CTA equity positioning back to pre-Iran levels: BofA

Systematic trend-following funds have returned to their equity positioning levels prior to the Iran conflict, with potential for further growth if volatility remains low, according to BofA Securities. Medium- to longer-term trend followers could still increase exposure in the United States and Japan, while European positioning appears more stretched, showing a consensus long across trend speeds, as per the bank's Systematic Flows Monitor.

A bearish price path could lead to significant unwinds, potentially surpassing $100 billion in global equity sales. For specific indices, BofA predicts accelerating selling when the S&P 500, Nasdaq-100, Russell 2000, Euro Stoxx 50, and Nikkei decline by 3%, 5%, 5%, 4%, and 5% respectively. Most of this selling would occur from medium- to longer-term trend followers.

U.S. Treasury futures remain stretched short for CTA positioning, but recent yield rises have provided more room for short-covering triggers. The U.S. dollar has declined, putting additional pressure on stretched EURUSD shorts held by slower-moving trend followers. The euro is projected to strengthen from 1.1691 to 1.1853 against Friday's 1.1679 reference.

Canadian dollar shorts also caused issues this week, though stop-out risk is more limited. CTA positioning against the dollar is not completely one-sided, as trend followers remain long Mexican peso/U.S. dollar, which has aided recent performance. Oil prices continue to rise due to renewed conflict in Iran, leading to increased long positions by medium-term models and longer-term trend followers.

Gold prices have also risen, but CTA involvement appears limited due to a recent flattening of shorts. Medium- and long-term gold trends remain negative, though faster models might be starting to accumulate long positions. Trend followers are stretched long in copper and soybean oil. S&P 500 hedger gamma ended on Aug. 20 at $3.2 billion, placing it in the 39th percentile over the past year, slightly lower than mid-week levels.

This decrease was due to positive gamma expiries rolling off. Monthly option expiry contributed $0.6 billion, with net long hedgers accounting for around 5,000 contracts between the 7550 and 7750 strike prices. Hedger gamma is positive for every expiry next week, with options expiring during the Jackson Hole conference on Aug. 27 and 28 contributing approximately $2.8 billion.

Hedger vega positioning in options with an expiry of more than one month remained net short, similar to last week's levels, as per BofA's findings.