Wall Road Week Forward: Traders who hedge are apprehensive about exuberance as US dangers improve

© Reuters. The spread of coronavirus disease (COVID-19) in New York

By David Randall and Megan Davies

NEW YORK (Reuters) – Wall Street is showing signs of concern about the continuing impact of the US coronavirus pandemic, which is compounded by resurgent case numbers, the prospect of a slower recovery in growth, and growing political uncertainty.

When a US stock rally stalled this week, investors net invested $ 24.5 billion in bonds, the third largest weekly inflow ever recorded, and pulled $ 3.8 billion out of them, according to BoFA Global Research Shares. Gold was the second largest inflow in existence, while investors brought in nearly $ 41 billion in cash.

In the meantime, the dollar hit its lowest level in almost two years, partially impacted by growth-enhancing investors who were reducing their positions in US assets in favor of allocations in Europe. On the bond market, inflation-adjusted yields for inflation-protected Treasury bills (TIPS) are at an all-time low.

"We are definitely concerned," said Nick Maroutsos, head of global bonds at Janus Henderson Investors. "I don't think you can buy assets blindly. Much of the value has been squeezed."

Maroutsos said there was some "fear of missing" in the market, with the expectation that the Fed's measures could continue to keep risk assets high and that investors "wanted to hedge part of their portfolio given the shift in risk assets." "".

He added that the behavior "can certainly continue".

The U.S. Federal Reserve has committed to unlimited purchases of financial assets. While the vast majority of these purchases were confined to US government bonds and mortgage-backed securities, the Fed's pledge to strengthen the corporate bond market has triggered madness in bonds and stocks.

The Fed meeting of July 28-29 could describe the turnaround that the economy appears to be approaching. According to a Reuters survey, the U.S. economic outlook has darkened in the past month.

Investors are considering coronavirus cases that are escalating in the southern and western U.S. states, increasing tensions between the U.S. and China, the potential volatility due to the November 3 presidential election and the amount of debt needed to combat the effects of the virus being constructed.

Jeffrey Gundlach, chairman of the board at Doubleline Capital, which manages $ 138 billion for fixed income investments, said he was concerned about the level of debt that several economic stimulus programs had built up over the years.

He believes this will weigh on the dollar as the US deficits widen. While the dollar can benefit from equity weakness in the short term, "it will ultimately weaken as the debt situation is really remarkably bad for an industrialized country."

There are also concerns that the rapid rally in the S&P 500 was led by a small group of technology-related names from its lows in March. Facebook (NASDAQ :), Amazon (NASDAQ :), Apple (NASDAQ :), Microsoft (NASDAQ 🙂 and Google (NASDAQ :), the five largest U.S. stocks, now account for 22% of Goldman's S&P 500 market cap Sachs (NYSE 🙂 said in a recent report.

The leadership role of the stock market and the frenzied purchase by private investors "are classic activities in the bear market," said Gundlach, and feel similar to 1999 – before the dotcom bubble burst.

However, it is "much worse because we are unable to lower interest rates" and "have used all the instruments that are normally reserved for combating economic problems," he said.

Some look more positive abroad.

According to Société Générale, GDP growth is likely to be felt in both the United States and Europe next year. However, the company predicts a 5.2% recovery in EU growth in 2022, compared to a 2.5% recovery in the United States.

"Next year will be the year of recovery for Europe and East Asia when a vaccine in the US will not have the same effects because the virus is not included," said David Kelly, chief strategist at JP Morgan Funds.

US cases of the virus continue to grow at the fastest rate in the world.

"We're seeing a bit in the US right now" What does that mean? "Said Jim Schaeffer, head of leveraged finance at Aegon (NYSE 🙂 Asset Management." We sold the completely unknown and recovered on hope. "

(Editing and additional reporting by Ira Iosebashvili; editing by John Stonestreet)

Related Articles