CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned - Saturday, March 28

Following futures positions of non-commercials are as of March 24, 2020.

10-year note: Currently net short 212k, down 39.1k.

Monday, the Fed went all-in – essentially. It now has an open-ended QE program in place. There is no set amount. The balance sheet has no limits. For the first time, it is also moving into corporate bonds, with plans to buy investment-grade securities in both primary and secondary markets and through ETFs. Both the European Central Bank and the Bank of Japan already buy corporate bonds; the latter also buys equity ETFs.    

This marked a third emergency announcement in as many weeks.

On March 3, the fed funds rate was cut by 50 basis points. Then on the 15th, the policy rate was cut by another 100 basis points to a range of zero to 25 basis points; it also committed to purchase $500 billion in Treasuries and another $200 billion in mortgage-backed securities over coming months.  None of these intra-meeting moves soothed investor nerves.

The Fed – and other major central banks – want markets to stabilize, animal spirits to kick in and wealth effect to begin to reverberate through the global economy. This is precisely how things unfolded in the wake of the 2007-2009 financial crisis; central bank activism worked. But at the same time, central banks were now interfering with the natural ups and downs of economic cycles. Their balance sheets ballooned, and overall debt continued to accumulate in the system. 

This is probably why markets’ reaction function has been different this time. It is too soon to say if they have decided to challenge the ‘do not fight the Fed’ adage, but if that is indeed the case, then central banks are out of ammo.

30-year bond: Currently net short 68.9k, down 9.2k.

Major economic releases next week are as follows. 

The S&P Case-Shiller home price index (January) is due out Tuesday. Nationally, home prices rose 3.8 percent year-over-year in December.    

Wednesday brings the ISM manufacturing index (March). Manufacturing activity in February dropped eight-tenths of a point in February to 50.1.  For five months through last December, activity was sub-50. 

Durable goods orders (February, revised) are scheduled for Thursday. Preliminarily, orders for non-defense capital goods ex-aircraft – proxy for business capex plans – fell 0.6 percent y/y to a seasonally adjusted annual rate of $68.8 billion. The all-time high of $70 billion was reached in July 2018.

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