For the fourth week in a row, ‘complacency’ has been squeezed out of US capital markets as short positioning in VIX, US Treasuries, and Gold have all reduced significantly.
This collapse in complacency – which appears to have a long way to go to get back to normal – has accompanied a month in US stock markets that echoes their performance 10 years ago, at the height of a financial crisis.
As Bloomberg notes, the S&P 500 Index has closed lower 15 times this month. There haven’t been that many declines in a full month since October 2008, when central banks worldwide cut interest rates and U.S. money-market funds got a bailout.
But while the drop in stocks has been somewhat unprecedented (especially amid the conditional biases forced down investors’ throats by the endless intervention of central planners around the world), the modest shifts in net short positioning is only just beginning to accelerate.
Traders remain massively net short US Treasuries across the entire futures complex, but for the 3rd week in a row, the net short Treasury bond position has shrunk considerably.
Speculators pared 133K contracts in 10Yequivalents from their net short position in Treasury futures over the week ending on Tuesday, October 23. They removed 72K, 46K, 16K and 5K contracts from their net short position in 10Y, 5Y, 30Y, and Ultras respectively, while adding 57K contracts to their net short position in 2Y.
Specs also bought 15K contracts in Eurodollars, cutting their net short position to 2,577K contracts.
As U.S. stocks tumbled this week, traders ratcheted back wagers on 2019 Federal Reserve rate increases. The market is now pricing in less than two quarter-point hikes for next year, compared with the three increases policy makers project. At one point this month, before equities started to lurch lower in earnest, traders had priced in about 40% of a third quarter-point rate increase in 2019.
