Summary
The sharp repricing of US rate expectations continued last week. In particular, the Eurodollar curve continued to flatten (with implied 3 month LIBOR peaking in December 2019 at just over 3%, see FIG A). This repricing accelerated following Powell’s comments last week (that the current Fed funds rate is “just below” neutral). With that, speculators reduced their net SHORT positioning in 2 year futures last week (from a record high the prior week, see fig 3). Our analysis suggests the Fed, and other major central banks, are likely to pause their policy tightening cycles next year, given growing evidence of tightening monetary conditions, both in the US and globally (for detail see last week’s LV on Friday “Do we need another Shanghai Accord?”).
FIG A: Implied futures 3m LIBOR (using Eurodollar futures, %) at present, 5 days ago, 20 days ago
While bearishness at the short end of the curve has unwound somewhat, positioning at the long end remains distinctly bearish. Net SHORTs in 30 year Treasuries, for example, increased again last week to a new record high (see fig 4, NB positioning data is collected on Tuesday evenings, i.e. prior to Powell’s comments). Given a slowing US (and global) economy, as well as crowded SHORT positioning, we continue to expect lower yields at the long end and remain LONG US Treasury futures in our simulated macro fund (for detail see Macro Trade No. 93, 11th Oct 2019: “Start BUILDing LONG Bond Positions”).
Points of note
Commodities: In oil, net LONG positioning fell further last week while the WTI price briefly dipped below $50/bbl (FIG C). Last Friday the OPEC advisory board (the OPEC Economic Commission Board) suggested that OPEC should cut production by 1.3mbpd to avoid an oversupplied market in 2019. Oil prices are up sharply overnight (on news that Russia and Saudi have agreed to cut oil production). This week’s OPEC meeting (Thursday) will be key in that respect (with an official supply cut likely to be announced).
FIG B: Oil price (WTI, $/bbl) vs. net speculative LONG/SHORT positioning
Currencies: Net SHORT positioning in the JPY increased last week as risk assets outperformed and safe havens fell out of favour (fig 12). Overall though, our model measuring positioning in safe haven assets (which includes the JPY & CHF) has moved significantly since August (i.e. showing that risk off positioning in portfolios has increased, FIG C).
Bonds/rates: Net SHORT speculative positioning in US 2, 5, and 10 year Treasury futures fell last week (figs 1 – 3). The unwinding of net SHORT positioning in 5 year futures since early October has been significant, from over 1 million contracts to under 350k (FIG D).
FIG C: Longview ‘safe haven’ positioning model (scale INVERTED) vs. S&P500
FIG D: US 5-year Treasury note futures vs. net speculative LONG/SHORT positions
Please see HERE for charts of positioning in a wide variety of assets.
