Is this U.S.-China selloff a buy? A top Wall Street voice weighs in
UBS noted today that Commodity Trading Advisors (CTAs) are becoming increasingly concerned about their positions in bonds and the US dollar amidst a volatile macroeconomic environment characterized by DeepSeek and tariffs.
Despite these conditions, CTAs have shown restraint in the equity markets, with a slight and unexpected increase in their exposure to US large cap indices. Near-term market flows are anticipated to be muted, with a minor uptick in emerging market (EM) buying counterbalanced by a slight reduction in developed market (DM) selling.
The recent market dynamics have prompted CTAs to consider reducing their substantial short positions in bonds. After cutting 20% of these shorts, equating to a daily value at risk (Dv01) of $30 to $40 million in the past two weeks, CTAs are predicted to unwind an additional 40% of their remaining short positions.
This could lead to potential outflows of $50 to $60 million Dv01 over the forthcoming fortnight. UBS’s model indicates that CTAs are likely to continue purchasing bonds even if the market experiences a standard deviation sell-off of approximately 20 basis points.
In the credit sector, CTAs are maintaining their maximum long positions, capitalizing on the carry trade. However, in the foreign exchange (FX) market, they have begun to gradually book profits on their long-standing US dollar positions.
The unwinding process has been steady, with $25 to $30 billion liquidated in the last two weeks, and no immediate acceleration is expected. UBS’s model forecasts that upcoming FX flows will be predominantly influenced by Group of Ten (G10) currencies, particularly the Japanese yen (JPY) and the British pound (GBP).
Regarding commodities, CTAs have cut back on their long positions in energy while bolstering their holdings in precious metals. They have also adopted a positive stance on agricultural commodities for the first time in several months. The trend of risk reduction in energy is projected to persist, while industrial commodities are expected to attract inflows.
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