With the last traces of the Trumpflation rally still noticeable, US equity inflows continued last week as positive economic data surprises rose to a 4-year high. Inflows into US equities ($4.4bn) continued for a 4th straight week, cumulatively adding $45bn. This is the longest consecutive stretch of inflows since June 2014, i.e., when the severe dollar shock began. Recent inflows have been in line with the macro data surprise index, MAPI, which reached a 4-year high this week, which however is likely set for an abrupt reversal once the hangover from the soaring dollar and the surge in interest rates hits.
For now, however, as the bottom right chart shows, investors just can’t seem to get enough of equities for 3 consecutive weeks.
And while European equities saw large outflows resume this week after a brief 2-week respite while EM saw outflows pause, as expected ahead of today’s Italian referendum, what is more surprising is that equity positioning has been cut back to neutral in what is a sharp disconnect from data surprises, almost as if the institutional investor base is not so sure the data will persist, and that the US will shortly recouple with the rest of the world.
As the chart below shows, after raising equity exposure to a modest overweight post the US elections, equity funds have again cut it back to neutral, and appear to be tiptoeing quietly on their way out of US stocks. Indeed, as DB notes, while equity mutual funds are overweight, asset allocation funds are neutral, long-short and macro hedge funds underweight.
This is confirmed by discrete fund flow data, which reveals that while equities received modest inflows this week, driven entirely by inflows to US, the inflow was quite modest; at the same time outflows from Japan and EM equities stopped while Europe witnessed outflows.
A look at the sector positioning breakdown between mutual funds and hedge funds shows that while everyone loves cyclicals, energy and financials, staples, infotech and utilities are widely loathed by the entire investing world.
Less surprising is that with a “No” vote in the Italian referendum expected, pptions positioning is short Italian equities. Similar to the sharp build-up in short positioning in the options market ahead of Brexit and the US elections, there has been a sharp rise in implied volatility in Italian equities ahead of the Italian referendum.
So while the technically-driven surge in equities may be over, a historic short squeeze in Treasuries may be about to unfold, as according to DB calculations, shorts in bond futures the largest in over 6 years with positions short across all bond futures maturities; One small change: shorts in very long dated bond futures are being trimmed from extremes, added in other parts of the curve.
A quick look at oil positioning confirms what we warned the day before the OPEC Vienna meeting, namely that OPEC was begging shorts (perhaps in collusion with bih oil traders, something the FT hinted at today), to press oil lower…
… just to force another massive squeeze higher. As DB reports, covering of large short positions in oil drove rally after OPEC supply cut agreement. Going into the OPEC meeting, net long oil positions were very low reflecting gross shorts rising to near all-time highs rather than a drop in long positions which remained very elevated. A covering of those short positions was likely the main driver of the rally post the OPEC supply cut agreement. Oil prices (+42%) are now well above the 30% overvaluation band which has marked historical extremes
So for the contrarians out there: stocks netural, long TSYs and short oil as the technicals unwind.
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