Market Positioning

Summary

Somewhat unusually, speculative net SHORT positioning has increased again in 2 year Treasuries and is now at a record high (FIG A). That’s despite a fall in yields in recent weeks.

With that move lower in yields, the rates market has continued to price out 2019 Fed rate hikes. Illustrating that, the spread between the Jan 2019 and Jan 2020 Fed funds contract has fallen significantly (i.e. almost a whole hike has been priced out of 2019 – see FIG B).

FIG A: US 2-year Treasury note futures vs. net speculative LONG/SHORT positions

In part, that reflects current risk aversion in markets. That repricing, though, accelerated on dovish comments by Vice Chair Clarida (on 16^th November) stating that Fed policy is close to neutral (and stressing that the future Fed hikes should be “data dependent” – he has reaffirmed this in a speech today). Given muted US inflationary pressures and signs of slowing growth (both in the US and globally) we expect the Fed to raise rates in December and then pause their hiking cycle (for detail see Extract from Quarterly AA No 35, 14^th Sep 2018: “The Fed: Gearing up for a Pause”).

FIG B: Spread between Jan 2019 & Jan 2020 Fed funds futures contracts vs. S&P500 cash index

In commodities, there were notable shifts in oil and natural gas positioning (and prices). Much of that reflected the unwinding of a ‘LONG oil’ & ‘SHORT natural gas’ pair trade (and the reversal of somewhat crowded positioning).

FIG C: Natural gas futures (USD/MMBtu) vs. net speculative LONG/SHORT positions

With that, and since the oil price peaked, net LONG positioning in natural gas has increased notably (FIG C) while front month futures are up over 30% month on month.

FIG D: Oil futures price (USD/bbl) vs. net speculative LONG/SHORT positioning (in USDbn, i.e. value)

Points of note

Bonds/rates: Net SHORT positioning in 30 year bond futures remains near record highs (having only modestly decreased last week). Net positioning in 5 & 10 year futures was largely unchanged last week, having unwound notably in recent months. As such, speculators are particularly bearish at the extremes of the curve.

Currencies: Net SHORT positioning in the AUD continued to unwind last week, despite modest weakness vs. the USD. Net SHORT positioning remains elevated, though, and the currency is therefore susceptible to a ‘short squeeze’. In the long run, we expect a lower Australian dollar given the case for a deteriorating economic outlook (for detail see Global Macro Report, 3^rd August 2018: “Australian Consumption: As Safe as Houses?”). Despite the GBP trading near its 2018 lows, net SHORT positioning was broadly unchanged last week (at reasonably high levels). For a detailed outlook on UK growth see Global Macro Report, 10th October 2018: “UK: The Economy Beyond Brexit”.

Equities: Positioning changes in equity futures were somewhat mixed last week. Whilst net LONG positioning in S&P500 futures increased notably (FIG E), speculators reduced their LONG exposure to the DJIA. Net LONG positioning in the VIX increased again last week (accompanied by a modest move higher in the VIX).

FIG E: S&P500 vs. net speculative LONG/SHORT consolidated* positions

*Consolidated positions aggregate the standard and mini size futures contracts (and weight the mini contracts accordingly).

Please see HERE for charts of positioning in a wide variety of assets.