The Market Has A New ‘Top Tail Risk’ (And The Same ‘Most Crowded Trade’)

Guess what? According to the latest Global Fund Manager survey from BofAML, investors have a new “top tail risk”.

No longer is Trump’s trade war the most pressing concern when it comes to things that might come out of left field and derail the market. Rather, “the threat of a hawkish Fed/ECB policy mistake” takes the top spot in May for the first time since December:

TailRisk

Here’s the breakdown:

TailRisk2

There are a number of interesting things here. First, the fact that a hawkish policy mistake is now back at the top of the list clearly suggests investors are worried about i) Powell and co. overtightening and triggering more dollar strength on the way to perhaps inadvertently inverting the curve, and ii) the ECB perhaps mistakenly assuming that Q1 weakness in the data was “transitory” when in fact it is not, on the way to ending APP and beginning to hike rates just as the bloc’s economy rolls over. All of those concerns have been underscored this week.

Second, do note that “$100 oil” made it onto the list for the first time. Just last week, BofAML became the first Wall Street bank to raise the specter of a return to triple-digit crude. To wit, from a note out a few days ago:

Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices. As a result, we project an oil market deficit of 630k b/d in 2018 and 300k b/d in 2019. The deficits should push OECD oil stocks down closer to 2.6bn barrels by 4Q2019. With inventories set to drop below 5-year normals, we raise our average Brent forecast for this year and next to $70/bbl and $75/bbl respectively. We also introduce a 2Q $90/bbl Brent price target for 2019 and see a risk of $100/bbl oil next year, although we are concerned that these market dynamics could unfold over a shorter timeframe.

Moving on to the famous “most crowded trade” chart, “Long FAANG+BAT” again tops the list, for the fourth consecutive month:

Crowded

Here’s the breakdown there:

TradesCrowded

Long tech was predictably followed by “short USTs” and “short USD” which, amusingly, aren’t entirely compatible trades in the current environment, which means that in all likelihood, someone is going to get squeezed and over the past two weeks, it’s been the short dollar crowd.

In the week through last Tuesday, the net dollar short was trimmed by some $5 billion. As Goldman notes, “bearish Dollar positioning has now eroded by nearly $15 billion over the past three weeks from a nearly seven-year peak of $28 billion in mid-April.”

USD

There was also this, which is interesting:

YieldCurve

As obsessed with an inversion as folks are, I’m surprised “tomorrow” wasn’t an option. But don’t worry:

In any event, you can take all of the above for what it’s worth, but do remember that this survey has proved remarkably prescient this year.

Just ask Seth Golden.


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