Zeal For Global Stocks Versus US Is Already Cooling

Authored by Simon White, Bloomberg macro strategist,

Enthusiasm for the rest of the world versus the US equity trade is showing signs of faltering, while global interest in US stocks is picking up.

Performance still looks healthy, with the MSCI All Country World Index ex-US up 9% this year versus near flat for the MSCI US.

But Commitment of Traders data released on Friday, snapshotting positions as of last Tuesday, shows a sharp drop in speculators’ net long in MSCI EM and EAFE equity futures.

US stocks have had a challenging start to the year, as parts of the tech industry (AI firms) threaten to eat – or provide the tools for others to eat – another part of the tech industry (SaaS firms).

China is also threatening to disrupt the AI firms themselves by offering cheaper, open-source alternatives, making Apple’s decision not to plough fortunes into AI infrastructure starting to look astute.

No-one can know for sure what will ultimately happen, but when the distribution of outcomes is so wide, that creates a market, and some are opportunistically buying software companies at what they see as a steep discount.

That, along with rises in energy and oil stocks, may be enough to keep the market supported, bringing more buyers back to the US.

That seems to be the case for the largest foreign buyer of US stocks, Europe. Flows of US equity ETFs domiciled in the region, taking these as a proxy for European and rest-of-world demand, show that foreign in interest US stocks is picking up again.

The chart above also shows that while domestic demand for US stocks has stopped rising, it is nevertheless holding steady.

If the global versus US stocks trade is further unwound, then that would likely be dollar-friendly.

Hedge fund styles almost across the board look to be positioned short the US currency, based on the sensitivity of their returns to the DXY index.

That could mean they directly short it or have on positions that are indirectly so, such as the unhedged selling of foreign stocks.

Reversing those positions would trigger a short-covering rally in the dollar, notwithstanding the latest twists and turns in the seemingly interminable tariff drama.

Overall, there is not yet enough to suggest an outright repudiation of the rest-of-the-world versus US trade, but if the trickle of positioning away from global stocks becomes a flood, then it would become a self-fulfilling prophecy.