The most crowded space in markets
As per the latest Bank of America Merrill Lynch (or BofAML) global fund manager survey released on May 15, long FAANG+BAT remain the most crowded trades in the financial markets. These tech giants include Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (or FAANG), as well as Baidu, Alibaba, and Tencent (or BAT). This list of tech companies featured in the most crowded trade for the fourth consecutive month, indicating that global managers are still long on the tech story. In the same survey, global fund managers were inclined towards banks (36% overweight), tech and energy, while avoiding utilities (37% underweight), telecoms, and consumer staples.
The other guys in the overcrowded list
The frequency of an asset class making financial headlines is indicative of investor interest. As per the BofAML report, the most crowded trade in May was long FAANG + BAT, and this was followed by short US Treasuries (GOVT). In the third place was short US dollar (UUP) trade. Investors track the most crowded trades to assess the risk of a short squeeze.
Which trades could see a short squeeze?
The recent market conditions bode well for equity markets, leaving short Treasuries and short US dollar trades exposed to a possibility of a short squeeze. We are already witnessing a short squeeze in the short US dollar trade, with speculator net short positions dropping to $10.8 billion on May 8 as compared to a seven-year peak net short positions of $28 billion in mid-April. With the possibility of further rate hikes from the US Fed and the increased correlation between the US dollar and bond yields, the short US dollar remains exposed to a higher risk of a short squeeze in the near term. In the next part of this series, we’ll discuss the views of global fund managers on the yield curve inversion.