Before the shit really hit the fan this week as Techs wrecked and Yuan crashed, CFTC data (reported as of Tuesday close) showed speculators piling increasingly into the most-crowded trades as if nothing will ever change.
The two most extreme positioning situations are in Gold and US Treasuries as there has never been more hedge fund shorts in the precious metal – and it is accelerating dramatically…
And never been more aggregate speculative short positions across the Treasury complex in history…
Specifically, 10Y Treasury shorts are exploding higher…
Additionally, as China’s offshore Yuan collapses, traders are adding to their net long USDollar positions – but for now, the dollar refuses to follow their positioning…
And finally, specs added further to their renewed belief in the old ‘sell vol’ trade being back…
As if February never happened.
Despite the fact that we are heading into the market’s most seasonally volatile time of year…
All of this positioning occurred before things went a little pear-shaped in global markets towards the latter end of the week, and as Bloomberg notes, this year even more so as for many, unpredictable markets could mar dreams of a lazy summer at the beach. Event risk could derail plans as trade tensions linger and China’s sliding currency recalls August 2015’s devaluation. And lest you forget: President Donald Trump has a Twitter account.
“It’s the winter in the markets — not the summer,” Louis Gargour, the chief investment officer of London-based LNG Capital, an alternative investment-management firm, said in an interview. He’s been reducing exposure to risk and increasing shorts in credit.
“China’s a big story, the second-order effects of trade wars are a much bigger factor that could pressure global markets.”
Additionally, Goldman has warned that depleted liquidity makes the market prone to crises.
“You have a lot of geopolitical events that could happen this summer,” said Barbara Reinhard, head of asset allocation at the $227 billion AUM Voya Asset Management.
“August ones are particularly alarming — that’s when volumes are thin and people are on vacation.”
Risk-off sentiment could rapidly snowball alongside the specter of higher borrowing costs. Investors may struggle to offload positions, from corporate bonds to emerging-market assets, in the second-lowest equity volume month of the year, as Reinhard concluded:
“Let’s put it this way, everyone taking a vacation: they can’t be without their devices.”
