Hi everyone, and welcome back to our weekly positioning update. 

I’ve been puzzled over the past weeks of just how much risk assets have been denying the underlying macro trends, and it very much mimics the pattern we saw in Q4 2023. Markets are not really responding to macro unless there is a major surprise to either side of the economic consensus as this is the only scenario which can change the expected rate path of the Fed. 

As long as the economy is doing okay (which is the case as long as macro data is not too weak), the trajectory of the Fed (and their reaction function) is still intact. This is the key element in all of this, as movements in basically all assets hinge on the Fed to continue their cutting cycle. The question in markets now is “how fast are they cutting rates” which is a much more benign question than “if they are cutting rates at all / turning hawkish”. As long as the Fed is planning to cut rates, risk assets can thrive even if cuts are priced out of the curve, and they were doing very well after services inflation was clearly softening in the CPI report.

The CPI report yesterday more or less confirmed a Fed cut next week (and potentially one in January as well as the outlook for the shelter component is looking a lot softer than previously), and as long as we don’t see a major catalyst for equities to sell off before New Years, the Santa rally should remain in the cards. However, every single positioning indicator is blinking red for equities, but the “issue” is just that as long as we don’t have such a catalyst for unwinding positioning, it will not happen, and we don’t really have any event for the rest of December that has the potential to ruin the party. 

In the spirit of Santa, we will run through the most important equity positioning indicators that we look at, to give you a glimpse of just how stretched equity positioning is – and why this has happened. Enjoy!