Citi indicator sees 70% chance of market losses from here

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Richard Baldwin, Professor of International Economics at The Graduate Institute in Geneva, wrote an extremely interesting article on the potential workforce changes accelerated by the pandemic. The concept of ‘white collar robots’ is particularly novel and important,

“An epic number of people have lost their jobs…The firings also matter since they boost the attractiveness of office-place automation – what I call ‘white collar robots’ … Automating service-tasks with, for example, robotic process automation (RPA) systems, chatbots, virtual assistants, or higher-end AI-systems is easier when you’ve already laid off the workers they are replacing… Estimates are that from 40-70% of workers in the US and Europe worked from home due to the pandemic (Berg et al 2020, Dingel and Nieman 2020, Brehan 2020). To make this possible, firms have invested in digital transformations – especially in the service sector. Companies have invested in hardware and bandwidth … [these] human, physical, and organisational investments are not going away. And anything that makes it easier to telework domestically also makes it easier to telework internationally.”

“Covid, hysteresis, and the future of work” – VoxEu

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The global strategy team at Citi knows asset flows much, much, better than I do but I still have trouble believing the argument in “Short Covering, Not Inflows, Drive Rally”. Can the huge equity rally from the March lows really be primarily driven by short covering? Anyway, here’s their thesis,

“Global equities have rallied 31% from March lows despite $120bn (0.8%AUM) of redemptions from equity funds, according to EPFR. We suspect that the sharp rise in stock markets has been driven by a closing of shorts. From here, a move higher will need new longs and inflows… the longer-term switch from active to passive has been relentless. Over the last 12 months, investors moved $541bn out of active equity funds and $327bn into passive… Panic/Euphoria [Citi’s sentiment indicator] is now back in Euphoria, suggesting there is a 70% likelihood that markets are lower in following 12 months…Citi’s Risk Positioning Monitor (RPM) shows that recent moves higher in equities have been accompanied by significant short covering. The market is currently long S&P for the first time since February… A further move higher will need new longs to be established and/or inflows.”

“@SBarlow_ROB From C's "Short Covering, Not Inflows, Drive Rally" – (research excerpt, chart) Twitter

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Also from Citi, the global economics team led by Catherine Mann remains skeptical that the equity market rally can continue,

“Global financial markets continue to decouple from the situation on the ground… Lingering uncertainties surrounding the pace of recovery after economic re-opening suggest scope for a U-shaped global recovery.

Citi Global Economics notes that uncertainties include epidemiology and medical advancements, consumer spending; business operations; and trade growth, which may temper consumer and business behavior, and result in a more modest 2H 2020 rebound than projections assume. Moreover, global GDP is unlikely to return to trend resulting in a permanent loss in output, similar to the GFC episode. Women around the globe are likely to bear the brunt of pandemic-related layoffs cutting $1 trillion from global GDP.”

“@SBarlow_ROB C: "Global financial markets continue to decouple from the situation on the ground" – (research excerpt) Twitter

Diversion: “ The exhausting playbook behind Trump’s battle with Twitter” – M.I.T. Technology Review

Tweet of the Day: “@David_Tracey For 27 years the market has gone nowhere in the [normal 9:30 to 4:00 market] session.” – Twitter

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