20/05/2015 00:27 AST
The dollar’s four-week decline and a slump in bond prices has upset some assumptions about where global financial markets are heading, but haven’t deterred most investors from staying faithful to their bets.
At the beginning of the year, a weak global economic environment combined with central-bank support made some trades seem like sure winners: buy the dollar, buy bonds, sell oil, and buy stocks. After the last four weeks, with the dollar sliding, oil rising above $50 a barrel and a rebound in inflation expectations, only the equities bet is left standing.
Still, most investors interviewed by Reuters said trades based on expectations for lower bond yields and a higher dollar will regain their attraction. They called the recent market moves more “technical” in nature.
“What we have really seen this month is a correction as opposed to a turn,” said Mark Astley, chief executive officer at Millennium Global, a $14bn currency specialist based in London. He expects the euro to resume its fall later this year.
One reason for a shift in investor sentiment was a resurgence in Europe, prompting some fund managers to invest more heavily in European stock markets.
“The unwind we have seen of these crowded trades in the past few weeks has everything to do people far too long Bunds and a recognition that the European economy has recovered a bit,” said Kate Moore, chief investment strategist for US with J Morgan Private Bank in New York.
The euro has risen 9% to $1.14 since hitting a 12-year low against the dollar on March 16, on signs that Europe has escaped a downward price spiral because of a weaker euro, engineered by European Central Bank’s €1.1tn quantitative easing programme.
Thanks to the brighter outlook on Europe, the $11bn New York-based hedge fund Jana Partners upped its stakes in the region’s equities, adding positions in Euronav NV and iShares MSCI Germany exchange-traded funds, according to regulatory filings.
Euronav shares were up 16% since March 31. The Germany EWG ETF is up 10.3% on the year, handily beating the 3.8% rise of the Standard & Poor’s 500 index.
“We think both European economic growth and profits growth will outstrip expectations,” said Chris Darbyshire, chief investment officer at Seven Investment Management in London, which has $14bn in assets.
Whether the support from the ECB is enough to offset an increase in US benchmark lending rates is another question. The Fed is still expected to end its near zero interest rate policy later this year. That unknown means, according to strategists at Bank of America/Merrill Lynch, that returns will remain mediocre, with “volatile trading” as investors rotate from one asset class to another, as well.
“There is going to be a lot of fits and starts for the market,” said Putri Pascualy, a managing director at PAAMCO, which oversees assets of $9.5bn in Irvine, California.
For US Treasury bond funds, the shakeout over the last month has wiped out their earlier gains. Fidelity and Vanguard’s long-dated Treasuries funds, and, worth about $1bn each, were among the biggest losers in their category, falling 5.3% during the sell-off, according to Lipper, a Thomson Reuters unit.
Some managed futures funds that focus on financial futures and options suffered steep losses during the initial market move as well.
In the last 30 days, managed futures funds tracked by Morningstar fell 5.1%, and are up just 1.2% on the year.
Reuters
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