Summary
‘Risk-on’ positioning in portfolios continued to fall last week, as weakness persisted in global equities. Despite that, positioning in markets is not yet fearful, as we show in FIG A below (e.g. see the comparison with the February/March sell-off). In keeping with that, net LONG positioning in S&P500 futures remains elevated (fig 7) while positioning in NASDAQ100 futures remains broadly neutral (fig 9). Last week we recommended modestly reinstating an opportunistic ‘tactical’ OW equities position (having removed it at the start of September) on the expectation that a ‘wave two’ relief rally should start soon (for detail see Longview ‘Tactical’ Alert No. 47, 24th October 2018: “‘Wave Two’ Relief Rally Expected/Due”).
FIG A: Longview ‘safe haven’ positioning model vs. S&P500 cash index
In oil, net LONG positioning has continued to decline as the spot price has weakened this month. With that, backwardation in the oil curve (i.e. a sign of bullishness/market tightness) has unwound. The WTI curve, using the 1st & 12th position, is now almost flat and typically correlates with speculative positioning (FIG B). Overall, though, net LONG positioning in WTI remains elevated, and has room to unwind further (fig 21). Earlier this month we outlined the near term case for oil price weakness, as well as the medium term case for higher oil prices (i.e. $100+), for detail see Commodity Fundamentals Report No. 86, 11th Oct 2018: “Oil: US bottlenecks easing, Iranian sanctions overblown”.
FIG B: WTI futures curve (1st less 12th position) vs. net speculative positioning
Points of note
Currencies: Net SHORT positioning in the yen has unwound for the third consecutive week as USD/JPY has fallen from over 114 to ~112 currently. Net SHORT positioning is still elevated, though (fig 12). Positioning in the euro was broadly unchanged, having turned net SHORT last week (fig 11). Following the ECB’s press conference last Thursday, EUR/USD weakened meaningfully as Draghi neglected to fully acknowledge slowing economic momentum in the Eurozone.
Bonds/rates: In the rates market, traders’ expectations of future short term interest rates have significantly changed over the last week. The Eurodollar futures curve shows that expectations for 3 month rates at the end of 2019 have fallen notably (FIG C). In US Treasuries, net SHORT positioning fell in 5, 10, and 30 year futures as yields fell across all maturities (see figs 1, 2 & 4).
FIG C: Eurodollar term structure (latest & 5 trading sessions ago)
Commodities: In both gold and silver net LONG positioning has increased since last week (figs 26 & 27). With that, gold futures are up 4.2% month on the month, on the back of rising demand for safe haven assets. In copper, net LONG positioning was broadly unchanged last week, unsurprisingly given that copper prices have broadly traded sideways for the past month (fig 24).
Summary table:
Please see HERE for charts of positioning in a wide variety of assets
