Chinese Economic Slowdown & Risk of Macro Investors Turning Short on Japanese Equities

In the past week, the S&P 500 showed a promising 0.8% rise, breaking a three-week downtrend. While the Fed's Jackson Hole symposium garnered attention, Jerome Powell, the Fed Chair, maintained his stance on the natural rate of interest. The market's concern about a hawkish shift waned, leading to a tentative rebound in equities after Powell's speech. However, looking from the standpoint of supply and demand among systematic investors, the sustainability of this stock price rally seems uncertain. Our assessments suggest that this week, CTAs might start trimming their long positions.

Macro Funds and US Economic Momentum Impact on Equities

Tracking the pulse of the US economy, macro hedge funds' exposure to US equities has typically aligned with economic surprises, except during the early part of Q2 results announcements. A correlation with the order-inventory balance in the ISM manufacturing index further accentuates this trend. With the upcoming jobs report set to draw attention, the level of concern preceding the announcement could magnify market reactions. Additionally, the short gamma position of dealers remains an important factor to consider.

Assessing Japanese Equities Amid Chinese Economic Slowdown

In the Japanese equity realm, the Nikkei 225 gained 0.5% compared to the previous week's close. However, this momentum was short-lived, partly due to CTAs reducing their long positions. As CTAs continue to favour Nikkei 225 futures over TOPIX, a decline in the NT ratio is evident. If the Nikkei 225 fails to surpass the 32,500 marks, the trend of CTA selling futures might persist. Conversely, macro hedge funds appear to be in a wait-and-watch mode, closely monitoring China's economic performance. A potential slowdown in China might prompt these funds to shift their stance on Japanese equities.

Impact of Chinese Manufacturing PMI on China-Related Stocks

China-related stocks face a delicate situation, with an anticipated economic slowdown in China already factored into prices. This implies that announcements of economic indicators, particularly the manufacturing PMI, could trigger significant price fluctuations. Investors should note that price reactions are tied to the degree of surprises relative to market forecasts. Notably, a strategy based on the surprise direction in PMI readings has shown effectiveness regardless of the surprise's nature.

CTAs' Potential Position Adjustments in Currency and Bond Markets

In the FX markets, the USD continued its ascent against other currencies. CTAs shifted their stance on EUR/USD long positions, moving to a neutral position. Their forward-looking "natural" positions indicate a possible shift towards short positions. For USD/JPY, CTAs are inclined to accumulate longs, but a drop below USD/JPY 143 might prompt them to adjust their positions. Meanwhile, in bond markets, CTAs maintain a bias towards short positions in US bonds.

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