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Investors who slashed their equity exposure during a bout of market volatility in early August sharply increased their holdings as global stocks rebounded last week, Deutsche Bank flow data shows.
In a sign of how quickly markets have recovered from the dramatic sell-off, positioning among discretionary investors — who judge when to buy or sell — last week “jumped sharply to fully recoup [the previous week’s] decline and is now well above average again”, Deutsche said in a note on Monday.
Cash poured into index options, megacap technology stocks, cyclicals and defensives, it added.
Trend-following portfolios including “volatility control” funds, which buy when markets are relatively calm and sell during periods of turbulence to stem losses, also “significantly increased” their equity exposure, though their positioning remains “well short of historical maximums”, Deutsche added.
The swift return of investor confidence comes barely a fortnight after global stock markets tumbled on rising concerns that the US economy was heading for recession.
A sharp appreciation for the Japanese yen had simultaneously hastened a reversal of the so-called “yen carry trade”, feeding what became the sharpest one-day sell-off for the Tokyo stock market since Black Monday in 1987. In both Japan and the US — where mega cap tech stocks, in particular, suffered sharp share price declines — the declines were exacerbated by a hurried exit from a few very crowded trades.
“Within a span of two short weeks, the US equity markets appear to have made a full recovery,” said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets.
Global equity markets last week notched their best weekly run since November as volatility subsided and a string of stronger US economic data allayed fears of an impending slowdown.
On Monday, Wall Street’s blue-chip S&P 500 rose 0.2 per cent shortly after the opening bell in New York, ahead of this week’s Jackson Hole meeting of central bankers from around the world. The index is less than 2 per cent below July’s all-time high.
“Even the perma-bears would have struggled to find much in the slew of data released over the past week that would justify recent recession fears,” said Neil Shearing, chief economist at Capital Economics.
Fed funds futures suggest investors expect four quarter-point interest rate cuts from the Federal Reserve by the end of the year. Just two weeks ago, some were calling for an emergency half-point cut ahead of the Fed’s September meeting.
Credit investors appear equally bullish, and overwhelmingly expect a “soft landing” for the US economy, according to a Bank of America survey.
Three in four respondents now expected US inflation to slow without triggering a recession, BofA said on Monday — the highest reading for a soft landing scenario on record. It added: “Geopolitics remains the [number one] concern, for the second survey in a row. But a close second is now central bank policy mistakes.”
BofA polled 48 bank, insurance company, pension fund, asset manager and hedge fund clients in high-grade and high-yield credit in the four days to August 16.
“This month’s ructions across markets have simply served to reinforce investor conviction in a Goldilocks macro environment,” BofA said.
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