Summary
Speculative positioning in the EUR turned net SHORT last week for the first time since early 2017. The unwinding of the net LONG positioning has, this year, coincided with the widening of Italian credit risk premiums (i.e. as proxied by the spread of Italian government bond yields over German). That has, of course, been driven by Italian politics and the emergence of a populist government. More recently spreads have widened as the Italian budget proposal has been published which is now under review by the European Commission. In that respect this week is key, as it is the deadline for the Italian government to reply to the Commission’s response (i.e. on the Italian government’s proposals). Theoretically the Commission retains the power to implement ‘sanctions’ if its satisfied that Italy’s proposals are inconsistent with the EU’s budget rule. Indeed, last Thursday, ECB president Draghi commented that undermining the Commission’s budget rules will “carry a high price tag for all actors".
FIG A: Italian – German 10 yr bond spread (pp.) vs EUR net speculative positions
Added to those factors, the ECB meeting and press conference on Thursday should also be of importance for the euro. The ECB is not expected to raise rates this week, but comments at the press conference could be of interest. Of late, the euro spot rate has moved to the bottom of its recent multi-week range (FIG B). We remain net SHORT the euro in our simulated macro fund (for detail see Macro Trade Recommendation No. 90, 8th March 2018: "Move SHORT EUR").
FIG B: Euro (USD per EUR) candlestick
Elsewhere, as this wave of risk aversion has been evolving, positioning in some key equities/equity proxies has been shifting sharply. Net SHORT speculative positioning in the VIX, for example, decreased significantly last week (FIG C). Similarly, speculators in NASDAQ100 futures are now net SHORT for the first time since May (FIG D), while bullish speculative positioning in other equity futures also fell notably (figs 7 & 8).
In our view, US (& western) equities are currently base building, i.e. setting up for a wave two relief rally within the three wave SELL-off*. The wave two rally is likely to be underpinned this week by several key earnings releases (including McDonalds, Caterpillar, VISA, Microsoft, Amazon, Snap, & Google, among others). With some market participants questioning whether we have come to the end of this cyclical bull market (given the two recent market SELL-offs and extreme valuations amongst an array of well-known metrics), our recent piece asks the question: “Is the Cyclical Bull Market over?” or is this recent pullback simply a risk event (see Longview Letter No. 116, 17th October 2018: "Extreme Valuations a.k.a. Is the cyclical bull market over? Should we be worried?").
* i.e. SELL-offs typically consist of three waves: an initial (often modest) phase of selling (wave 1), then a relief rally (wave 2) before a final third wave lower (wave 3).
FIG C: VIX vs. net speculative LONG/SHORT positions
FIG D: NASDAQ 100 vs. net speculative LONG/SHORT consolidated** positions
** Consolidated positions aggregate the standard and mini size futures contracts (and weight the mini contracts accordingly).
Points of note
Bonds/rates: Net SHORT speculative positioning in 5 & 10 year Treasury futures fell last week as bond yields continued to move higher across the curve. Bearish positioning in 30 year futures increased to a new all-time record (although yields failed to reach a new multi-year high, fig 4). Speculation at the short-end of the curve was also bearish, with a modest increase in net SHORT positioning in 2 year futures.
Currencies: Changes to positioning in key currency pairs was generally mixed last week. Most notably, speculative positioning in the CAD remains relatively flat (fig 16) ahead of the BoC policy decision later this week (at which policymakers are expected to hike rates by 25bps). In contrast, Aussie dollar positioning is relatively SHORT (fig 15). Current net SHORT positioning in the Brazilian real fell to (modestly) lower levels ahead of the Presidential elections this coming weekend (see forthcoming Global Macro Report on Brazil). Otherwise, changes to positioning in typically ‘safe-haven’ currencies were mixed, with increased bearishness in the CHF and USD (fig 14 & FIG E), but bullishness in the JPY (fig 12).
FIG E: US dollar index vs. aggregated net speculative LONG/SHORT positions
Commodities: The unwinding of high net LONG positioning in oil futures, continued last week. Net LONG positioning fell again for the third consecutive week (fig 21). Of note, in that respect, several key E&P and servicing companies are reporting earnings this week (e.g. Halliburton, TechnipFMC, ConocoPhillips, Valero, and Phillips 66, among others). The ‘Davos in the Desert’ conference in Saudi also begins this week, with several major international organisations boycotting the conference following the death of journalist Jamal Khashoggi – and adding to already heightened geopolitical tensions in the Middle East. While those rising tensions may provide a tailwind to oil prices over the coming days/weeks, key technical and fundamental factors over the next 1 – 3 months should add to further weakness in the oil price over that timeframe (see Commodity Fundamentals Report "Oil: US bottlenecks easing, Iranian sanctions impact overblown a.k.a. SELL oil (near term)").
Positioning in copper futures has been relatively unchanged over recent weeks (fig 24). With a bounce in Chinese equities overnight, though, copper prices have also strengthened (up over 1.5%). Interestingly over the last several weeks, while Chinese equities have continued to fall, copper prices have been relatively stable (contrary to their typical correlation, FIG F).
FIG F: Copper futures (USD/lb) vs. Shanghai comp. index
The wave of risk-off in global financial markets has had a notable effect on precious metals with sharp changes in positioning. Gold positioning, in particular, has returned to net LONG after several months net SHORT (fig 27). Positioning in many key agricultural commodities futures became more bullish last week (e.g. sugar; coffee; wheat; soybeans; rice; oats; corn) following a particularly bullish USDA outlook last Monday.
Summary table:
1 & 12 week changes show whether positioning has gone up (more bullish) or down (more bearish).
Percentile shows how bullish/bearish positioning is relative to (entire) history.
The charts show current positioning on a Bollinger Band basis (i.e. 200-week standard deviation bands).
Please see HERE for charts of positioning in a wide variety of assets
