Asia stocks climb tracking Wall St rally; Nikkei hits record high, China GDP beats
Investing.com -- Recent equity gains have supported trend-following funds, but risks of a commodity trading advisor (CTA) unwind remain high as positioning stays stretched, according to Bank of America.
With trend followers still “meaningfully long global equities,” last week’s market strength likely drove advances in systematic strategies, the bank’s analysts said.
However, they cautioned that the backdrop remains fragile after earlier choppy price action raised the risk of U.S. equity unwinds. While no new all-time highs were reached, the latest gains “did add some cushion to CTA stop-loss thresholds,” BofA said.
Even so, “price trends could still decline from here, especially for faster-moving trend followers, but gradual unwinds on falling trends are typically much less impactful on the market than the more urgent selling that we can see when risk management frameworks kick in,” the analysts said.
Currently, the analysts note that Nasdaq trends “are likely to be the fastest to fall.”
According to BofA’s estimates, systematic strategies could sell up to $132 billion in a down market over the next week, versus modest buying in flat or rising scenarios. The analysts also said risk remains asymmetric, with CTAs alone potentially selling as much as $95 billion in a negative scenario.
Outside the U.S., trend followers remain heavily long Euro Stoxx 50 and Nikkei futures regardless of model speed, indicating crowded positioning globally.
Elsewhere in macro markets, CTAs are still broadly short the U.S. dollar against most currencies except the yen, though the recent dollar rally could prompt trimming of euro, sterling and Canadian dollar longs in coming days. Stop-loss levels for these short-dollar positions sit less than 60 basis points from recent levels, the analysts said.
In commodities, trend followers continue to add to soybean complex longs and remain long gold and copper futures, both of which helped drive positive returns for the index over the past week.