Markets were somehow weaker yesterday in Europe specifically on Auto (-2.6%), Energy (-1%), Basic Resources (-1%) with a switch into defensive and sector benefitting from a fall in rates like real Estate (+1.2%) and Utilities (+0.9%). The Real Estate segment was positive also after a German court found that the Berlin rent freeze to be unconstitutional (Deutsche Wohnen +3% the most affected). The US market has managed to close positively and Asia this morning was mixed with Japan down 0.2% and China up 0.5%.
On the US-China trade we had the positive news that US seems to be willing to give a license extension for up to 3 months to Huawei is an incremental positive news. But we also had the negative news coming from a CNBC journalist saying that the mood in Beijing about the trade deal is pessimistic as the Chinese don’t see Trump doing a rollback of the existing tariffs.
Overnight the FED has performed a Repo operation for 61bn$ in what is still considered to be “non QE”. Yesterday there has been a meeting between Trump, and Powell. The outcome was relatively easy to predict as Trump has protested about rates being still too high as he would prefer a weaker Dollar.
The GBP has strengthen further vs both the € and USD. Boris Johnson said every Conservative candidate signed a pledge to vote for his Brexit deal if elected next month. A very positive key milestone for an orderly Brexit, quotes from Bojo “All 635 Conservative candidates standing at this election, every single one of them, has pledged to me that if elected they will vote in Parliament to pass my Brexit deal. The pair GBPUSD up 60bps at 1.2970 while GBPEUR up 20bps at 1.17. In addition, Johnson announced that his party will shelve a planned cut in corporation tax (from 19% to 17%), claiming he would put £6Bln into public services instead. It is striking to note that the GBP is consistently stronger on better Conservative polling and prospects for the Brexit deal passing. Market prefer the certainty of Brexit deal than uncertainty of a Labour government and deal even with the prospect of a second referendum.
In focus, the dollar underperformance as the EURUSD pair was hovering 1.109, after Trump met with Powell and tweeted, they discussed everything including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc. This sparked some hopes on a further potential easing, prompting dollar weakness and bid on US duration, 10Y US treasury -4bps.
Let’s now spot some interesting stats about positioning.
The S&P is now up 5% in Q4 and positioning can no longer be called light. This doesn’t necessary mean that market are due for an imminent correction but the risk/reward profile for the overall market is more balanced than what used to be for most of the year.
Systematic funds have continued to add to positions and leverage is increasing. Global CTA funds equity leverage has now reached the 83th percentile since 2011 while Volatility Target have reached their 80th percentile. These levels are the highest since June last year. Volatility Target funds manage roughly 450bn$ AuM, considering that over the last 8 trading days they have increased their weight from ~77% to 86%, it has a direct effect on markets of roughly 5bn$ to buy every day. If you add the Risk Parity (AuM of 500bn$) and CTAS, that’s an additional 3/5bn$ of daily purchases. However, considering the recent positioning, their buying contribution should therefore start to slowdown.
Another important daily buying factor is given by the Buybacks. In Q419 in US we should see roughly 190bn$ of buybacks, if you assume that it will be completed it simply means that if you divide the amount by the days left in 2019 you reach 5bn$ a day. Another important buying flow to be considered until the end of the year.
On Emerging Markets futures, there has been a consistent buying flows by Asset Managers initiation new longs for the 5th consecutive week. Since the middle of October it is estimated that have been bought more than 10bn$ of MSCI EM futures, the most over any 5-week period since January 2019.
On Gold, the buy-side liquidated $5.3 billion notional of longs through futures last week and their current net long position is now the smallest it has been since June 2019. A similar move could be seen on ETFs where holdings has been reduced by 788,065 ounces last week, the biggest drop in volume terms since December 2016! The gold ETF holdings had hit their highest level in more than six years just before the decline and as you know we were predicting a retracement as positioning was too crowded. We would now continue to accumulate on further weakness.
Interesting to spot the performance of the Dow Jones Index that shows the difference of long position on high momentum companies and a short on low momentum. In about a month, this Momentum Index fell 15% from high to low, in the same period the S&P (green line) went up over 6%. This to us is the classical representation of the fact that market is rising independently of the Factor trade. The excess liquidity is most important reason to justify these market behaviors.