* Risk and macro capitulation
The summer FMS anomaly of high cash levels and high macro optimism has been corrected via sharp Sept declines in global growth expectations (lowest since Jul'12) & equity allocations (lowest since Sep'12). Unambiguous pessimism means risk assets riper for a rally (note investors don’t want a Fed hike this week). If no rally, then markets ominously hinting “recession” and/or “default” imminent.
* Goodbye TINA1…
Asset allocators cut stocks & commodities (to 2008 levels) to seek the alternatives of bonds (highest allocation since May'13) & cash (Exhibit 1)…cash levels rose back to 5.5%, equal to the 2008 highs. Note also Hedge Fund gross asset exposure sank to lowest since Jun'12.
* …Goodbye Janet
Growth fears + default fears (75% say Chinese recession or EM default the big “tail risks") + liquidity fears (liquidity conditions "poor"/"very poor" at 3-year high)…no surprise investors expecting Fed to hike this week fell from 48% to 25%.
* Autumn Pain Trades
“Recession-like” allocations to EM (all-time low), UK (4-year low), Energy (all-time low), Materials, Commodities & Cash are vulnerable to dovish Fed/stronger autumn growth. In contrast, “expansionary” allocations to Europe, Banks, Tech & Consumer Discretionary vulnerable to US/China policy mistake & weaker growth in coming months.
* The Contrarian FMS Trades
Contrarian trades struggled in August. The Sept FMS nonetheless shows extreme positions & good contrarian opportunities in EM & commodities. Our September trades: long EM, short Eurozone; long commodities, short cash; long energy, short tech.