RBC: "Energy, Stat Arb And Value Teams Are Getting Blown Out"

Is today's the day someone - following the suddenly resurgent VIX - finally blows up? Here are some timely thoughts from RBC's head of cross-asset correlation Charlie McElligott.

* * *

Why Energy Teams Are Getting Blown Out

THE ENERGY / ‘VALUE’ MARKET-NEUTRAL / MEAN-REVERSION MELTDOWN: Currently, we see crude scrambling-higher despite last night’s bearish API’s and generally weak price-action as traders began fading the ‘9 month extension’ story as many instead continue to focus on ever-ramping US shale supply (word of warning: OPEC trades the market like no other, I would be shocked if they were keeping an additional ‘further production cut’ in their back-pocket (in conjunction with the extension) to catch the market with flat-footed expectations into their policy announcement). 

The “real” fireworks off the back of the crude move however have come in the energy equities space, specifically within the market-neutral community.  Since the start of the year, the energy sector (-10.2% YTD) has come unglued, spending the majority of 2017 as the S&P’s worst-performing sector (although currently we see ‘Telco’ holding the title -11.6% YTD) after having finished 2016 as the S&P’s BEST performing sector (+23.7% in ’16).

What I have simultaneously been noting (again most-recently just yesterday) is the YTD destruction of ‘value’ factor market neutral (long ‘value’ short ‘growth’) after it too exploded higher in the back half of ’16, as a near-decade of central bank interest rate volatility suppression saw a reversal from the ‘lower / flatter forever’ narrative.  You might recall this chart from last week, highlighting the ‘value / growth’ ratio trading inversely correlated with US Financial Conditions Index, as ‘easy’ conditions and pinned-rates saw investors search for yield via ‘secular growth’ and / or ‘bond proxies,’ which has once-again ‘thematically flourished’ in 2017:

The Fed / QE killed ‘value,’ as ‘value : growth’ ratio inversely correlates to ‘easy’ US financial conditions

The second-largest 110d (essentially, YTD) move lower in ‘value : growth’ ratio since 2009

So how does this tie back into energy equities?  Well, with ‘energy’ as a ‘cyclical’ and ‘deep value’ poster-child after the multi-year deflation crisis, it clearly got popular last year, and fast (i.e. ‘momentum’) per the aforementioned ‘best S&P sector performer in 2016’ datapoint and the fact that ‘value’ factor saw the largest ‘smart beta’ ETF inflows of 2016 at +$8.6B. 

< Prev 1 2 Next >

Sign Up

Get the InvestingChannel
Free e-Letter Today

Learn More

Independent market opinion, analysis and ideas - delivered every business day

Premium market opinions, analysis, and ideas - delivered every business day

Editor's Picks