Around this time last year as we left 2017 and entered into 2018, there was widespread optimism. Whether it was the record low volatility readings, synchronized surge in the PMIs, easy money, widespread positive economic surprise and earnings upgrades, it was (in hindsight) an air of both complacency and euphoria. And as we enter 2019, basically it's all gone wrong... with many of these flipping in the opposite direction.
This week's chart came from a report where we made some initial reflections on 2018 vs. 2017 from a macro/risk sentiment point of view.
The chart of the week hones in on one particular aspect - the reflation trade.
The chart shows the average standardized (z-score of speculative futures positioning - which itself is standardized by open interest) speculative futures positioning across crude oil, copper, aggregated US equity futures, and the inverse of treasuries and US dollar positioning. Basically all the trades that are consistent with the whole reflation theme.
This reflation trade positioning indicator surged at the turn of the year and finally peaked in late April this year, and has since plunged as traders give up on the reflation trade. Indeed, aside from the trade issues, there are broad based indications of a global softening in growth momentum, and it's only natural that this would negatively impact on sentiment here.
This brings us to the key question: is the softening in global growth momentum just a growth scare/temporary soft patch, or is it the start of a global recession? The reason this question matters is because if it is the former, then the plunge in this indicator basically amounts to a healthy reset and a shaking out of weak hands. My base case is that it is just that, but it's going to be more important to keep on top of the higher frequency global growth indicators as we enter the new year.
So the key takeaway is probably to be mindful that while people were arguably too optimistic at the end of last year, there is a genuine hazard that we end up too pessimistic as we head into 2019.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.