Our theme of crowded trades getting killed continues. We have been writing about the VIX shorts (and other short volatility related trades) driving much of the October sell-off. We have been arguing that fear had gone ahead of itself and that we were to expect a reversal of the sharp selloff and a fall in volatility. This has so far played out very well.
Main European index, Eurostoxx 50, is up almost 5% from recent lows. Volatility indices have sold off sharply over past sessions. What occurred in October is nothing really new, people’s greed and fear create huge moves at certain times. Hedge funds as an aggregate have been forced to liquidate risk, all resulting in crowded trades extending moves. This has over past sessions been reversed and markets have bounced.
While equities have moved higher over past sessions, the mighty USD is seeing some reversal signs today. The DXY index is turning right on the big level from earlier this year. You can argue the USD is fundamentally a buy or a sell, the Fed is doing this or that, the economy is going here or there, but for the shorter term, this has no real value for trading directions.
We continue to argue that the space of crowded trades remains elevated in various assets. Given the fact we have seen such big crowded trades implode recently, any sign of positions going against the crowd, will be closely monitored by the risk manager, and probably resulting in a quicker “plan of action”, as many global asset managers have been brutally hit by recent moves in the markets.
USD has been a safe haven space and has attracted many to pile into USD longs. The below chart shows USD versus net non-commercial longs in the USD index.
Maybe USD longs will face the same recent fate as crowded trades in VIX, FAANGs etc?
Let´s await the ISM later today, but as NDA macro team points out, the ISM might be taking the USD further down as their model predicts a lower reading than the crowd seems to price.
Source: charts by Bloomberg