Late last week, two key economic datapoints surprised to the upside — U.S. GDP on Thursday, which suggested the economy grew at a 2.8% annualized pace in Q3 (versus the 2.0% consensus estimate), and the jobs report, which suggested 204,000 workers were added to nonfarm payrolls in October (versus the 120,000 consensus estimate).
Both releases have market participants and Fed-watchers moving up the timetable for when the FOMC announces the first tapering of the Federal Reserve’s $US85-billion-a-month quantitative easing program. As the economy now appears to have largely shrugged off the government shutdown that spanned the first two weeks of October, a tapering announcement before the FOMC’s March meeting has become a very real possibility.
In a new report, Deutsche Bank strategist Keith Parker highlights “a few positioning inconsistencies that have the potential to unwind on renewed taper fears and USD strength” if a tapering announcement sooner rather than later really does become the case.
There are five, according to Parker, who writes:
Japan equity underweight and global emerging markets overweight likely to reverse on USD strength. Japanese equity mutual funds are notably underweight despite the Nikkei being a big beneficiary of USD strength; in contrast to the large Yen short, Japanese equity funds are not positioned for another leg down in the Yen. On the other hand, GEM equity fund beta is quite elevated and a Fed taper is likely to see this GEM overweight unwind and outflows pick up.
15y+ rates long and 5y short despite potential taper/guidance tradeoff. Since June, positioning in 15y+ rates has increased and is now notably long; a decline in Fed buying of the long end together with extended positioning raises the risk for longer maturity bonds. On the other hand, investors have surprisingly turned net short 5y rates even though the recent Fed papers raise the idea of strengthening forward guidance by reducing the unemployment threshold and pushing out the first rate hike.
Gold longs have risen as USD positioning has stayed neutral. USD longs were cut on the no taper decision and US shutdown, but positions have basically stayed neutral since September. Gold is most exposed to a turn up in the USD and global growth, yet gold positioning has risen the last few weeks back to April levels. Oil positioning is also very long and continues to be pared.
In short, according to Parker, investors are too bearish on Japanese stocks and 5-year Treasuries, while too bullish on emerging markets stocks, longer-dated Treasuries, and gold.