Bank of America Global Research said systematic strategies run by commodity trading advisors moved to rapidly cut equity risk over the past week, with the biggest unwind pressure appearing in U.S. large-cap indices after earlier selling centered on international markets.
According to the bank, CTAs began the period with about $180 billion of net long exposure to global equities. Across the week, trend-following models hit stop thresholds and prompted a wave of de-risking that initially focused on European and emerging market equities. Those sales then propagated to U.S. markets, where model signals indicate significant unwinds in the S&P 500 and Nasdaq.
Aggregate positioning has flattened materially, the bank said, noting that only residual long exposure now remains in the two U.S. indices. BofA attributed those remaining long positions largely to slower, longer-term trend-following strategies that adjust exposures at a more gradual pace.
In contrast, shorter-term CTA models - which respond more quickly to price moves - likely rotated into net short positions during the week. BofA emphasized that these faster-reacting strategies represent a smaller portion of assets under management within the CTA universe.
The bank suggested the current state of systematic flows may be close to a pivot point, with risks becoming "two-sided." If equity prices rebound, CTAs could rebuild long exposure relatively quickly because longer-term trend signals remain broadly positive. Conversely, continued declines in equities could force further selling as the slower-moving trend-following models unwind remaining long holdings.
BofA provided a scenario framework for the coming week: systematic strategies could sell roughly $62 billion of equities if markets fall, sell about $14 billion if markets remain flat, or buy approximately $87 billion if markets rise.
Outside of equities, the bank pointed to strong commodity gains as a partial offset to trend-following losses. Crude oil futures rallied sharply, leaving CTAs close to their largest long oil positions in the past year and creating scope for additional buying in the near term.
At the same time, rising U.S. Treasury yields and a firmer dollar compelled CTAs to reduce some long positions in Treasury futures and to unwind certain currency trades. BofA cited long positions in the Mexican peso and the British pound among those that were trimmed.
Options positioning may further influence market dynamics, the report warned. With S&P 500 options gamma moving increasingly short, additional downside in equities could generate extra selling pressure through hedging flows, amplifying declines.
Key points
- CTAs began the week with roughly $180 billion of net long exposure to global equities and significantly reduced that positioning after trend models triggered stops.
- Selling started in European and emerging market equities before spreading to U.S. markets, with notable unwinds in the S&P 500 and Nasdaq; residual long exposure in those indices is mainly held by slower-moving strategies.
- Strong commodity gains, particularly in crude oil futures, have helped offset some CTA losses and have pushed CTAs toward near-year high long positions in oil.
Risks and uncertainties
- Further falls in equity markets could force additional CTA selling, especially from slower trend-following strategies that still hold long exposure - a risk to equity market stability.
- Short S&P 500 options gamma could amplify declines by prompting hedging-related selling, increasing downside pressure in equity markets.
- Rising U.S. Treasury yields and a stronger dollar have already driven unwind activity in Treasury futures and currency trades; continued moves in rates or FX could generate further positioning changes in fixed income and currency markets.
Bank of America’s assessment frames systematic flows as a potential accelerant in volatile markets, with the direction of future CTA positioning dependent on near-term price action across equities, commodities, rates and FX.