David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave. Brendan Livingstone is a member of the economics team.
One thing is for sure: Market sentiment has turned less upbeat.
This is underscored by the sector performance we have seen over the past month. Only three S&P 500 sectors have managed to make it into the green – Telecom (+6.4 per cent), Utilities (+4.4 per cent) and Real Estate (+0.9 per cent) – and these are hardly areas that are associated with heightened risk appetite.
The bond market is flashing the same signal – high yield spreads have widened out by 34 basis points over this time and the yield on the 10-year U.S. Treasury note has declined by 17 basis points and looks poised to test its low-point for the year. The yield curve, as measured by the spread between 10-year and two-year Treasuries – at 83 basis points currently, is a mere 4 basis points away from its postelection low and the futures market is priced less than 40 per cent of the way for another U.S. Federal Reserve rate hike by year-end.
These are not bullish signposts. And at the same time, we have seen traditional safe havens such as gold and the yen find a discernible bid, up more than 3 per cent and 2 per cent, respectively, during the past month.
Last week's Commitments of Traders Report from the U.S. Commodity Futures Trading Commission was also telling. For the first time in quite a while we are seeing signs that the speculators are turning more cautious:
- The net speculative long position on the 10-year T-note increased to 266,547 futures and options contracts, up from 194,326 contracts previously. Long-dated bonds continue to be in vogue, and to think this is at a time when the Fed is about to embark on its Quantitative Tightening experiment.
- Short positions on 30-day federal funds contracts were scaled back – the net short went from 284,749 contracts to 259,097 in the week ending August 22. Ditto for 3-month eurodollars – the net short position declined from 1.350 million futures & options contracts to 1.209 million. Another Fed rate hike before year-end continues to be priced out here.
- The net speculative long position on gold jumped from 191,831 futures and options contracts to 215,452 – the highest level since the election. Silver net longs also moved higher – to 43,862 contracts from 37,975 the week prior. In just more than a month, net bullish positioning on silver has quintupled. On Monday, gold topped the closely watched $1,300-an-ounce (U.S.) mark – a very constructive development for the precious-metals space. The December contract in New York settled at $1,315.30 an ounce, its highest finish in 11 months.
- Speculators are still net short the yen, but less so – 78,652 contracts currently, which is down from 81,099 contracts in the prior week. The nearby peak short position was 131,370 futures and options contracts in the week ending July 18 – so bearish positioning has been scaled back by 40 per cent in little more than a month. This is one currency you want to make sure you own when skittishness becomes more prevalent.
- And even the net short on the VIX has been curtailed – from 129,406 futures and options contracts in the prior week to 105,294 currently. This is quite the move from the all-time peak net short position (158,114 contracts) registered in the week of August 1. Volatility has picked up in recent weeks, and while still low by historical standards, it looks as if we have seen a tidal shift.
The message from the non-commercial accounts in the futures and options pits is pretty clear: Now is not an opportunity to add to risk – defensive positioning remains the prudent strategy at the current time.