'PAIN TRADE': The results of the latest BoAML global fund manager survey are in

The latest Bank of America Merrill Lynch global fund managers survey (FMS) has identified a massive pain point for markets which could lead to the next big dislocation in prices for the US dollar and other markets.

The survey reveals increasingly everyone has got the same bets in the same trades based on a belief the Fed will tighten and the US dollar and associated trades will surge.

BoAML says that in the wake of the survey:

The Big November FMS takeaway is that the most vulnerable tactical trade heading into Dec Fed hike is “long dollar”, and associated positioning, i.e. long discretionary, eurozone, banks, Japan, and short EM, resources, commodities.

Given current global interest rate and economic settings, it’s not hard to see why so many fund managers have jumped onto these trades. Aren’t they obvious?

And, they are working nicely, the euro (1.0646) hit a fresh 6 month low overnight.

But the level of “overcrowding” is also a warning that everything, or at least most of the information, might already be priced in.

So it’s worth noting that BoAML also said the survey showed:

…biggest long DM versus EM ever; 2nd highest Eurozone OW ever; 3rd biggest EM UW ever; 2nd largest tech OW ever; 3rd largest banks OW ever; long of industrials at 3-year low; US$ is 2nd most “overvalued” in 6.5 years; largest ever US equity “overvaluation” versus RoW (EM/Europe/Japan).

These sorts of extremes, or near extremes, show starkly how crowded these trades are. Most people still believe the Fed will tighten in mid-December. If they deliver this survey suggests it could be another case of the well worn market axiom “buy the rumour sell the fact.”

It sounds ridiculous to say the Fed tightening could trigger US dollar selling but that, and positions around it, is the massive pain point this survey identifies.

Short US dollars anyone? Would you like to buy some Australian dollars, perhaps euro? Maybe some emerging market bonds?

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