a healthy correction. The S&P 500 is just 10% off all-time highs. Equities will have to suffer much larger losses over an extended period before there is any concern.
- It could be a different story if credit markets start to soften
- If there is no central bank put, the logical assumption is there is no change in the view - rates are going higher and potentially faster.
- Bank of England Deputy Governor Broadbent spoke earlier this morning confirming that although hikes will be limited and gradual, they may come a bit sooner.
- I have spoken before about the profits accounts are sitting on from fixed income shorts. This offers protection and enables them to keep selling rallies. Until the central banks say otherwise flight to quality rallies are likely to be small.
- I think what we are seeing at the moment is a mix of leverage account unwinds in equities / vol positions coupled with accounts beginning to take profits in equities and other risk markets. If you believe the central bank put has gone, then you are going to start reducing equity / credit risk. It is sensible to book some profits.
- I also suspect that accounts are starting to book profits on populated positions to help cushion losses elsewhere - oil markets would be a great example of this.
(bolding mine ... though I reckon the 'put' is done for a good while to come ... b/s unwind, rate hikes are the new black)
