Nomura: “There Is A Widespread Breakdown In Macro Regimes Across The Market”

Authored by Nomura’s Charlie McElligott; head of Cross-asset strategy

Feeling January

As “yield enhancement” volatility selling returns across asset spectrum, systematic funds are re-leveraging into broad “max” positioning—a move reminiscent of January behavior
- VIX Futures positioning (as of 7/31) shows “net vega” growing to the largest “short” position of 2018 at ~$103mm
- CTA positioning model shows “Max Longs” currently seen or being re-established across Equities—SPX, FTSE, CAC at “Max,” while Euro Stoxx and Nikkei nearing “100% Long” trigger-levels as well
- U.S. Rates “Max Short” intact in both UST 10Y and ED$
- FX shows consensual “Max Long” US Dollar positioning (“100% Short” EURUSD, “100% Long” USDJPY)
- WTI Crude has been near “max” levels at “91% Long”—however, CTAs are the likely source of “price insensitive” selling yesterday across Crude complex as momentum fades, seemingly confirmed EMEA Quant Strategy model showing Brent flipping / deleveraging powerfully to “Neutral”
- “Max Short” Metals (Gold, Silver, Copper, Lead and Zinc) remains, with Gold / Silver a simple offshoot of the “bearish Rates”- (higher “real yields” = lower Gold) and “bullish USD”-trades
This “max bullish Equities, max bearish Rates / USTs” posture is occurring in front of both VIX and SKEW index positive seasonality into August
USTs again struggling to further sell-off is similarly notable in light of large U.S. auctions and Corporate Issuance, as U.S. economic data “surprise impulse” pivots to “misses” from “beats” on average for the first time since early Fall ‘17
U.S. Breakeven rates slowly crumbling as well, with 5Y BE’s back to mid-February levels as Crude loses momentum and “Inflation Expectations” begin to fade
Another “troubling” signal relative to this “short vol” risk re-leveraging is the “Quant-Insight” model showing-us a widespread breakdown in macro regimes across major asset-classes, with 13 out of 18 “no longer” explained by their previously-leading macro factor sensitivities
The “regime change” is likely reflecting that “Domestic / U.S. Inflation Expectations” are no longer dictating global asset prices as they have for much of the past few years across both Fixed-Income and Equities
Instead, Quant Insight shows the recent collapse in Japanese “Inflation Expectations” and the BoJ’s new “forward guidance” policy-response as now the highest R-Squared model for U.S. Rates at 77%—with the recent breakdown in JGB Breakeven rates then looming ominously for UST / Rates “bears” if this speaks to a potential BoJ “policy error”
The global “steepening impetus” provided by the BoJ’s policy modifications is looking increasingly fatigued as expected, with last night’s JGB auction showing large demand for 30Y JGBs (4.68 bid-to-cover vs avg of 4.13 over AS past year)—speaking to investor belief that Japanese yields will remain “lower for longer” off the back of their new “forward guidance” policy
As I have spoken about frequently of late, until the yield curve steepening turns “sticky”—which in my mind is a 2019 story, as the market begins to “sniff a slowdown” (and thus re-prices the front-end on lowered rate-hike expectations)—it is then highly unlikely that the recent “rebalancing burst” seen in U.S. Equities “Value” outperformance over “Growth” can sustain in the near-term
HOWEVER, One final point on UST yield curve trajectory and the recent Equities “Value / Growth”- and related “Defensives / Cyclicals”- reversals which could speak to POTENTIAL for a “pain trade” looking out T+6m, and roughly aligning with that “2019 timing expectation” of mine for the market “picking-up” on the negative impact of tightening financial conditions on the economy / curve steepening:
- An analog series run by Anthony Antonucci shows that with a comparable UST 2s10s yield curve “trigger” (~30bps and coming from a steeper level for the first time in 6m while moving towards eventual inversion), the market exhibits an increasing “Value”- / “Defensive”- lean, while “Secular Growth” leaders like Tech and Cons Disc show large underperformance
- 1m returns after said “trigger” shows SPX -0.4%, with “Defensives” Utes / Staples / Telcos outperforming Tech and Cons Discretionary
- 3m returns show SPX rallying powerfully but with a “Value” shift, as Financials / Staples / Utes / Telcos lead while Materials and Cons Disc lag
- 6m returns evidence the worst potential pain-trade of them all: best performing sectors are Fins / Utes / Healthcare / Telco / Energy, with Tech as worst-performing sector

Why this scenario would be a major “pain trade”:
- Nomura positioning data shows the largest current “common overweights” of both Mutual Funds and Long-Short Hedge Funds as Software, Tech Hardware, Semiconductors and Transports
- Conversely, the largest “common underweights” are Utilities, Household & Personal, Telco, Food Beverage & Tobacco, Food & Staples, Banks, Commercial Banks, Regional Banks, REITS and Diversified Financials

CTA POSITIONING AGAIN “MAXING”: