Summary
Speculators continued to unwind their net SHORT exposure to mid/long dated US Treasuries last week (e.g. see combined 5, 10 & 30 year positioning – FIG A). Arguably that’s consistent with (and has been driven by) growing levels of fear in markets in recent weeks*. Net SHORT exposure to the VIX has also unwound and is now almost flat (i.e. another sign that positioning in markets has become more risk averse, see FIG E).
Our central expectation is that risk assets will perform well over the next few weeks (for detail see Longview ‘Tactical’ Alert No. 47, 24th Oct 2018: “‘Wave Two’ Relief Rally Expected/Due a.k.a. Move ‘opportunistically’ OW equities (on a multi week view)”). After that relief rally, our historical analysis suggests a high likelihood of a third wave of selling, although that weakness is likely to be limited (for detail see Longview ‘Tactical’ Alert No. 48, 2nd Nov 2018: “Analysing Price Action Post a Crash a.k.a. how likely is a ‘wave three’?”).
FIG A: Combined US 5, 10 & 30 year USTs net speculative LONG/SHORT positions vs. 10 year note futures
*Although, unusually, the change in positioning has not been accompanied by a fall in yields.
As concerns around slowing global growth momentum continue to build, speculators are reducing their exposure to cyclical commodities. The combined dollar value of WTI and copper positioning, for example, has unwound further (having peaked in week 5 this year) and remains correlated with the S&P500 materials sector (FIG B). In early October we outlined the case for near term oil price weakness (for detail see Commodity Fundamentals Report No. 86, 11th Oct 2018). With that weakness having probably largely played out, the medium term case for moving LONG oil, based on fundamentals, is building (see Commodity Fundamentals Report No. 85, 15th Aug 2018: “Oil: Challenging 5 year supply outlook a.k.a. Short term cautious; medium term heading to $100”).
FIG B: Combined USD value of net speculative positioning in WTI & copper vs. S&P500 materials sector
Points of note
Currencies: Net positioning in the AUD was LONG at the start of the year, then unwound and has turned increasingly net SHORT as the currency has weakened. As of last week, net SHORT positioning is still close to multi year highs (see FIG C). Given Australia’s poor structural backdrop we expect continued weakness in coming quarters, albeit that (relatively extreme) positioning increases the likelihood of a SHORT squeeze in the near term (for detail see Global Macro Report, 3rd August 2018: “Australian Consumption: As Safe as Houses?”). In the euro, net positioning was largely unchanged last week despite the currency weakening notably since the October ECB meeting (fig 11).
FIG C: AUD-USD vs. net speculative LONG/SHORT positions
Bonds/rates: In European rates, the market continues to push back the timing of EZ rate hikes. FIG D shows how future 3 month rates (implied by EURIBOR futures) have fallen over the last 20 trading sessions. In the US, net SHORT positioning in Eurodollar futures continued to unwind (albeit only modestly, see fig 6).
Commodities: In precious metals, net LONG positioning, overall, remains particularly low (and unwound modestly last week). Net positioning in gold, for example, is still close to flat (fig 27). In WTI, net LONG positioning continues to unwind as the price weakens (fig 21, NB futures were down over 6.5% last week).
FIG D: Implied 3 month EZ rates (using the EURIBOR curve) – current vs. 20 days ago
FIG E: VIX vs. net speculative LONG/SHORT positions
Please see HERE for charts of positioning in a wide variety of assets.
