By Nomura’s Charlie McElligott, head of cross-asset strategy
The US Dollar is again rallying into this week’s Jackson Hole meeting, with net USD longs at one year highs and against specs now short all available G10 currencies for the first time since Jan ‘17
Today’s USD move is being driven by 1) Euro weakness (again teetering around ~1.14 level) and now too 2) a modest “re-weakening” in offshore Yuan despite the PBoC overnight strengthening the reference rate by the most since Aug 2nd and a new headline stating “*PBOC SAID TO HAVE PROVIDED USD LIQUIDITY TO MARKET” via FX swap market
EU Equities outflows for the 23rd consecutive week and making -$51B OUT over the past six months, as Macro Fund beta to Eurostoxx indicates “outright capitulation” going down to the 10th %ile from 69th %ile
EM stabilizing modestly overnight:
- China “State Fund” buying in Equities is the highlight, driving a 2% reversal over the last hour and a half of the session and turning A-shares from lows of day (and two year lows at that) to closing at session highs
- Also boosting EM sentiment was a beat in Thai GDP which boosted broad Asian EMFX, as policy-normalization looks to be on-track
- Euro EMFX is the overnight exception and again specifically TRY, which is modestly weaker into the local holiday week as recent restrictions on selling TRY in forwards “informally” look like nascent steps towards capital controls
U.S. Rates shows spec short positioning in TY growing again (another -$8mm/01 on the week) and now makes for the shortest TY positioning of all-time as a percentage of open interest—which to us means significant “reversal / squeeze risk,” especially as U.S. Economic Surprise Index approaches one year lows (and now negative = “missing” on average)
The multi-month performance disaster for U.S. Equities funds (primarily L/S and M/N HFs, although MFs significantly lagging index as well) which has seen “gross exposure” purged lower (see “Gross-Down” monitor below) has dictated two standout flows last week:
- A “Beta Grab” (HF L/S beta to SPX jumps to 89th %ile from 65th %ile the prior week)
- A re-adding of exposure to “Momentum Longs” (L/S beta to Momentum Longs leaps to 32nd %ile from the recent puke down to 10th %ile)
- All of this despite SPX sector-performance last week showing “pure de-risking”: Telcos / Staples / REITS / Utes / Healthcare as the five best sector returns, while the bottom-six sectors were Industrials / Financials / Tech / Consumer Discretionary / Materials / Energy
The largest part of the Equities performance-issue (in addition to “idiosyncratic” EPS reactions in a number of “crowded” trades) has been either the de-facto “Long Growth / Momentum, Short Value / Quality” construction of “consensus” portfolios and / or the “Reflation” positioning theme—“Long Cyclicals / Commodities-Sensitives, Short Defensives / Duration-Sensitives,” all highlighted as “at-risk for reversal” in the “Downshift” call June 18th
An update on these key thematic reversals since making the “Downshift” call:
- U.S. Equities “1m Price Reversal” factor +6.8%
- U.S. Equites “Long Duration” sector hedge +4.6%
- U.S. Equities “Sector Mean-Reversion” Market-Neutral +5.1%
- TLT +0.5%
- U.S. Equities “Cyclicals / Defensives” Pairs -3.0%
- U.S. Equities Cash / Assets factor (“Long Growth, Short Value” proxy) -4.1%
- U.S. Equities “Cyclical Beta” Longs -5.1%
- AQR Long-Short Equity Fund -4.7%
- AQR Equity Market-Neutral Fund -4.7%
- GS HF VIP L/S -5.0%
- Bloomberg Commodities Index -5.0%
- U.S. Equities Long Tech / Short Utes (“Long Growth, Short Defensives” proxy) -7.3%
- UST 5Y Breakeven rates collapse 2.085 to 1.958
EQUITIES “GROSS-DOWN” MONTH-TO-DATE:
DESPITE POSITIONING-DATA SHOWING HEDGE FUNDS ADDING ‘BETA TO SPX’AND ‘MOMENTUM LONG’ EXPOSURE LAST WEEK, BROAD S&P SECTOR PERFORMANCE SHOWS OUTRIGHT ‘DE-RISKING’:
FACTOR- REVERSALS CONTINUE TO ‘BLEED’ VS YTD / PAST 1Y RETURNS:
AS UST 5Y BREAKEVEN YIELDS BREAK-DOWN, SO TOO DOES U.S. EQUITIES “HIGH BETA / LOW VOL” RATIO, AS PORTFOLIOS SHIFT-BACK TO MORE DEFENSIVE STANCE:
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