Market positioning 9th July 2019 · 2019. 7. 9. · 1 & 12 week changes show whether positioning...

The SHORT VIEW (& market positioning), 9th July 2019 1

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The SHORT VIEW (& market positioning) 9th July 2019 More Eurozone QE: Is it time to BUY the banks? Euan Brown, Economics & Markets Analyst, Longview Economics Direct Line: +44 (0) 207 062 8808 Email: [email protected]

Summary

“I can imagine that [an interest rate hike during 2019]” ECB’s Ewald Nowotny, 11th January 2019

While Nowotny is one of the ECB’s well-known hawks, others on the governing council have shared his expectation (in early 2019 and before) that European rates should be working their way higher. Those expectations, though, have now fully reversed. In March, the ECB committed to holding rates steady this year; in June that commitment was extended (to mid-2020); and, last week, rumours of a new QE program have surfaced (aided and abetted by the appointment of Christine Lagarde as ECB president). With that, the rates market has moved appropriately: EURIBOR futures have shifted from pricing hikes, to expecting policy rates to move further into negative territory (FIG A). FIG A: Implied change in 3m EURIBOR by Dec 2019 (bps)

Basis

poin

ts (

bps)

-20

-10

0

10

20

30

40

50

60

70

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan

2017 2018 2019

Implied change in 3m EURIBOR by Dec 2019

Source: Longview Economics, Macrobond




That change of ECB policy direction has revived a number of key questions. In particular: Will the next phase of ECB easing successfully re-stimulate growth and inflation in Europe? If so, how will German bund yields perform? And, linked to that, is there now a case for buying European banks (which have significantly underperformed the broader market, FIG B)? FIG B: German 10y yield (%) vs. EZ banks vs. index (relative performance)

The common answer is that ECB easing (either via rate cuts or QE) squeezes bank interest margins and is negative for banking sector equities. The evidence for that, though, is somewhat patchy (with no correlation between ECB easing and the relative performance of EZ banks). Indeed, there have even been bouts of aggressive ECB stimulus in which Eurozone banks have meaningfully outperformed (e.g. mid 2016 – mid 2017). Instead, the correlation of Eurozone banks with bund yields is more convincing/stable, and is shown in FIG B above. How bund yields perform, and over what time frame, are therefore the key questions for Eurozone banks outlook. In the longer term, German bund yields are likely to stay pinned at/around zero, resulting in long term poor performance of Eurozone banks. That reflects the ‘Japanification’ of Europe’s economy, in which generating growth and inflation is likely to become increasingly challenging for the ECB (for detail see Longview Letter No 125, 9th May 2019: “China & Europe: The new Japans – Part II”). Of




interest in that respect, bund yields, which used to trade in lock-step with US Treasuries, have latched onto JGB yields (i.e. since the Eurozone crisis, see FIG C). FIG C: US, German & Japanese 10 year government bond yields (%)

In the shorter term, the key question becomes: What is driving bund yields? It’s not, in our view, ECB policy: Bund yields do not correlate particularly well with phases of QE/policy easing (i.e. as with the banks). That’s probably linked to (growing) evidence that the ECB is losing its ability to meaningfully influence growth and inflation in Europe (for detail on the European economy see Extract from Quarterly Asset Allocation No. 38, 19th June 19: “EZ: How much does ECB easing really matter?”). Instead, bund yields are more closely correlated with global growth (expectations) than marginal changes in ECB policy (e.g. FIG E). In that respect, Eurozone banks are looking increasingly attractive (i.e. on a 6 – 9 month time frame). Of note, there’s an emerging case for a bounce in global (and therefore Eurozone) growth, probably in the second half of this year (see Quarterly Global Asset Allocation No. 38, 5th July 2019: “Keep BUILDing ‘Risk-On’ Exposure

in Strategic Portfolios”). If that happens then bund yields, as well as US yields, should bounce along with banks in both the EZ and US.




This then throws up an additional question: Should investors allocate to US or Eurozone banks? Typically, as we show in FIG D below, the relative performance of these sectors (i.e. US banks vs. EZ banks) has been driven by the spread of US bond yields over German. In recent months however (i.e. since late April), that relationship has broken down (FIG D). FIG D: US banks relative to EZ banks vs. US - German 10y bond spread (bps)

Our central expectation is that US bond yields back up by more than bund yields over coming months and quarters (given a stronger US macro outlook*), and the relationship re-establishes itself. As a result, US banks should continue to outperform those in the Eurozone. Additionally, in the near term, and from the perspective of an overseas investor, the recent unwinding of net SHORT positioning in the EUR increases the risk of currency weakness (fig 11). Of interest in that respect, our medium term technical scoring system for the euro recently generated a SELL signal which has not yet fully unwound (FIG F). This therefore adds to the case for owning US rather than Eurozone assets. *Certain key, cyclical sectors in the US are showing early signs of recovery (e.g. housing). In Europe, in contrast, leading indicators are not yet pointing to a pick-up in economic activity (for detail see US & EZ extracts from QAA no. 38, published 12th & 19th June as well as the asset allocation recommendations extract published 5th July).




FIG E: World trade growth (Y-o-Y, %) vs. Y-o-Y change in 10y bund yield (p.p.)

FIG F: Longview EUR medium term technical scoring system vs. EUR/USD




Summary table:

FigNet

positions

1 week

change

12-week

change

Percentil

e

Data

Since

US Dollar, Bonds & Rates

US 10-yr 1 -259,443 DOWN DOWN 10 Jan-86

US 5-yr 2 -91,122 DOWN DOWN 26 May-88

US 2-yr 3 -202,128 DOWN DOWN 3 Jun-90

US Long Bonds 4 -208,611 UP UP 6 Jan-86

US Dollar Index 5 23,713 UP DOWN 75 May-92

Three-month Eurodollar 6 1,206,932 UP UP 98 Jan-86

Equities

S&P 500 7 15,517 DOWN UP 37 Jun-10

DJIA 8 19,589 UP UP 78 Jul-10

Nasdaq 100 9 3,911 UP UP 20 Aug-10

VIX 10 -135,094 DOWN UP 3 Sep-10

Curencies

Euro 11 -7,316 UP UP 41 Jan-99

Japanese Yen 12 1,327 UP UP 65 Jan-86

UK Pound 13 -77,933 DOWN DOWN 4 Apr-88

Swiss Franc 14 -20,645 UP UP 32 Jan-86

Australian Dollar 15 -68,380 UP UP 4 Jan-87

Canadian Dollar 16 19,773 UP UP 65 Jan-86

New Zealand Dollar 17 -26,840 UP DOWN 1 Jan-99

Brazilian Real 18 -3,390 UP UP 11 Nov-95

Mexican Peso 19 112,991 DOWN DOWN 94 May-95

Russian Ruble 20 33,653 UP DOWN 98 Apr-98

Energy

Oil 21 398,231 UP DOWN 90 Jan-86

Nat Gas 22 -128,480 UP DOWN 15 Apr-90

Heating Oil 23 1,059 UP DOWN 20 Jan-86

Base Metals

Copper 24 -25,027 DOWN DOWN 7 Jul-89

Steel 25 4,834 DOWN UP 99 Feb-14

Precious Metals

Silver 26 52,063 DOWN UP 69 Jan-86

Gold 27 286,822 UP UP 97 Jan-86

Palladium 28 12,107 UP UP 71 Jan-86

Platinum 29 17,298 UP DOWN 66 Jan-86

Agricultural - Grains

Corn 30 361,020 UP UP 98 Jun-98

Oats 31 3,013 DOWN UP 49 Jun-98

Rice 32 314 DOWN UP 47 Oct-94

Soybeans 33 -17,169 DOWN UP 31 Jun-98

Wheat 34 29,887 UP UP 93 Jun-98

Agricultural - Softs

Coffee 35 6,662 UP UP 45 Jan-86

Sugar 36 15,752 UP UP 30 Jan-86

Cocoa 37 51,706 UP UP 85 Jan-86

1 & 12 week changes show whether positioning has gone up (more bullish) or down (more bearish). Percentile shows how bullish/bearish positioning is relative to (entire) history. The charts show current positioning on a Bollinger Band basis (i.e. 200-week standard deviation bands).




US Dollar, Bonds & Rates Fig 1: US 10-year Treasury note futures vs. net speculative LONG/SHORT positions

Fig 2: US 5-year Treasury note futures vs. net speculative LONG/SHORT positions




Fig 3: US 2-year Treasury note futures vs. net speculative LONG/SHORT positions

Fig 4: US 30-year Treasury bond futures vs. UST bonds net speculative LONG/SHORT positions




Fig 5: US dollar index vs. net speculative LONG/SHORT positions

Fig 6: Three-month Eurodollar futures vs. net speculative LONG/SHORT positions




Equities & Volatility Fig 7: S&P500 vs. net speculative LONG/SHORT consolidated* positions

Fig 8: DJIA vs. net speculative LONG/SHORT consolidated* positions

*Consolidated positions aggregate the standard and mini size futures contracts (and weight the mini contracts accordingly).




Fig 9: NASDAQ 100 vs. net speculative LONG/SHORT consolidated* positions

Fig 10: VIX vs. net speculative LONG/SHORT positions

*Consolidated positions aggregate the standard and mini size futures contracts (and weight the mini contracts accordingly).




Currencies Fig 11: EUR-USD vs. net speculative LONG/SHORT positions

Fig 12: JPY-USD vs. net speculative LONG/SHORT positions




Fig 13: GBP-USD vs. net speculative LONG/SHORT positions

Fig 14: CHF-USD vs. net speculative LONG/SHORT positions




Fig 15: AUD-USD vs. net speculative LONG/SHORT positions

Fig 16: CAD-USD vs. net speculative LONG/SHORT positions




Fig 17: NZD-USD vs. net speculative LONG/SHORT positions

Fig 18: BRL-USD vs. net speculative LONG/SHORT positions




Fig 19: MXN-USD vs. net speculative LONG/SHORT positions

Fig 20: RUB-USD vs. net speculative LONG/SHORT positions




Energy Fig 21: Oil futures price (USD/bbl) vs. net speculative LONG/SHORT positioning (no. of contracts)

Fig 21a: Oil futures price (USD/bbl) vs. net speculative LONG/SHORT positioning (in USDbn, i.e. value)




Fig 22: Natural gas futures (USD/MMBtu) vs. net speculative LONG/SHORT positions

Fig 23: Heating oil futures vs. net speculative LONG/SHORT positions




Base Metals Fig 24: Copper futures (USD/lb) vs. net speculative LONG/SHORT positions

Fig 25: Steel futures (CNY/MT) vs. net speculative LONG/SHORT positions




Precious Metals Fig 26: Silver futures (USD/fine ounce) vs. net speculative LONG/SHORT positions

Fig 27: Gold futures (USD/fine ounce) vs. net speculative LONG/SHORT positioning (no. of contracts)




Fig 27a: Gold futures (USD/fine ounce) vs. net speculative LONG/SHORT positioning (in USDbn, i.e. value)

Fig 28: Platinum futures (USD/fine ounce) vs. net speculative LONG/SHORT positions




Fig 29: Palladium futures (USD/fine ounce) vs. net speculative LONG/SHORT positions

Agricultural - Grains Fig 30: Corn futures (USD/bushel) vs. net speculative LONG/SHORT positions




Fig 31: Oats futures (USD/bushel) vs. net speculative LONG/SHORT positions

Fig 32: Rice futures (USD/hundredweight) vs. net speculative LONG/SHORT positions




Fig 33: Soybeans futures (USD/bushel) vs. net speculative LONG/SHORT positions

Fig 34: Wheat futures (USD/bushel) vs. net speculative LONG/SHORT positions




Agricultural – Softs Fig 35: Coffee futures (USD/lb) vs. net speculative LONG/SHORT positions

Fig 36: Sugar futures (USD/lb) vs. net speculative LONG/SHORT positions




Fig 37: Cocoa futures (USD/Ton) vs. net speculative LONG/SHORT positions




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Market positioning 9th July 2019 · 2019. 7. 9. · 1 & 12 week changes show whether positioning...

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