Wednesday, December 2, 2015

'Large-Speculator' Positions Offer Clues to Policy Rates

On the approach of the upcoming December FOMC meeting, where the Fed is widely expected to begin normalizing monetary policy, we might take stock in how market participants are positioned.  We read yesterday that ‘active’ clients in the JPMorgan Treasury Client Survey showed 82% of respondents as ‘neutral’ as of November 30th.  With equal amounts of remaining long and short, we can make inference that ‘active’ participants are unsure or indecisive as regards near-term direction. 

The chart immediately below (enclosed) indicates the net positioning in Eurodollar futures and options by CFTC described ‘non-commercial’ accounts.  These account types, sometimes referred to as ‘large-speculator’, have in the two weeks ending November 10th, reduced net long positions by 584K.  This took net positioning from a positive or ‘bullish’ 388K to a negative or ‘bearish’ 195K.  Seeing this position change as somewhat incredible, I reviewed historic data to discover that in only 4 other instances since information became available in 1995, have positions changed, either positively or negatively, by as much or greater. 

Five data points do not provide enough information to make any statistically significant implications, but a brief review of that history may provide some flavor for how things faired for those account types in general following dramatic position changes in the past. 

In 2007, there were back to back instances where the two week periods found net positioning change by over 600K.  Several months following this jump in net longs, the rolling 5th Eurodollar future rallied by over 350 basis points.  Some still contend that it was impossible to predict the financial meltdown that occurred in late 2007.  Apparently however, ‘large speculator’ accounts did dramatically change their positions well in front of that unfolding. 

Following the late 2010, 700K+ decline in net longs, the same Eurodollar future fell by over 90 bps over the next 5 months.  There was only a smaller bullish reaction following the mid-2014, 600K+ increase in net long positions.  These findings offer modest support to the notion that CFTC described ‘non-commercial’ accounts tend to position correctly in front of market moves.

Only time will tell if it is correct to make bearish Eurodollar price implications from the recent outlier in bearish positioning changes by ‘large-speculator’ accounts.  There remains a lot of indecision on the part of economic agents as regards the prospect for U.S. domestic rates.   Not only is the timing of the initial policy response not yet chiseled in stone, the progress of policy rates thereafter is still allows for a large disparity in views. 

While Fed transparency may not dramatically improve following a policy rate hike in December, we should expect that increasing efforts thereafter will be made by economic agents in an effort to benefit from expected policy path. 


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