UBS reports trend followers cautious amid market volatility

UBS reports that CTAs are currently positioned cautiously due to stock market volatility, favoring European and Chinese equities while underweighting U.S. mid and small-caps. CTAs have rapidly reduced bond duration, selling $70-80 million Dv01 in two weeks, and have re-established long positions in credit markets, currently at 50% of maximum. In FX, CTAs are short the USD and JPY, while commodities see them repurchasing energy contracts, remaining long on gold, and short on agricultural commodities; overall positioning is expected to remain largely unchanged as June approaches.

Analysis

Commodity Trading Advisors (CTAs) are adopting a cautious stance, largely remaining on the sidelines due to heightened short-term stock market volatilities and ambiguous price movements, according to UBS. In equities, CTAs exhibit a preference for European and Chinese indices over US counterparts, specifically underweighting US mid and small-cap stocks; UBS signals an overall neutral stance on stocks but highlights a bullish outlook for China, the EU, and Latin America, contrasting with a bearish view on the US and Asia ex-China. The bond market has witnessed rapid duration offloading by CTAs, with $70 to $80 million worth of Dv01 sold in the past two weeks; while this selling pace is expected to moderate, sustained selling pressure might persist due to lower anticipated bond volatilities in Europe potentially leading to higher leverage. CTAs have re-established long positions in credit markets, currently at 50% of the maximum long signal, and are expected to pause before increasing exposure, awaiting further spread tightening. Foreign exchange markets show minimal CTA activity, with minor selling in G10 currencies, notably the Japanese Yen (JPY), and some buying in emerging market currencies such as the Chinese Yuan (CNH) and Indonesian Rupiah (IDR); their overall positioning remains significantly short the US dollar, at 82% of a more than 30-year distribution. In commodities, CTAs are repurchasing previously shorted energy contracts, maintain a fully long position in gold while delaying profit-taking, hold a neutral stance on industrial metals, and are short agricultural commodities. Positioning is largely expected to remain unchanged approaching June, with UBS summarizing current CTA signals as neutral on stocks, bearish on the US dollar and bonds, and bullish on credit and gold.

Key Decisions for Investors

• Investors should consider the implications of CTA's cautious equity positioning, particularly their underweighting of US mid and small-cap stocks and preference for European and Chinese indices, when reviewing regional allocations.
• The significant short positioning in the US dollar by CTAs, at 82% of a multi-decade distribution, alongside their fully long stance in gold, warrants attention for currency hedging strategies and assessing safe-haven asset demand.
• Note the aggressive reduction in bond duration by CTAs, evidenced by $70-$80 million Dv01 sold, which suggests a strong bearish outlook on bonds, while their re-engagement with long credit positions indicates a more favorable view of credit spreads.