Global equities continued their upward run for a fifth consecutive week, with U.S. markets at the forefront, as systematic strategies added exposure in line with rising prices, according to a Friday note from Bank of America.
Model estimates and positioning
BofA's modeling suggests trend-following funds - commonly referred to as commodity trading advisors or CTAs - added about $40 billion of equity exposure over the course of the week. The bank cautioned that the rebuild is uneven across different model speeds: faster and medium-term trend models have largely increased long positions in U.S. equities, while slower-moving trend-following cohorts still appear to have significant room to add further exposure.
Analysts led by Chintan Kotecha pointed out that, even after the recent accumulation, systematic equity positioning remains notably below the levels seen in January and February. A further return to those highs, the note said, would require continued trend persistence and a reduction in realized volatility.
CTA benchmark and near-term flows
The bank observed that Thursday's equity gains produced only a "relatively muted performance for the CTA benchmark," reinforcing the assessment that, as a whole, the cohort is not yet heavily long equities.
Looking ahead to the following week, BofA's scenario frameworks point to continued buying, with Europe expected to lead flows. The bank's models estimate roughly $20 billion of buying interest into European equities under both flat and rising market scenarios, while U.S. demand is expected to be more modest under the medium-speed CTA framework.
Interest rates and fixed income positioning
U.S. Treasury yields rose during the week after Federal Reserve Chair Jerome Powell's final FOMC meeting as chair was read as more hawkish. BofA noted that longer-term trend followers continue to add to U.S. Treasury short positions. Faster-moving models are more sensitive to yield changes but remain biased toward adding shorts except in bullish futures price paths.
The bank also flagged that CTAs could be increasing short positions in Bund futures and Korea Treasury Bonds while expanding long positions in Chinese government bonds.
Foreign exchange and commodities
In FX markets, intervention in the Japanese yen during the week pushed the dollar lower against the yen. BofA's model showed trend followers maintaining their yen shorts despite that price action. The bank expects CTAs to buy the euro, pound, Australian dollar and Canadian dollar in the coming period.
On the commodities side, WTI crude futures rose about 8% for the week, with BofA's performance data indicating that the CTA cohort holds net long oil positions. Trend followers also appear to be more long soybean futures and could add to those positions, while longs in aluminum and soybean oil were flagged as potentially stretched.
Key takeaways
- Trend-following CTAs added an estimated $40 billion of equity exposure during the week, supporting a fifth straight week of global equity gains.
- Positioning varies by model speed - faster and medium-term models rebuilt U.S. equity longs, while slower models still have room to increase exposure; Europe is projected to see around $20 billion of CTA buying next week under BofA scenarios.
- Fixed income and FX positioning is shifting: CTAs appear to be adding U.S. Treasury shorts and possibly Bund and Korea Treasury Bond shorts; they are also positioned to buy several developed currencies after yen intervention.
Risks and uncertainties
- Systematic positioning remains below January-February highs - a reversal or lack of trend persistence could limit further CTA-driven buying, affecting equity demand.
- Higher realized volatility or a change in interest rate expectations could prompt faster-moving models to alter positions quickly, influencing Treasury and equity markets.
- Commodity and FX exposures flagged as "stretched" - notably aluminum and soybean oil longs - introduce potential for sharp adjustments if price momentum reverses.