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Investing.com -- UBS analysts warned in a research note that Commodity Trading Advisors (CTAs) are set to continue cutting equity and risky asset exposures, with no support expected from them in the near term.
“We should not expect any support from CTAs in the near term, they are equity sellers,” UBS stated.
The bank notes that over the last two weeks, CTAs halved their overall equity exposure, leading to $50-$60 billion in outflows, and this selling pressure is likely to persist.
Even if equity prices were to rise by 5%, UBS says that CTAs are expected to use the opportunity to sell further. Less liquid markets such as OBX, OMX, AEX, and TOP40 are considered most at risk.
Meanwhile, the bank adds that CTAs have been buying back duration, roughly $30 million DV01, but they now expect this trend to pause due to a more balanced reaction function. Rising bond volatility in the EU could help cap potential outflows.
In the credit market, recent spread widening, combined with increasing equity and bond volatilities, suggests that CTAs will cut one-third of their long positions, impacting the market.
On the currency front, UBS highlights that CTAs are rapidly reducing their long U.S. dollar positions.
“From a pick of $200 billion on January 20th, they are left with just a quarter of it today,” writes the bank.
UBS predicts CTAs will fully sell off their remaining $50-$60 billion in dollar holdings over the next two weeks, with a 75/25 split between G10 and emerging market currencies.
Additionally, they state that CTAs have rapidly de-risked energy positions, flipping to short at record speed, while adding to metals, where flows are expected to stabilize.
Current signals from UBS indicate bullish but selling stocks/credit, bearish bonds, neutral USD, and bullish metals but bearish energy and agriculture.