ASIA STOCKS: Taiwan Inflows Remain Very Strong, South Korea Inflows +1$bn

The S&P and the NASDAQ seem to be making new all-time highs every other day. The Russell Index(Small Caps) though has consistently lagged and is trading around 2200 still a way off its all-time highs just below 2500. Recent US data has pointed to headwinds beginning to mount for growth and the Russell would clearly be one of the best ways to express that view. Hedge Funds as a result have piled into shorts but the price action for the moment has not been rewarding with retail and trend following systems continuing to buy the dip. With positioning at extremes it leaves the market vulnerable, a sustained break back below 2100 is needed to signal a deeper correction, whereas a break back above 2300/22350 could start seeing some of these shorts having to pare back exposure.

• Barchart on X: “Hedge Funds have now built the largest short position in small cap stock futures in history.” See Fig.1 Below.
• The Kobeissi Letter on X: “Small-cap stocks are more hated than ever: Hedge funds’ short exposure to Russell 2000 stocks has risen to a record ~$20 billion. Over the last few weeks, bearish positioning has DOUBLED, now exceeding the 2021 high. According to Goldman Sachs, hedge funds shorted ~$4.3 billion in small-cap stocks between July 22nd and August 5th, the largest 2-week amount in at least 10 years.”
• Financelot on X: “Retail is max long, hedge funds are max short. Who wins?”
• Lance Roberts on X: “The problem with the current assumptions for the huge jump in EPS growth for the Russell2000 is that group of stocks are very tied to economic growth which, at the moment, doesn't support that outlook.”

• Andreas Steno Larsen on X: “If we get three rate cuts, Russel is going to explode to the upside.”

  Fig.1: Russell 2k Fund Short

  

  Source: MNI/@Barchart/Goldman Sachs

  Fig.2: Russell 2000 Daily Chart

  

  Source: MNI - Market News/Bloomberg Finance L.P

Equity inflow momentum was mixed yesterday, with tech sensitive markets offering contrasting viewpoints. South Korea saw positive momentum, but Taiwan saw outflows. For Taiwan this followed very strong inflow momentum last Thursday, but since then momentum has stalled somewhat, albeit remaining positive for the 5-day rolling sum period. The Taiex looks to be establishing itself above the 24000 level. Recent data outcomes have been positive in terms of export growth for July up 42%y/y. The local authorities did note yesterday that if the current 20% tariff rate is maintained that growth could be cut by 0.1-0.36%.  

• In South Korea, yesterday's inflows ended a run of two consecutive days of outflows. The past 5-days of inflows are running at a more modest +$500mn. Onshore media reported on stocks capital gain tax: "The official at Lee’s office told DongA that the current 5b won threshold is likely to be maintained as ruling party has stated its position" (see this link, via BBG for more details).
• Indian inflows returned at the end of last week but not enough to shift the 5-day rolling sum into positive territory.
• Indonesian inflows remained positive. In contrast, Malaysia saw further outflows, which now stretch back to July 25th in terms of consecutive outflow days seen. Still, the local Malaysian bourse has tracked higher since the start of August.
• Thailand markets were closed yesterday and return tomorrow. 

Table 1: Asian Markets Net Equity Flows 

Source: Bloomberg Finance L.P./MNI 

The ESU5 overnight range was 6387.50 - 6431.50, Asia is currently trading around 6400. The ESU5 contract stalled around 6430 and drifted lower in the N/Y session as some risk was pared back going into the US CPI. This morning US futures have opened pretty muted, ESU5 +0.05%, NQU5 +0.06%. Price bounced strongly off its first support around 6200/6250, depending on what your view is I suspect bounces back towards 6450 should now find sellers initially as we enter a poor period based on seasonality. A break below 6200 is needed to potentially signal a deeper correction back to the 5900/6000 area. The price action in stocks continues to be bullish ignoring the headwinds that point to any possible retracement, let's see what CPI holds tonight.

• Guy Berger on X: “I’ll die on this hill: the net benefit (or cost) of the tariffs is more negative than you would get from naively applying a basic trade model because we are taxing imports of capital goods and other inputs into production (eg aluminum, steel, copper, etc). The “optimal tariff” argument and the “we need to produce key production inputs here” argument are at cross purposes with each other.  The more you pursue one the more you will undermine the other.” 
• Bloomberg - “CFRA’s Angelo Zino acknowledges the revenue tax on the chips(Nvidia & AMD) will have a negative impact on profit margins relating to China sales; re-entry into the market could be worth the cost. “We think the news opens up a host of other issues, as geopolitical uncertainty could change plans in place amid trade discussions and raises questions about whether it potentially creates a new precedent with other industries/trade partners,” Zino said.”
• Bloomberg - The dual force of Fed balance sheet runoff and the rebuilding of the Treasury’s general account is extracting liquidity from the financial system through multiple, compounding channels — and this will increasingly be a headwind to risk appetite

Fig 1: SPX(ESU5) 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P