Consensus Positioning

New York Round of Views

Occasionally, I get an update from various banks regarding what their clients are currently thinking. Most of them are pretty consensus, but given where we are in this cycle and are now looking at the potential end of the rate hiking cycle, the below offers quite a good insight into where today’s consensus is across various asset classes.

This is from UBS, and I like their strategist as he goes around all the institutional and hedge fund blocks and hits the nerve very well.

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SUMMARY OF CLIENT POSITIONING / VIEWS

• EQUITIES: Increased exposure but still under-invested, and a high degree of scepticism remains. US exceptionalism persists, long Japan, underweight Europe, long India.

• RATES: Nearing a peak in yields? Preference for US 5YR

• FX: Long US Dollar, notably vs. Yen and CNH

• COMMODITIES: Bullish Oil (WTI) and the underlying equities. Gold: Tactically constructive

Every meeting began with a discussion on US yields; the NY client base is concerned by the damage further gains for the US Treasury could inflict on equities. Investors have rotated from highly defensive equity positioning at the start of the Summer into moderately increased cyclical exposure. Their primary concern is rising Treasury yields could undermine that trade, especially since conviction levels remain low. It’s ironic if not contradictory concern, given the 10-year yield rose 80bp since June 1st, yet over the same period, SPX advanced more than 10%, and the Equal Weight S&P rose over 12% (albeit only 7% now). As US exceptionalism persists and the market has become more enamoured with Japan, Europe has been relegated to being the funding leg once more. Overall, despite increased risk exposure, clients are far from being all-in, as roughly half of the clients we saw felt the S&P felt Jul’s 4,607 top was the high for the year (a bold call given that’s only 3% away with 3½ months of the year remaining). Most have pushed out the timeline for their recession call and remain broadly cautious long-term. NY clients are open-minded about China and are willing to consider it as the next opportunistic tactical long (or at least consider re-visiting European luxury names as a proxy for China risk). Clients remain broadly dollar bullish, and especially so vs. Yen (USDJPY 160 being the median view). Most are long oil and/or the energy sector, albeit not as long as they would like to be, and many are tactically long gold, anticipating a test of $2,000.

Most Common Questions / Themes;

• Are central banks done hiking rates, and are we in the ninth innings for global yields?

• How high can US yields, and in particular real yields rise before it’s a problem for equity markets?

• Outlook for US yield curve; 2/10’s and 5/30’s.

• When will US household savings in the US run out?

• What’s the probability / risk of a re-acceleration in US inflation?

• Was the ECB’s rate hike a step too far or an insurance policy enabling them to tone down hawkish rhetoric and offset ongoing speculation about another increase?

• Sequencing of BoJ policy and what that would mean for; Nikkei, Yen and JGB’s?

Despite a 32% SPX and 52% NDX rally off the Oct low, for the most part, people have simply shifted timeline on a broader bearish view rather than the narrative.

A perception of narrow market breadth in the US persists – the outlook for Equal Weight S&P (SPW) vs. SPX came up in most meetings.

Less than a quarter of the people we saw expect a new all-time high beyond 4,818 for SPX.

Post AI catalyst, most clients are back in the US exceptionalism camp.

Sector rotation and dispersion throughout the course of the year have been a challenge for US equity long/short funds.

Virtually everyone we saw is long Japanese equities; a structural position they are looking to add to and are doing so, currency hedged.

European equities are the least favoured developed market again – why own European equities if both the US and Chinese economies are slowing?

Opportunistically, after a 20% decline, clients did acknowledge the upside optionality for the EU Luxury Sector, albeit contingent on China stabilising.

A number of questions about the potential upside optionality in global REITS and US Regional Banks – both of which have screened well technically recently.

Outlook for US Utilities if yields are peaking?

EM, the majority who are looking at Asia are doing so ex-China, with India an ongoing favourite. Outside of India, Brazil and Mexico are popular, but position size is small given the volatility.

Volatility: Most are surprised by how low VIX is and that MOVE has now broken below the 97.30 low from Jul ‘22. Despite their fundamental concerns though, they recognise it’s hard to see a sharp / sustained risk-off environment if both equity and bond market volatility are falling simultaneously.

Most clients are long WTI and / or the energy sector, but since energy only represents 4.65% of SPX weighting, positions aren’t as big as many would have liked in their overall portfolio’s.

Clients impressed base metals have held up better than expected, considering news flow on China and given USD strength.

Opportunistic longs in gold, looking for the next $75-100 and the gold miners.

Least Common Questions / Themes;

• US Politics, either the political landscape generally or the outlook for next year’s election.

• Russia, Saudi, OPEC – very little discussion.

• Ukraine – wasn’t mentioned by anyone we saw.

• UK came up quite a bit – as was the case last time, but few articulated that in terms of how to trade their negative view on the economy.

• Sweden / Switzerland – very little discussion on Riksbank or SNB.

POLICY & MACRO:

Clients were split 70/30 on the Fed’s hiking cycle having already ended (and hence similarly split on whether the Fed’s 2023 “dot”, which in June inferred another hike to come this year, will be removed. Although the sense on the immediate policy decision was relatively dovish, the same split expected the Fed’s 2024 dots would show only 75bp of cuts to come next year rather than the 100bp inferred in June (Dec23/24 SOFR is bang on -100bp at the moment). Clients felt an upward adjustment to the policy outlook would be more consistent with the Fed’s higher-for-longer message. Nobody considered QT/liquidity to be troublesome anymore (the H1 fears about the Fed’s shrinking balance sheet have been put to one side). Any pricing of Fed cuts is considered beneficial to the S&P at the moment – clients focusing more on the likely multiple expansion rather than the deterioration of the economy. Over the last few months, upward pressure on Treasury yields has been driven by rising real rates (higher for longer), but clients felt that the risk was that would now be replaced by rising term premia to account for much higher Treasury issuance as well as much reduced sponsorship from China.

The ECB’s decision to raise rates 25bp in September was considered a policy error. Although clients could understand why the ECB had acted (strong core inflation), comments after the decision referenced the weakness of the ECB’s economic growth forecasts and the very deep deterioration in data seen in the last few weeks. The general impression was that the ECB was prepared to chase inflation down regardless of the cost to the broader economy. Client feedback prior to the ECB’s decision had indicated an expectation for a hike, even though clients felt it would be a misguided decision. Thoughts turned very quickly to when the first Eurozone cut might materialise – the general view was that given the weakness of economic data, it would be before the Fed cut.

The Bank of Japan confused most people. Japan/JGBs/Topix/Yen and the BoJ cropped up in most meetings. Clients were unsure of the BoJ’s reaction function. On the whole, most agreed that yield curve control (YCC) will be dropped completely before the end of the year. But recent hawkish commentary from Governor Ueda on interest rates made clients nervous the BoJ could actually raise rates. That would be considered akin to the BoJ snatching defeat from the jaws of victory. To that extent, clients were wary of adding any further to Japan's equity exposure near-term.

Surprisingly little attention was being paid to the Bank of England (or indeed the UK) by NY clients. There were few views as to what the BoE might do next. That’s indicative of clients not having any UK-related positions running. Attention is entirely focused elsewhere. Similarly, with the Riksbank and SNB where there was only passing interest.

TECHNICAL OBSERVATIONS:

EQUITIES:

As we noted from the trip in June, AI gave renewed impetus to US Tech and as a consequence, there’s an expectation US exceptionalism will persist. However, while client positioning has certainly improved, bringing up both net and gross exposure, most remain structurally defensive until fears of a recession are abandoned and tactically, there’s nervousness a pullback could be exaggerated by weak hands who were late to the party given Tech’s weighting in the index (Tech represents 27.54%, while Communications Services represent 8.91%) and if Apple was to come under increased pressure, given It accounts for roughly 7% of the SPX weighting.

US Market Breadth Not as Narrow as People Think: The market remains fixated by the perception market breadth has been highly concentrated. Given how SPX is calculated, it’s true a handful of stocks represent the bulk of SPX gains YTD, don’t forget the FANG acronym has been around since 2013 and being side-lined because of concern 4 stocks had been driving the market higher since then would have meant missing one of the greatest bull markets of all time. In any case, the narrow breadth argument is misleading; SPX is up 16.63% YTD and 293 stocks are positive on the year, of which; 135 stocks are up as much or more than the market, 112 stocks are up 20% or more YTD, 59 stocks are up 30% or more YTD, 37 stocks are up 40% or more YTD and 23 stocks are up 50% or more YTD (including Eli Lily, Royal Caribbean Cruises, General Electric, Pulte and Fedex). Meanwhile, the Equal Weight S&P is up 18% off the Oct low, while the Equal Weight Nasdaq is up 34% off the Oct low.

Clients have had to recalibrate expected parameters: heading into 2023; the consensus expected a US recession in Q2, so portfolios were positioned accordingly as people feared a break of the 3,491 Oct low, with scope for overshoot to 3,200. Now, the majority see the floor raised to the 3,800-4,000 zone, but most feel SPX shouldn’t be at these levels (4,475), in lieu of clarity on the economy / rates, so if we were to get that visibility, there’s a widespread belief fundamentally the narrative would simply have caught up with the price action and as a consequence risk / reward is poor. To buy here, one would have to expect at least 10% upside and the majority simply don’t believe that’s possible – on the contrary, many are keen to re-add hedges given where the VIX is and very few are willing to sell puts.

Technically, I maintain (UBS Tech) we’ll see a new high for SPX beyond 4,818 by next year, with a likely overshoot to 5,025. Most agreed there is optionality in both US REITS (B3REITP) and US Regional Banks (S5RBNK) – both of which screen well technically from here, but while REITS are popular, there was minimal interest in upside for the regional banks. Few believed that having reached my 12.73 downside target for VIX it would reach my 9.80 secondary target by the middle of next year or that MOVE, which has met my 97.30 target, will get to my secondary target in the mid-low 80’s.

Japan: The majority have captured the move in the Nikkei and most feel a test of the 38,957 all-time high from 1989 is likely. Clients remain constructive and are looking to add to long exposure into weakness.

Europe: SX5E is back to being a funding leg for most people. Technically, it remains a buy in the 4,175 zone ahead of a move beyond this year’s 4,491 high. There was some sympathy with my view European Luxury is a Buy for the next 15-20% move, especially if China was to stabilise.

China: Clients in NY are willing to consider it (in stark contrast to their European peers), but while a few have started buying China Tech, positioning more broadly remains light. Opportunistic longs from earlier this year stopped out, and many remain cautious on a longer-term basis. There is a sense Chinese equities will surprise to the upside at some point, but timing that will be challenging, so people are more inclined to add exposure when price action validates improving fundamentals – there is very little appetite to add long exposure into weakness. Technically, the long-term DeMark Buy signal in CSI300 from 3,541 last Oct remains intact (which reversed a Sell from Feb ’21) and more recently SHCOMP triggered a weekly DeMark Buy at 3,064 (25-Aug), for the first time since the top in Jun ’15. There wasn’t much sympathy for my long MSCI China vs short MSCI India view (given India remains a consensus long).

Brazil: Sympathy with the intact bullish technical signals from 100,000, which has scope for 130,000 before year-end, but clients remain wary of the headline risk and underlying volatility in USD terms, so positioning remains light.

RATES: Most believe we’re in the 9th innings on yields near-term (although at least a quarter of the people we saw think we can see 6% plus for the US10YR yield in the next 18-24 months), but there was fairly widespread scepticism the market could reach my 3.50% downside target in the next 6-9 months.

FX: Most people are USD bullish – primarily vs Yen, where the median target was 160 over the next year. Long USDCNH remains a crowded trade, too. There was widespread sympathy with my view long the crosses vs. Yen offer better vol adjusted returns than USDJPY from here, that Swiss could be a relative underperformer as we advance regardless of overall USD direction and that BRL is attractive again vs. MXN and CLP.

COMMODITIES: Long energy, both the sector and WTI had been popular earlier this year and that remains the case. There was sympathy with the view WTI can trade to $110 in the next 12 months, but that near-term, oil stocks offer better risk / reward than the underlying commodity. Rather than chasing WTI higher from here near-term, clients didn’t have an issue with the view we’re more likely to see $83 before $97.

Gold came up in a number of meetings. Many were tactically long and agree with my view technically, we’re more likely to see $2,000 than $1,800.

Copper (HG1), most feel there’s more upside and that at the very least, we should see a re-test of the 10,707 high from Mar.