Long-US dollar trade is overcrowded, Bank of America-Merrill Lynch survey finds
October’s stronger-than-expected US jobs report drove fund managers back into equities in December and led to a sharp increase in expectations for a rate hike by the US Federal Reserve next month, but that meant there were few investors left to push stocks higher, Bank of America-Merrill Lynch said in its November fund manager survey.
“With consensus very clustered in QE and strong dollar trades, asset price upside appears limited until an ‘event’ curtails the Fed hiking cycle, as in 1994,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Managers entrusted with other people’s money dipped into their cash reserves and in turn used that to fund a 17 percentage point increase in their overweight positions to 43%.
Fund managers’ cash levels retreated to 4.9%, down from 5.1% in the month before but remained above the post-“taper tantrum” mark of 4.7%.
Confidence in the global economy as a whole rebounded, with local fund managers in China turning ‘neutral’ on the outlook for the rate of expansion in Asia’s largest economy - their most positive reading in more than a year.
Nevertheless, that left several popular positions exposed to increased risk.
The ‘most vulnerable’ trade heading into the December Fed hike is “long dollar” and associated positions, such as ‘long discretionary’, the Eurozone, banks, Japan or being ‘short’ emerging markets, the broker said in a summary of its global survey.
Overweight Eurozone positions reached their second highest ever with long-US dollar at its most overvalued in six-and-a-half years.
“While European equities are loved by global investors and the ECB has created some excitement about growth, sector positioning shows local asset managers are lacking conviction and hugging their benchmarks,” added Manish Kabra, head of European quantitative strategy.