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Observer
03-07-2025
- Business
- Observer
Investors mobilise market whiplash from wild-card events
LONDON: Big investors are mobilising to trade through weeks packed with wild-card events that may shatter the calm in stock markets and drive big swings for assets they see as exposed to both positive or negative surprises, from gold to corporate credit. US Treasuries, the dollar, yen and euro zone debt may also turn volatile, investors said, Thursday's US jobs data is followed by next week's crunch US-European Union tariff deadline and then an unpredictable French budget vote. After that, markets face an August 12 deadline for US-China talks to achieve a trade deal. "I can't think of a time in my history in markets, which is pretty long, where you've had so much risk and so little risk premium," said Insight Investment head of investment specialists April La Russe, referring to the compensation for holding risky assets over cash. Here's a look at how investors are gaming out potential market flare-ups in the days and weeks ahead. TARIFF TREMORS Russell Investments global head of solutions strategy Van Luu said market participants were pricing a mildly positive outcome on July 9, with the US and EU either settling for 10 per cent universal tariffs or postponing a resolution, as the US had with China. He had turned negative on corporate credit because yields were underpricing the economic risks of ongoing tariff uncertainty, he said. With Brussels now pushing for exemptions for key EU export sectors, the worst-case scenario was a deadlock and markets starting to fear reciprocal tariffs, he said. Amundi global head of macro, Mahmood Pradhan, a former IMF deputy director for Europe, said the July 9 outcome was a coin-toss but a benign result was already priced into risky assets. World stocks have rebounded and are up 24 per cent since a low of April 8, soon after US President Donald Trump delivered his "Liberation Day" April 2 bombshell of tariffs on imports from around the world. "Given the rally we've had, there might not be more upside," Pradhan said. DOLLAR, TREASURIES, GOLD Any outcome on July 9 could hit the dollar and spark cross-currency volatility, investors said. The greenback is already down some 10 per cent against other major currencies so far this year. Treasuries would suffer if talks broke down, a threat to world trade, Artemis head of fixed income strategy Liam O'Donnell said. A long and steady accumulation of Treasuries by overseas investors and central banks has been partly driven by the dollar's dominant position in global trade flows. Gold, which has soared by more than 25 per cent year-to-date to $3,344 as investors piled into the precious metal to hedge portfolios against inflation and recession risks sparked by high tariffs, is also vulnerable to a positive EU tariff outcome. "We could see profit taking (on gold) by real money investors and also hedge funds," Edmond de Rothschild multi-asset head Michael Nizard said. DATA JOLTS While latest US payrolls data is released on Thursday, the next official payrolls report on August 1 could be a bigger jolt to world markets than tariffs, coming at a time of holiday-thinned trade, investors added. "In terms of what would produce the biggest market surprise, I think it's actually US data because that has been flying under the radar," Russell's Luu said. Artemis' O'Donnell said the upcoming US job reports were the biggest event risk for markets. Luu said gauges of expected volatility in some world currencies seemed too low, particularly those expressing how Japan's yen, which can rip higher when US rate cut bets build, might swing against the dollar and the euro in the months ahead. EUROPE DEBT STRESS There are also crunch dates for Europe that could revive anxiety about debt stress, overshadowed so far by investors tapping assets such as triple-A rated German Bunds as Treasuries' haven appeal has diminished. French Prime Minister Francois Bayrou survived his eighth no-confidence motion on Tuesday but investors are wary about his chances of getting a plan to trim the euro zone's biggest budget deficit on July 14 through a parliament rocked by right-wing rebellions. Germany's stimulus bonanza is also now rolling, with an upper house vote on business tax breaks on July 11. Benchmark Bund yields are about 25 basis points (bps) higher so far this year to around 2.62 per cent given expectations for increased bond sales to fund extra borrowing. The extra yield bond investors demand for lending to France over Germany, at 70 bps now, might be too low given the immediate French budget risk ahead. "We prefer an underweight position in French sovereign bonds in the near term," RBC Wealth Management investment strategy head Frédérique Carrier said. And Britain is also back on the watch-list as government U-turns on welfare reforms threaten a budget blowout, sparking fresh bond selling. — Reuters
Zawya
02-07-2025
- Business
- Zawya
Foreign investors increase dollar hedges on US stock portfolios
NEW YORK - Overseas asset managers and pensions are adding protection against a weakening dollar, concerned about the U.S. currency's diminishing ability to diversify their U.S. equity portfolios. Because such stock funds carry built-in dollar exposure, investors with other home currencies that had not neutralized the foreign exchange risk were cushioned when the dollar was strong if Wall Street performed badly. But the dollar's correlation with other U.S. assets, and the impact of its fall on portfolio performance, came into sharper focus when the Trump administration announced far-reaching global tariffs on April 2, sending U.S. stock indexes and the greenback sharply lower. The dollar hit a three-year low against a basket of currencies, raising risks for investors whose portfolios once benefited from the natural hedge. Now, managers are reducing dollar exposures and increasing the hedge ratios for U.S. stock portfolios where clients' investment policies allow them to do so. About 10% of Russell Investments pension fund clients in Europe and the UK have already increased hedge ratios on their international stock portfolios, said Van Luu, global head of solutions strategy for fixed income and foreign exchange for Russell in London. One client raised it to 75% from 50%, highlighting the desire to have a greater portion of U.S. stocks protected against the weakening dollar. "If what we're seeing persists... then you will have more clients taking action in that direction," said Luu. 'MORE HOSTILE' The dollar is down 10% for the year, and 6.5% since U.S. President Donald Trump's so-called Liberation Day in April. Meanwhile, the S&P 500, the benchmark U.S. stock index, has recovered 24% since an April slump and is up 5.3% this year, flirting with record highs. The MSCI gauge of global stocks, minus the U.S., has risen 16% for the year. "It's not enough to look at the stock market and say it is more or less back to where it was, so nothing happened," said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management, who manages currency exposures across its asset classes. BNP has been reducing dollar exposures for its clients that include pension funds, sovereign wealth funds and central banks. It has sold U.S. dollars across stock and fixed income portfolios, and built up what Vassallo described as a sizable position in options for funds that allow these strategies. He said the euro, yen and the Australian dollar are among the primary currencies it bought against the dollar, a big contrast to how the asset manager ended the previous year with a small "overweight" in the U.S. dollar. "This switch towards a more uncertain policy regime created an environment where we as market participants see the U.S. as more hostile to international capital flows, international trading," Vassallo said. After a June review, Justin Onuekwusi, chief investment officer at St. James's Place, said it is maintaining a strategic hedge that allows it to reduce overseas currency exposure in favor of the pound by up to 20%. The strategy "has been beneficial for our clients' returns year to date," he said. Onuekwusi said he now sees the dollar as closer to its longer-term fair value and has marginally reduced dollar hedging across managed portfolios. Foreign investors hold more than $30 trillion in U.S. securities, about $17 trillion of which is in equities and more than $12 trillion in long-term debt, according to data published in April by the U.S. Treasury Department. Marcus Fernandes, global head of currency management at Northern Trust, said the divergence in the correlation of risk is more than in the past. "That's why people are thinking faster than before, 'I need to increase my hedge ratio'," he said. "Once those conversations start, they usually end with increased hedge ratios," he said. COST INCENTIVE Data from Russell showed that a euro-hedged version of the MSCI USA index was flat for the year through May, while the euro-unhedged version was down 8.3%, showing the benefit of hedging for euro-based investors. The dollar is down 13% against the euro on concerns about flip-flopping U.S. trade policies and growth. "FX is back on the boardroom agenda," said Joe McKenna, head of fund solutions at MillTech, a London-based FX and cash management company. "What was once handled quietly in the back office is now drawing the attention of CIOs and CFOs, driven by renewed dollar volatility." Managers hedge currency exposure by selling the dollar against their respective base currency like the euro or the pound in the FX forwards market, and also use derivatives like options. When the dollar weakens, the hedge position gains in value while the dollar exposure on the underlying stock portfolio loses. Forward selling of the dollar is the largest in four years, according to John Velis, Americas macro strategist at BNY Markets, suggesting investors are unwilling to carry long dollar exposures, even with the potential for it to rally if U.S. tariff policy changes or the Israel-Iran conflict resumes. Investors reallocating to U.S. assets to meet benchmark weights after April's selloff are now hedging those exposures, he told Reuters. "It communicates that dollar volatility is a concern," said Velis. "It can be policy volatility as well as macroeconomic volatility that's causing people to... not keep that dollar exposure because of the fears of the dollar decline."
Reuters
01-07-2025
- Business
- Reuters
Foreign investors increase dollar hedges on US stock portfolios
NEW YORK, July 1 (Reuters) - Overseas asset managers and pensions are adding protection against a weakening dollar, concerned about the U.S. currency's diminishing ability to diversify their U.S. equity portfolios. Because such stock funds carry built-in dollar exposure, investors with other home currencies that had not neutralized the foreign exchange risk were cushioned when the dollar was strong if Wall Street performed badly. But the dollar's correlation with other U.S. assets, and the impact of its fall on portfolio performance, came into sharper focus when the Trump administration announced far-reaching global tariffs on April 2, sending U.S. stock indexes and the greenback sharply lower. The dollar (.DXY), opens new tab hit a three-year low against a basket of currencies, raising risks for investors whose portfolios once benefited from the natural hedge. Now, managers are reducing dollar exposures and increasing the hedge ratios for U.S. stock portfolios where clients' investment policies allow them to do so. About 10% of Russell Investments pension fund clients in Europe and the UK have already increased hedge ratios on their international stock portfolios, said Van Luu, global head of solutions strategy for fixed income and foreign exchange for Russell in London. One client raised it to 75% from 50%, highlighting the desire to have a greater portion of U.S. stocks protected against the weakening dollar. "If what we're seeing persists... then you will have more clients taking action in that direction," said Luu. The dollar is down 10% for the year, and 6.5% since U.S. President Donald Trump's so-called Liberation Day in April. Meanwhile, the S&P 500, the benchmark U.S. stock index (.SPX), opens new tab, has recovered 24% since an April slump and is up 5.3% this year, flirting with record highs. The MSCI gauge of global stocks, minus the U.S., (.dMIWU00000PUS), opens new tab has risen 16% for the year. "It's not enough to look at the stock market and say it is more or less back to where it was, so nothing happened," said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management, who manages currency exposures across its asset classes. BNP has been reducing dollar exposures for its clients that include pension funds, sovereign wealth funds and central banks. It has sold U.S. dollars across stock and fixed income portfolios, and built up what Vassallo described as a sizable position in options for funds that allow these strategies. He said the euro, yen and the Australian dollar are among the primary currencies it bought against the dollar, a big contrast to how the asset manager ended the previous year with a small "overweight" in the U.S. dollar. "This switch towards a more uncertain policy regime created an environment where we as market participants see the U.S. as more hostile to international capital flows, international trading," Vassallo said. After a June review, Justin Onuekwusi, chief investment officer at St. James's Place, said it is maintaining a strategic hedge that allows it to reduce overseas currency exposure in favor of the pound by up to 20%. The strategy "has been beneficial for our clients' returns year to date," he said. Onuekwusi said he now sees the dollar as closer to its longer-term fair value and has marginally reduced dollar hedging across managed portfolios. Foreign investors hold more than $30 trillion in U.S. securities, about $17 trillion of which is in equities and more than $12 trillion in long-term debt, according to data published in April, opens new tab by the U.S. Treasury Department. Marcus Fernandes, global head of currency management at Northern Trust, said the divergence in the correlation of risk is more than in the past. "That's why people are thinking faster than before, 'I need to increase my hedge ratio'," he said. "Once those conversations start, they usually end with increased hedge ratios," he said. Data from Russell showed that a euro-hedged version of the MSCI USA index was flat for the year through May, while the euro-unhedged version was down 8.3%, showing the benefit of hedging for euro-based investors. The dollar is down 13% against the euro on concerns about flip-flopping U.S. trade policies and growth. "FX is back on the boardroom agenda," said Joe McKenna, head of fund solutions at MillTech, a London-based FX and cash management company. "What was once handled quietly in the back office is now drawing the attention of CIOs and CFOs, driven by renewed dollar volatility." Managers hedge currency exposure by selling the dollar against their respective base currency like the euro or the pound in the FX forwards market, and also use derivatives like options. When the dollar weakens, the hedge position gains in value while the dollar exposure on the underlying stock portfolio loses. Forward selling of the dollar is the largest in four years, according to John Velis, Americas macro strategist at BNY Markets, suggesting investors are unwilling to carry long dollar exposures, even with the potential for it to rally if U.S. tariff policy changes or the Israel-Iran conflict resumes. Investors reallocating to U.S. assets to meet benchmark weights after April's selloff are now hedging those exposures, he told Reuters. "It communicates that dollar volatility is a concern," said Velis. "It can be policy volatility as well as macroeconomic volatility that's causing people to... not keep that dollar exposure because of the fears of the dollar decline."
Yahoo
07-04-2025
- Business
- Yahoo
Market stress signals are flashing bright
LONDON (Reuters) - As a rout in global equity markets deepened on Monday amid tariff turmoil, the signs of stress across financial markets have started to flash brightly. "It's quite clear that the market is in a panic," said Van Luu, global head of FX and fixed income strategy, Russell Investments. The asset manager's gauge of investor risk aversion, which incorporates pricing trends and sentiment indicators, was approaching levels last seen in September-October 2022, when global central banks started an unprecedented run of interest rate hikes. Here's a look at just some of the indicators on investors' watchlist. VIX JUMPS Wall Street's closely watched fear gauge, the VIX volatility index, jumped to 60 on Monday - its highest level since a global market selloff in August. It closed above 45 on Friday for the first time since the 2020 COVID-19 crisis, and jumped the most on a single day since then. In Europe, a similar indicator -- the Euro STOXX Volatility Index -- was set for its biggest one-day surge in absolute terms since October 2008, the depths of the global financial crisis. DOLLAR DEMAND Demand from non-U.S. investors for dollars has surged, a typical sign that market participants need cash. The rate on three-month cross-currency basis swaps for the euro , a derivative that reflects this demand, traded around -7% from above 12.5% a week ago, its most negative since late 2023. A more negative number indicates higher demand for dollars. JUNK IT Junk bond spreads, which reflect the premium investors get for owning riskier corporate debt, compared to government bonds, have blown out to multi-month highs. On Monday, the iTRAXX Crossover Index an index of five-year European junk bonds, leapt above 420 basis points in its largest one-day rise since March 2023 and to its highest since November that year and nearly 80 basis points higher than it was a week ago. In the United States, the ICE BofA U.S. High Yield Index ended last week at its lowest since September, having posted its largest weekly drop since September 2022. BANKS SLIDE Global banks, key to the functioning of the global economy and a barometer for growth, continue to suffer steep share price falls. European and Japanese bank stocks have shed roughly 20% of their value each in the last three trading sessions alone. Japanese banks closed 10% lower on Monday, while U.S. banks slid some 15% last week in their biggest weekly drop since 2020. SWAP SPREADS The pressure building in the U.S. bond market, the world's biggest with some $28 trillion in outstanding government debt, is starting to become apparent and one sign of strain is in swap spreads. They capture the premium on the fixed side of an interest-rate swap, which investors use to hedge against rates risk relative to bond yields. U.S. two-year swap spreads - the difference between two-year swap rates and the two-year Treasury yield - briefly dropped to almost -46 basis points on Monday before pulling back to around -24 bps -- near its tightest levels since November.
Reuters
07-04-2025
- Business
- Reuters
Market stress signals are flashing bright
LONDON, April 7 (Reuters) - As a rout in global equity markets deepened on Monday amid tariff turmoil, the signs of stress across financial markets have started to flash brightly. "It's quite clear that the market is in a panic," said Van Luu, global head of FX and fixed income strategy, Russell Investments. here. The asset manager's gauge of investor risk aversion, which incorporates pricing trends and sentiment indicators, was approaching levels last seen in September-October 2022, when global central banks started an unprecedented run of interest rate hikes. Here's a look at just some of the indicators on investors' watchlist. VIX JUMPS Wall Street's closely watched fear gauge, the VIX volatility index (.VIX), opens new tab, jumped to 60 on Monday - its highest level since a global market selloff in August. It closed above 45 on Friday for the first time since the 2020 COVID-19 crisis, and jumped the most on a single day since then. In Europe, a similar indicator -- the Euro STOXX Volatility Index (.V2TX), opens new tab -- was set for its biggest one-day surge in absolute terms since October 2008, the depths of the global financial crisis. DOLLAR DEMAND Demand from non-U.S. investors for dollars has surged, a typical sign that market participants need cash. The rate on three-month cross-currency basis swaps for the euro , a derivative that reflects this demand, traded around -7% from above 12.5% a week ago, its most negative since late 2023. A more negative number indicates higher demand for dollars. JUNK IT Junk bond spreads, which reflect the premium investors get for owning riskier corporate debt, compared to government bonds, have blown out to multi-month highs. On Monday, the iTRAXX Crossover Index an index of five-year European junk bonds, leapt above 420 basis points in its largest one-day rise since March 2023 and to its highest since November that year and nearly 80 basis points higher than it was a week ago. In the United States, the ICE BofA U.S. High Yield Index (.MERH0A0), opens new tab ended last week at its lowest since September, having posted its largest weekly drop since September 2022. BANKS SLIDE Global banks, key to the functioning of the global economy and a barometer for growth, continue to suffer steep share price falls. European and Japanese bank stocks have shed roughly 20% of their value each in the last three trading sessions alone (.SX7P), opens new tab. Japanese banks closed 10% lower on Monday (.IBNKS.T), opens new tab, while U.S. banks slid some 15% last week in their biggest weekly drop since 2020 (.SPXBK), opens new tab. SWAP SPREADS The pressure building in the U.S. bond market, the world's biggest with some $28 trillion in outstanding government debt, is starting to become apparent and one sign of strain is in swap spreads. They capture the premium on the fixed side of an interest-rate swap, which investors use to hedge against rates risk relative to bond yields. U.S. two-year swap spreads - the difference between two-year swap rates and the two-year Treasury yield - briefly dropped to almost -46 basis points on Monday before pulling back to around -24 bps -- near its tightest levels since November.
