Finance
The summer’s market shock isn’t quite over yet as investors brace for more turmoil
Major investors are preparing for this summer’s stock market crisis to extend into the fall, fearing a broader selloff will follow unrest fueled by worries about the US recession and misguided currency speculators of the Bank of Japan.
The sudden reversal of busy stock and currency trading, which set off a vicious cycle of price falls, volatility and hedge fund selling, has abated, with world shares up almost 2% so far this week.
But asset managers overseeing hundreds of billions of dollars in investments said they were more likely to continue selling shares than buying them back, with signs of weakness in the US labor market and global consumer trends lowering the bar for market aftershocks laid.
The buy-the-dip mentality, where investors typically respond to sell-offs by betting on a recovery, has given way to fear.
“It’s not simply a big bad luck in the financial markets, as we might describe last week. It’s broader than that,” said Mahmood Pradhan, former deputy managing director of the IMF and head of Global Macro at Amundi’s research division , the largest fund in Europe. manager.
He expects that investors, who have already reduced their stock holdings and increasingly turned to cash, according to Bank of America (BAC), will remain cautious.
Michael Kelly, head of multi-asset at PineBridge Investments, which oversees about $170 billion of client funds, is among those who have cut his funds’ stock market positions and he could pull back even further.
“It’s going to be very, very volatile over the next two months,” he said.
A first US rate cut, expected next month, could be too late to save the economy, he added.
Investors’ global growth expectations have fallen to an eight-month low.
A weak US employment report and a shock rate hike by the BOJ drove the sell-off in global stock markets, as volatility-linked and trend-following hedge funds headed for the exit and fearful investors piled into government bonds.
The BOJ hike destroyed billions of dollars of previously profitable trades where speculators had borrowed the yen cheaply to buy higher-yielding assets such as U.S. technology stocks.
About 70% of that carry trade has now been unwound, JP Morgan (JPM) estimates. But money flows linked to yen-related positions are difficult to measure and Amundi’s Pradhan said the possibility of further deleveraging is making people quite risk averse.
Gerry Fowler, head of UBS’s European equity strategy, said the hedge fund sell-off is likely over, but slower mainstream investment managers often take four to six weeks to adjust their portfolios.
These fund managers could be the next to sell, says Marie de Leyssac, multi-asset portfolio manager at Edmond de Rothschild Investment Partners, but would do so based on economic data.
Although she doesn’t think a massive slowdown in US growth is likely, she didn’t buy stocks, preferring put options, which protect against stock losses by paying out when markets fall.
Pension funds would also continue to sell their equity exposure and move into fixed income, Goldman Sachs strategist Scott Rubner said in a note, adding that the second half of September was the worst period of the year for Wall Street since 1950.
Paul Eitelman, chief strategist at Russell Investments, said another weak US jobs report had the potential to trigger new volatility.
Fed Chairman Jerome Powell’s speech at the annual central bank conference in Jackson Hole and artificial intelligence giant Nvidia’s (NVDA) earnings report on August 28 are other market risk events.
“Volatility makes it difficult to increase exposure even if you think it makes fundamental sense,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
Money managers’ risk mandates prevent them from buying stocks when prices fluctuate widely.
The VIX (^VIX) measure of expected volatility on Wall Street’s S&P 500 and its European equivalent hit multi-year highs last week before easing, but a related index continues to send out warning signals.
The VVIX, another options market benchmark that rises when traders expect the VIX itself to be turbulent, is trading above 100, indicating the market’s wild ride isn’t over yet.
“Until you see the VVIX get below 100, keep it on your radar. It’s the most important metric right now,” said Stuart Kaiser, head of Citi’s equity trading strategy.
(Additional reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and Kirsten Donovan)
