Hartnett: Private Credit Trigger For Market "Flush" Now In Play

The latest Flow Show note by Michael Hartnett is a bit on the short side: almost as if the BofA strategist sensed there would be (literal) fireworks to distract from markets. And while he refrained from commenting on geopolitics, oil, regime change - after all, everyone else is suddenly an expert in all three - he did instead discuss two other key market moves in recent days: private credit and emerging markets.

Diving into the first one, where as we said last night "all hell has broken loose",  Hartnett reminds his clients that when bank loan funds "break bad", i.e., dip below their 200dma, "bad events" happen such as the yuan devaluation in 2015, COVID in 2020, and the UK pension crisis in 2022. It appears that private credit is either one of the best early indicators out there, or the catalyst that leads to broader market contagion. 

Extending this analysis, Hartnettt writes (early on Friday morning) that if the SRLN Senior Loan ETF drops below $40, and XLF Financials $52 hold we're good. But he warns that if these key levels break, then a market “event” is coming, one which could trigger "a proper flush in risk assets."

Said event would likely get priced in via i) big March pop in US dollar (DXY to 100), and/or ii) big bid for duration (note ZROZ up 5.6% YTD), and will last until "either Fed eases and/or AI capex cut eases credit tension."

Incidentally, when stocks closed on Friday, the SRLN  traded at 39.89 and the XLF was at 51.43: the conditions for Hartnett's "proper flush" are now in place. 

Next, he turns to the relentless meltup in emerging markets, which as we explained last week (see "What's Behind The Explosive Surge In Korean Stocks: 3 Things") is mostly just South Korea's Kospi - now up 50% YTD - soaring due to its overweight exposure to memory stocks SK Hynix and Samsung. Sure enough, Hartnett writes that SK Hynix (AI memory darling) is up 5x in the past 10 months (another 18% and the surge will match Cisco's 6x bubble gain Oct'98 to Mar'00), making the KOSPI as overbought as gold in January 26, Bitcoin in March 24, and Mag7 in Jul 2023, all moves which were followed by major pullbacks, and which this time could the Nikkei (now at an all-time highs) and China FX (at a 3-year high).

Away from Korea, the BofA strategist says that Asia assets are frontrunning the global economic boom + Trump's affordability drive. But to validate this, Trump needs to reduce China's 31% tariffs which remains to be seen.

Here Hartnett is more bearish, and says that his "short view" is to sell the greed, as Asia risk assets fall ahead of US-Japan (19th) & Xi-Trump (31st) March summits.

As for his "long view", that goes back to his refrain from recent weeks, that the new world order = new world bull.

Here, Hartnett says international stocks outperform the US in the second half of the 2020s, (see Hartnett's latest chartbook: "The Longest Pictures"); and with the RoW representing just a 38% share of the $97tn global stock market cap (vs US 62%)...

... International stocks are bound to rise further on fiscal excess, populism, end of deflation.

Add to this AI disrupting more of the labor market (see Block recently firing 40% of its workers and blaming not bloat and terrible management but, of course, AI) and/or corporate revenue negative to the services-heavy US GDP and the S&P index, than the manufacturing/resource-heavy EAFE/EM macro and equity indices.

Hartnett concludes this week's note with his snapshot of weekly fund flows, which were all inflows, even crypto: $38.1bn to stocks, $38.0bn to cash, $16.8bn to bonds, $6.2bn to gold, $0.3bn to crypto.

Finally, Hartnett's Flows to Know as we enter what is sure to be a volatile week, are the following: 

• Stocks: $38.1bn inflow, annualizing $1.1tn YTD… a new record.

• Gold: $6.2bn inflow, annualizing record $148bn YTD: 

IG bonds: $9.6bn inflow, smallest in 7 weeks, annualizing record $708bn YTD:

• HY bonds: $0.6bn outflow, 1st since Nov’25
   
• Bank loan: $0.8bn outflow, 1st since Dec'25

• Financials: $2.2bn outflow, biggest since Liberation Day in Apr’25 

Korea: $3.7bn inflow - YTD $21bn inflow bigger than any year ever.

More in the full Hartnett note available to pro subscribers.