The current combination of high net positioning among asset managers and high open interests might be a contrarian bearish signal for the MSCI EM Index, according to Bank of America Merrill Lynch analysts. In their latest “Futures and HF Positioning Report,” analysts Jue Xiong and Stephen Suttmeier also said asset managers bought S&P 500 futures and emerging markets but unloaded the NASDAQ 100 and EAFE.
Tightening risk control on MSCI EM Index
The BAML team noted that the MSCI EM Index has rallied recently but added that they believe risk control measures should be tightened in this area based on other signals they’re seeing. Specifically, they’re looking at how high open interests and high asset manager net positioning relate to the MSCI EM Index. They said that historically, when both of these two metrics hit three-year highs, the index declined an average of 0.691% over the next week 80% of the time.
Looking further out, Xiong and Suttmeier observed that over the four weeks following these two metrics hitting three-year highs, the MSCI EM Index was down 2.747% 80% of the time, excluding this month because the four-week returns aren’t out yet.
Asset managers buy S&P 500 futures
The BAML team noted that data from the CFTC indicates that last week asset managers picked up $9.4 billion worth of S&P 500 futures and $2.4 billion worth of emerging markets.
However, they sold $2.4 billion of NASDAQ 100 futures and $100 million of EAFE and continued to short the Russell 2000.
They added that last week marked the highest level of asset managers’ purchasing of S&P 500 futures since October. Last week also brought asset managers’ lowest level of NASDAQ 100 positioning in three years, although their positioning in the MSCI EM hit a three-year high.
According to BAML data, Market Neutral funds cut their market exposure to 14% short from 6% short, while Equity Long/ Short funds upped their exposure to 42% net long from 38% long. Macro hedge funds increased their long positioning in the S&P 500, NASDAQ 100 and Commodities and cut their short positioning in 10-year Treasuries, the U.S. dollar, and emerging markets.