For the fourth week in a row, ‘complacency’ has been squeezed out of US capital markets as short positioning in VIX, US Treasuries, and Gold have all reduced significantly.
This collapse in complacency – which appears to have a long way to go to get back to normal – has accompanies a month in US stock markets that echoes their performance 10 years ago, at the height of a financial crisis.
As Bloomberg notes, the S&P 500 Index has closed lower 15 times this month. There haven’t been that many declines in a full month since October 2008, when central banks worldwide cut interest rates and U.S. money-market funds got a bailout.
But while the drop in stocks has been somewhat unprecedented (especially amid the conditional biases forced down investors’ throats by the endless intervention of central planners around the world), the modest shifts in net short positioning is only just beginning to accelerate.
Traders remain massively net short US Treasuries across the entire futures complex, but for the 3rd week in a row, the net short Treasury bond position has shrunk considerably…
Speculators pared 133K contracts in 10Yequivalents from their net short position in Treasury futures over the week ending on Tuesday, October 23. They removed 72K, 46K, 16K and 5K contracts from their net short position in 10Y, 5Y, 30Y, and Ultras respectively, while adding 57K contracts to their net short position in 2Y.
Specs also bought 15K contracts in Eurodollars, cutting their net short position to 2,577K contracts.
As U.S. stocks tumbled this week, traders ratcheted back wagers on 2019 Federal Reserve rate increases. The market is now pricing in less than two quarter-point hikes for next year, compared with the three increases policy makers project. At one point this month, before equities started to lurch lower in earnest, traders had priced in about 40% of a third quarter-point rate increase in 2019.
Even more concerning to The Fed, the market is now pricing in rate-cuts for 2020 and 2021.
‘Safe-haven’ buying was also evident in precious metals as Gold’s almost unprecedented net short position squeezes further into net long territory (and silver is almost back to even)…
This is the biggest two-week surge increase in net positioning since Brexit (June 2016).
For now, price (in USD) and positioning remain glued together…
But gold’s price in Yuan has exploded as it appears Chinese authorities have lost control of their currency’s ‘peg’…
One thing that Jesse (at Cafe Americain blog) noted, the sudden trend change in Gold ETF holdings looks like they are managing the physical ‘gold float’ fairly closely, shoving metal around the plate to make the global market seem fully functional.
“He who sells what isn’t his’n, must buy it back or go to prison.”
Daniel Drew
So with bonds & bullion bid, there is only one more aspect of market complacency left to consider – the Short-Volatility trade.
The last three weeks have seen net speculative short positioning in VIX futures collapse at the second fastest rate in history (only the XIV crash in Feb was bigger) as once again that steamroller snapped off a few overly-greedy fingers trying to pick up those nickels…
The VIX term structure remains inverted (for the 15th day in a row), but something very notable occurred this time…
Typically, VIX’s curve will invert into backwardation with a spike, then trend back rapidly to normalized ‘contango’. This time, the spike occurred, the trend back began, BUT before the curve could normalize it reaccelerated its inversion – something we have not seen the VIX complex do since Nov 2008…
So complacency is rapidly being unwound from US capital markets – after a year of pressing their luck on the back of goldilocks’ hope – as bonds, bullion, and volatility is bid once again.
Of course, this should not be a surprise as the world’s most systemically important banks had started to collapse, the rest of the world’s stocks had started to collapse, and finally US markets start to collapse as the great unraveling of central planners’ balance sheets begins to hit home…
It seems – much to the chagrin of the global synchronized recovery crowd who have now shifted to the US-is-the-cleanest-dirty-shirt narrative – that what goes up in a spuriously-correlated fashion comes back down to earth much faster (thanks to leverage and extreme positioning).
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